Saul Eslake on limiting #negativegearing and capital gains tax.

Saul Eslake explains why he thinks curtailing negative gearing and reducing the capital gains tax discount will aid housing affordability in Australia.

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“But in my view, curtailing negative gearing and/or the capital gains tax discount which needs to be brought in here because the change to the capital gains tax regime instituted by the Howard government in 1999 played an important role in enhancing the appeal of negative gearing to would-be property investors.
So the two have to be taken together. In my view curtailing negative gearing and the capital gains tax discount would reduce what has been over the last fifteen or so years and increasingly an important source of upward pressure on the price of housing. The proportion of Australian taxpayers who are negatively geared landlords has increased quite significantly since 1999 and the proportion of housing finance going to investors has risen from less than twenty percent in the early 1990s to as much as 50 percent in some recent years reflecting the growing share of housing purchases that are being undertaken by investors.
Now, the effect is that competition has forced up the price of housing to the detriment of would-be first home buyers to the benefit of investors who get their interest bills subsidized by being able to write them off against their other income as negative gearing allows. So in my view reducing that, curtailing negative gearing would mean less upward pressure on house prices and I would say that's a good thing.
It's less clear in my view that it would result in significant downward pressure on house prices as adherents of or supporters of negative gearing assert and they sometimes point to what allegedly happened in the mid-1980s when the Hawke government did temporarily, as it turned out, abolish negative gearing.
They say defenders of negative gearing that this caused massive withdrawal of landlords from the property market and rents went through the roof. If you actually go back and look at what happened then rents did rise in Sydney and Perth but in my view not because of the abolition of negative gearing but rather because just before negative gearing was abolished in 1985 the rental vacancy rate in those two cities had fallen to about two percent to historic lows. The rents would have risen in those two cities anyway and it did. If the abolition of negative gearing had been the reason rents should have risen everywhere and they didn't. They didn't rise in the other major capital cities so nonetheless supporters of negative gearing continue to chant this mantra about what allegedly happened. If negative gearing were to be curtailed now but as proposed by the Opposition ahead of the last election existing landlords were to be grandfathered that is they would keep their negative gearing entitlements and it would only be new investor entrants to the property market who couldn't get it then in my view there'd be very little forced selling by investors of negatively geared properties because if they did would they lose their tax privileges so they'd be more likely to hang on. In other words there'd be I think very little downward pressure on house prices but if there was let's suppose that landlords did move to sell investment properties if negative gearing were no longer available you have to ask who would they sell them to they wouldn't sell them to other landlords for the same reason that existing landlords would be selling their properties. They would be selling them to previously frustrated would-be home buyers and as a result those people who are currently renting and then buy homes from landlords who were selling would no longer need to rent The demand for rental housing would fall by the same amount as the supply of it and there's absolutely no reason why rents should go up in any significant way. So I say that of the various things that the federal government, a federal government could do to arrest and reverse the slide in home ownership rates especially among young people over the last 30 or 40 years, reducing negative gearing and curtailing the capital gains tax discount would, I think, be the most effective thing and helpful thing that they could do.”
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