Luci Ellis, the Reserve Bank’s head of financial stability, has given a brilliant speech this morning on how and why Australia’s property market has developed the way it has.
She also discussed the reasons for why centres of density occur in major capital cities, and how they have evolved over time.
And by my reading, Ellis has just laid down a very strong argument for the government to scrap negative gearing.
She has come at the topic with her financial stability hat on. But one thing that jumps out when reading the speech, is what she says about the impact of investors in the areas where people either need, or want to live because of work and other factors.
It is often said that negative gearing is essential because it provides rental accommodation. But what Ellis is saying is that investors are providing the accommodation for the very people who would otherwise buy the houses if investors had not bid the prices up.
The cumulation of individual decisions and government policies over many years has given us comparatively low-density cities that create large price premiums for the most convenient districts in those cities. If prices rise beyond people’s comfort levels, it is not always feasible or attractive for households to respond by voting with their feet, and moving to cheaper areas – especially if that means moving out of a state capital and further away from work. So an increase in investor demand for housing has less of a safety valve, because potential home buyers in the same place are less likely to reduce their net demand for housing in that district. Even those who react by choosing not to buy now are still adding to demand for the rental stock, which actually makes rental housing a more attractive investment.
That all sounds very academic and wonkish. But the key is the part that has been highlighted.
Ellis is essentially saying that investors out-compete home owners, and when they drive prices up, those people who would otherwise buy a home can’t afford to.
Crucially though these people join the ranks of renters – they can’t move out of the city or suburb because they need to live there for work or other reasons.
So what the economy ends up with in the long run, which we are seeing the beginning of now, is that first home owners are pushed out of the housing market by investors, most of whom are other Australians who are already property owners themselves.
Negative gearing is the policy tool which is institutionalising this disenfranchisement of younger Australians from the housing market, through the subsidy it gives to investors already on the property ladder.
Recently Business Insider covered the release of Australian Tax Office data showing that “Australia’s 1.3 million landlords claimed $13.8 billion in tax losses in 2012 to offset other income via negative gearing and other costs associated with investment housing.”
It is this very tax deduction of negative gearing which drives investors’ ability to pay higher prices for housing and which is distorting the system and disenfranchising home owners.
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