Negative gearing is the end of the Australian Dream

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Last week the Prime Minister announced that negative gearing would remain 'untouched' under a Coalition government.

Greg Foyster cartoon shows cross-stich house and motto Tax Break Sweet Tax BreakNegative gearing is a tax concession allowing a taxpayer to offset the cost of an investment property against their other income. It encourages people to buy houses as investments.

It does nothing, however, to help housing affordability — and this is becoming a major problem, especially for younger Australians.

The government's argument in favour of negative gearing focuses on protecting investment opportunities for 'mum and dad investors'. In other words, the government would like us to believe that the policy protects 'ordinary' Australians.

Indeed the PM and treasurer assert that it is teachers, electricians and nurses who use negative gearing, much more so than finance managers — who presumably earn more.

Although some 'ordinary' Australians may be able to afford investment properties, it is most commonly used in the wealthiest electorates. Indeed in response to the government's claims, the Grattan Institute has found that wealthy Australians are the most likely to use negative gearing.

Not only is less likely to be used by 'ordinary' Australians, but one effect of negative gearing is to push up house prices, putting home ownership out of reach for the 'ordinary' Australians the government says it is trying to help.

The PM tacitly acknowledged the impossibility of home ownership for so many younger people when he introduced us to a young 'mum and dad', Kim and Julian, who had purchased an investment property while living with their parents. They could not afford to buy a family home and say that the only way they could enter the property market at all is through negative gearing.

 

"Negative gearing in the current economic environment promotes a significant wealth gap between existing investors and future generations."

 

People like Kim and Julian, and the others who cannot afford any property at all, still need somewhere to live. So, they become lodgers or they rent from the investors who own the housing stock. The result is that Australians' homes are being divorced from what has been the principal source of wealth for ordinary Australians: property.

 

Home as wealth

Since World War II Australia has had a largely egalitarian distribution of wealth through the Australian Dream of home ownership. Home ownership rates have been at around 70 per cent for decades.

Historically, having a largely home-owning population has ensured both the social benefit of housing, and an economic benefit through enforced saving with long-term capital growth. And home ownership became a cultural institution.

In contrast, the current negative gearing push splits the cultural and economic meaning of home ownership. It does so first because it focuses on investment. Negative gearing promotes property ownership but not home ownership. Thus the social benefits of home ownership that we have come to expect give way to bare economic indicators — how much investment is occurring.

The resulting reduction in owning our homes will mean a large shift to rental. This need not of itself be a bad thing — but there is no policy to support a widespread increase in home rental.

Apart from being a homeowner or taking the more precarious option of short-term private rental, there are few alternative, secure, housing tenures. Residential tenancy in Australia occurs largely in a private rental market with fairly weak tenant protection. A lifetime of home rental is for many an insecure and expensive prospect.

Secondly, negative gearing in the current economic environment promotes a significant wealth gap between existing investors and future generations — starting with Millenials who are at the life stage when they would expect to enter the housing market.

 

"What would benefit 'ordinary' Australians instead, is a comprehensive policy that addresses housing affordability, and secure housing more generally, in the current economic climate."

 

The 'haves' are those who are already homeowners or investors. These people can almost certainly count on long-term capital growth — a good return on their investment.

In contrast, the 'have nots' are those who are not yet homeowners, and who may never become so. They are likely to remain excluded from home ownership through a convergence of economic factors including low wages, precarious work, increasing university debt, and an inflated property market.

Negative gearing does not provide these people with an economic benefit. For government to suggest that these are 'mums and dads' who will benefit from negative gearing fails to understand the economic conditions they face.

The conclusion about the government's announcement is that negative gearing supports structural inequality. The policy is at odds with intergenerational equity in the distribution of wealth, and also in distribution of the social good of secure housing.

What would benefit 'ordinary' Australians instead, is a comprehensive policy that addresses housing affordability, and secure housing more generally, in the current economic climate. Failing to do so means that older generations will have lived the Australian Dream to the exclusion of their children.

 


Kate Galloway

Kate Galloway is a legal academic with an interest in social justice.

Original artwork by Greg Foyster

Topic tags: Kate Galloway, negative gearing, Malcolm Turnbull

 

 

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Existing comments

In May last year, the Australian Greens announced a costed proposal to reform negative gearing and to use the proceeds to boost affordable housing supply and provide accommodation for people experiencing homelessness. I think is fair and just, as opposed to the current unjust situation that puts home ownership out of reach of so many people, but puts more money in the pockets of rich people like Malcolm Turnbull.
Grant Allen | 27 April 2016


How true! It's time we had some discussion of the fundamental principles and entitlements we want future generations of all Australian citizens to enjoy. Where are the statesmen/women among the politicians?
Ann | 28 April 2016


I am a boomer but came to the world through the working class Catholic background. 5 children, struggled to buy a home in a poorer suburb. Resisted the lure of negative gearing knowing full well where it would lead for our family's future. It seemed like putting our money where our mouth was. Now they struggle with employment, debt and housing anyway, and we are left wondering if we are to blame, or at foolish, for NOT negatively gearing and thus ending up with properties that could at least help them get into the market. (Yes, I do understand about the wider structural good). Where will they live when they are too old to afford rent, and do not have us as a backstop?
Pauline Small | 28 April 2016


