In its Financial Stability Review (FSR) released today the RBA signalled that the housing market had become unbalanced.
So unbalanced by investor buying that it is in discussion with the prudential regulator, APRA, about the imposition of Macro-prudential regulations to target, and restrict, lending to the investment segment of the market.
But in a special study of “Households’Investment Property Exposures”, contained within the FSR, the RBA makes a case why negative gearing should end.
Essentially having earlier said that investor activity is distorting prices and destabilising the market the RBA then showed that these actions are being undertaken by a very narrow percentage of the population. A narrow percentage who receive a tax subsidy from the rest of the tax paying public.
In short negative gearing favours the richer cohort of Australians over the everyone else and as such is unfair and regressive.
It’s not the first argument this week which has shined a light on the negative impact investors have on the market. Earlier this week the Housing Industry Association released a report which inadvertently suggested that negative gearing should only be allowed on new dwellings being built so as to add to the stock of available housing.
In its own analysis the RBA said that based on the HILDA survey data, “investor households
with incomes in the top 20 per cent of the income distribution owe the bulk of the investor housing debt and over a quarter of total housing debt outstanding”.
They also say the correlation of income and investment properties is solid: “ATO data also show that the incidence of property investment and the incidence of geared property investment both increase with total income.”
In contrast: “At the other end of the income distribution, the HILDA survey suggests that households in the bottom 20 per cent account for just 2 per cent of investor housing debt.”
The idea to end negative gearing is not currently on the political radar. Indeed policy toward this tax shelter for wealthier Australians has remained stuck in the ire ever since Paul Keating ended and then reinstated it back in the 1980s.
Of course, any talk of ending negative gearing will bring out the doomsayers harking back to the ’80s and the fall in supply of rental accommodation.
But as the HIA study showed it is only in the long run that investors actually add to the housing stock – for the most part, as economist Saul Eslake noted recently, investors buy established dwellings and thus drive prices higher with no net benefit to the housing market.
Likewise while in many ways macro-prudential restrictions on high LVR lending (particularly if targeted at investment housing) can protect buyers from themselves and the system from the type of financial instability we saw in the US after 2007. It is the tax shelter that is offered to investors over an above all other home buyers that is the real culprit.
It’s time to sacrifice the sacred cow.