This document discusses Australia's tax policy around negative gearing and how it distorts the residential property market. It argues that negative gearing primarily benefits high-income earners and inflates housing prices. Instead, the document proposes using tax incentives to encourage investment in infrastructure and startups to promote real economic growth. It suggests allowing super funds and investors to jointly invest in vetted infrastructure projects through organizations like the G20 Global Investment Hub. The goal is to redirect investment toward more productive assets while improving housing affordability.

1. Tax Policy to Incentivize Growth and Efficiency, not Market Distortion
May 30, 2016 | Cassandra Oaten
Everyone wants a retirement nest egg. But how do our leaders facilitate this without distorting
residential property markets which affect other market players?
Negative gearing allows property investors to attain tax deductions from the outgoing expenses that
come from holding a rental property (or properties) as an investment. This includes: interest on the
loan, the cost of repairs, maintenance and improvements, renovations, council rates, water rates,
insurance, fire levy, stamp duty and real estate transaction costs. However, if you buy the property
as a home you do not get to claim these tax deductions.
Researchers from the Grattan Institute have found “that certainly there are some middle income
earners that negatively gear” but “when you look at the distribution of tax benefits they
overwhelmingly go to high-income earners”. About 50% of the benefits from negative gearing go
towards the top 10% of income earners.
Australian Prime Minister Malcolm Turnbull once agreed with this opinion. He described negative
gearing as using tax policy to “distort economic behaviour…skewing national investment away from
wealth-creating pursuits, towards housing, [creating] a property bubble” in a 2005 tax policy paper.
More recently, Turnbull has changed his opinion stating that "scrapping negative gearing will cause
rents to rise” and will curb investors’ “demand for property”.
Particularly in Melbourne, the PM’s stance that scrapping negative gearing will increase rents
is unjustified. There is no evidence of this. In 1985-87 when negative gearing was abolished,
rent decreased in Melbourne and every other city in Australia (other than Sydney and Perth and
thus negative gearing cannot be deemed the cause).

2. His comment is further unfounded due to the current and amplifying glut of city and inner city
apartments in Melbourne. In 2016 and 2017 there is expected to be “about 21,000 to 22,000
apartments” built in Sydney and Melbourne, further adding to the market. The law of supply and
demand means that this will, in fact, keep rent prices low. This, paired with an extremely low
interest rate predicted to drop to a “record low” of 1.75% in August 2016, means that 2016 is an
ideal time to realign this market distortion.
What would help to keep rent prices affordable is using tax policy to encourage Australians to rent
out empty properties. By measuring water usage, researchers havefound that there are currently
“some 82,724 properties, or 4.8 per cent of the city's total housing stock" that appear to be unused
in Melbourne.
First home buyers in Melbourne and Sydney can only hope for a dip in property demand (and
hopefully a realignment of the market) after the unsustainable growth in house prices
averaging 7.3% a year since 1999.
According to the 2015 12th Annual Demographia International Housing Affordability Survey,
Australia has 2 of the top 10 least affordable housing markets in the world. We want Australia to be
a world leader, but not in this measurement. Sydney sits at number 2 globally and Melbourne equal
4th with Auckland and San Jose, USA. The other 6 are Hong Kong, PRC (1st), Vancouver (3rd), San
Francisco (7th), London (8th), Los Angeles and San Diego, USA (shared 9th).
Negative gearing needs to be wound back, used for new properties (to encourage supply) but with
a limit placed on the amount of properties that can be negatively geared per family.
The flow on effects and negative ramifications that would come from restricting negative gearing to
only the banking sector have also been mitigated. In June 2015 financial services regulator, the
Australian Prudential Regulation Authority (APRA), enforced policy to significantly change banks’
lending policies to investors, thus cooling the market. They released a temporary directive to the big
four banks and Macquarie requiring them to “increase the amount of capital they hold against their
residential mortgage exposures”, causing banks to reduce the amount of mortgages they can supply.
However, Westpac has now reduced these higher mortgage deposit requirements for investors.
The government needs to stop incentivizing investment in property, which artificially inflates
housing markets at the expense of other buyers. Instead, it needs to incentivize the investment of
startups and long term infrastructure funding.
The coalition has recognised this and has made a start supporting angel investors, startups and
entrepreneurs in an attempt to adopt an Israeli style support network for entrepreneurs. This
incentivizes real growth in the economy, rather than market distortions for the gain of just one
section of society. Initiatives include “a $200,000 cash injection to promote fintechs on the global
stage” and a continuation of the innovation agenda announced in 2015. This involves the
government contributing "$11 million to establish startup landing pads” in Tel Aviv, San Francisco,
Shanghai and Berlin. According to the budget, these landing pads will “support emerging Australian
companies in global innovation hotspots”.
There are other investment possibilities that have not been incentivized for individuals: long-term
infrastructure, science, research, and very necessary communication infrastructure such as a higher
quality National Broadband Network (NBN).

3. In response to the dire need for investment in long-term bankable infrastructure projects,
multinational organisations have taken up the call as they recognise the long-term, negative
ramifications of a shortage of adequate infrastructure in Australia’s major cities.
The G20 has come to the forefront to address this need. Sydney has put up its hand to house the
G20 Global Investment Hub (GIH). This platform has a global outlook and seeks to
facilitate “knowledge sharing, highlighting reform opportunities and connecting the public and
private sectors” as well as “lowering barriers to investment, increasing the availability of investment
ready projects, helping match potential investors with projects and improving policy delivery.”
It would be incredibly helpful for superannuation funds, managed funds and personal investors to
have the ability to jointly invest in hugely needed infrastructure projects checked by the GIH as being
a high-quality investment which would help to develop economies without compromising housing
affordability. The GIH is planning to eventually provide “a project pipeline to showcase investment
ready projects to multilateral banks and private investors.”
The World Economic Forum’s Infrastructure Investment Blueprint stresses the need for investors to
have ‘a clear role’ in funding projects either solely or as part of public-private partnerships (PPPs). It
recommends tax policy changes with “lower expenses and cost of capital for investors” for long-term
infrastructure.
Thus, allowing long-term investors the ability and information to invest in needed infrastructure
boosts the growth potential of economies while still obtaining returns in a lower risk market
compared to other vehicles as well as furthering the public-private model.
When it comes to building a retirement nest egg for the future, property is still regarded as one of
the safest long-term investments – no incentive is needed. The funds from Australian ‘mum and dad’
investors could be more strategically incentivized in order to enable growth, jobs and efficiency.
Cassandra Oaten is the International Trade and Economy Fellow for Young Australians in
International Affairs.
This article can be republished with attribution under a Creative Commons Licence. Please
email publications@youngausint.org.au with any questions or for more information.
Image credit: OTA Photos (Flickr: Creative Commons)