We had such hope for Turnbull when he took over, someone Australia did not need to be ashamed of on the international stage. But backflip on the Republic, backflip on climate, backflip on tax reform ... seriously, is it possible he might backflip on his negative gearing too?
Frank | 28 April 2016


If only the Opposition could explain their position on negative gearing as Kate Galloway has explained the socio-economic consequences. If only the media, generally, could expose the exaggerations, the bombast and obfuscation of the Government's spokesmen when they defend their retention of negative gearing. The government complains about lack of revenue on the one hand and gives away concessions on the other hand to the wealthy investors who need them least.
Uncle Pat | 28 April 2016


Kate has nailed the situation. Negative gearing is a tax which blatantly helps the privileged in our society at the expense of others.
Anne | 28 April 2016


So right Kate. Elegantly said. In March 2016 St Vincent de Paul Society published The Ache for Home, its paper on affordable housing. It canvases the issues raised in this article in depth. The paper was based on contributions from each State and Territory in the Commonwealth. I circulated the paper to the Minister of Housing and the Chief Minister of the NT, as well as every Member of Parliament in the NT. Apart from an acknowledgment of receipt of the paper; there has been no Ministerial response on the issue to Vinnies since. Meanwhile publicly owned dwellings in the NT remain unoccupied and Homelessness remains off the chart at 7% of the population of the Northern Territory which is fourteen times the national average. Recently housing prices in the NT have begun to fall, perhaps leading to greater affordability for young buyers over time. But the reaction in the Territory from the real estate industry has been a call for the reinstatement of the First Home Buyers subsidy which will simply have the effect of raising prices again. I recommend The Ache for Home to subscribers of Eureka Street, available on the St Vincent de Paul website at: https://www.vinnies.org.au/page/Publications/National/Articles_Reports__Speeches/TheAcheforHome/
Mike Bowden | 28 April 2016


Like a number of respondents, we were tempted to purchase an investment property a decade or so ago but decided that being school teachers with, at that time having a young family, all in Catholic schools, there simply was not the money to spare during the year to cover expenses on a rental property while we waited for the tax refund to arrive to give us financial relief. I was amazed at the comment from the Government that school teachers were investors in housing - maybe those in executive positions with grown up families could, but I can assure you that ordinary teachers on maybe $89,000 pa with a young school age family could not even dream of it! I think the whole scheme is ethically and morally corrupt and should be abolished for the sake of our young first home buyers. We had to assist one of our children and their family to buy their home and no doubt we will have to do the same for our youngest when she leaves home to purchase her own home- we are now close to retirement.
Gavin | 29 April 2016


As someone who is barely managing to hold down a modest mortgage without the perks of negative gearing, I'm hoping all my sacrifices will be worth it and that if the payments ever became too burdensome or I lost my job and had to sell my home - at least it would have retained its value. And I've often considered living on a park bench or moving into a backpackers hostel, renting out my home, and negative gearing it!
AURELIUS | 30 April 2016


1. Home ownership - 30 year mortgage and the purchase of a newly built home that is designed to only last the lifetime of the loan - dubious construction [all too observable as I drive through suburban streets], dubious designs that fail address Australian environmental conditions and a lack of shade trees that larger, older housing blocks used to provide can also be expected to impact on home owners. There are housing incentives [highly restrictive] for buyers of newly built houses, but if I had to opt to buy a house, I'd want a house that was built several decades ago, even though I may possibly have to upgrade the electrical and plumbing systems. 2. The mums and dads who do own a 2nd home, are often precluded from medical benefits because they are seen as "wealthy" yet they have worked and saved all their lives in an attempt to create a safety net for their old age - a safety net that results in their having to continue to work in order to pay for essential pharmaceuticals. Negative gearing has a lot more fallout for home buyers than the points made in the article.
Carolyn Talbot | 19 July 2016


I remember - somewhere in the mists of antiquity - when I bought my first home for $28,000. It was about three times my then annual salary. We were young and starting in life. Could a young person on a starting salary do this in Fremantle today? Or anywhere else comparable in Australia? I would feel, if prices were high, but rentals readily available and affordable, we were somewhere. I feel that an older, more egalitarian Australia has been lost.
Edward Fido | 19 July 2016


I agree with Kate Galloway absolutely. A middle-aged couple appeared on TV a few weeks ago, saying they had 8 investment properties bought via negative gearing, and I feel sure there are many more people doing just this. It is legal, no doubt, but as everyone knows, this practice has pushed up house prices to ridiculous levels. Neither side of politics is prepared to change it, for fear of a voter backlash. The Australian dream? Forget it.
Rodney Wetherell | 19 July 2016


Kate, The real problem isn't negative gearing but the political ineptitude of state and federal governments to provide low cost housing loans and secure land away from the wealthy property developers.
Wayne McMillan | 20 July 2016


Private rental property ownership is a legitimate enterprise, so why shouldn't owners be able to claim deductions for improvements, depreciation, repairs etc? Eventually a negatively geared property turns positive or is sold and then the ATO takes a big slice in capital gains tax. If you axe negative gearing you also have to axe capital gains tax. Also why shouldn't a domestic rental property owner be able to claim legitimate deductions like any other business? A mining company can claim all sorts of deductions as they build infrastructure which can take decades before a mine turns positive. Can't really so why those who choose to invest in property should be disadvantaged. Axe negative gearing and who will build all the homes and flats that our fast growing population needs? Surely not the government. They will build more sub-standard Housing Commission ghettos.
Colin | 28 July 2016


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