Monday Night Q & A | Negative Gearing

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LIBERAL

Rowan Cravey, Editor-in-Chief of the MQU Liberal Club Magazine

In the modern day politics, when there is an announcement, you can bet your bottom dollar that we’re going to be hearing those same words a million times a day. Such as happened with Labor’s recent policy of radically changing the current setup of Negative Gearing (NG). Now, I’m not an economics kind of guy, but even at a basic understanding of the context that surrounds us, one doesn’t have to be a genius to see the unspoken flaws and ulterior motives in the plan.

Firstly, as has been said many times by the critics of Labor’s plan, the changes would send the housing market into a new stage of chaos for many years. The distortion of the market will lead to incredibly huge changes. Simply put, with the NG only being able to be applied to new housing, the fact that the owners of this new housing can still use NG, the desire to have them will be extraordinary, thus, their prices will skyrocket and for the rest of the country’s properties (not to mention other negatively geared investments), becomes a very unenticing item of purchase.

Now even that is frustratingly complex for the vast majority of people.

It is ostensibly trying to make housing more affordable, but it is without a doubt going about the wrong way. The method that will make housing more affordable is one that has been known for centuries. Supply. If one increases the supply of an item in demand, the cost will go down. Unless you’ve been living under a rock, anyone knows that. The only issue at hand here for Labor is that means that it will have to chastise the fiefdoms that call themselves local councils to allow such construction, the same people who tend to be the people Labor prides itself on being friends with. At the moment, due to nimbies and their own personal gripes with too many buildings, the authorisation for construction is severely hampered. So how does Labor get around that? An unfounded belief that by forcibly spiking the value of new housing, a new dawn of buying will ensue.

The main goal that is being obfuscated with pretty sounds like ‘housing affordability’ is that Unions certainly would love this policy. You see, that means all the more construction of new properties, able to be negatively geared and incentive for evermore construction, giving new life to unions. With ONLY new properties being able to be negatively geared, being the strong temptation for so many, the demand for new housing will never die. None other than the unions will build more and more housing.

One must wonder if the CFMEU and other unions have written this for the sole purpose of getting more business and perhaps they are wanting more members?

If you eschew the obfuscation that Labor is so shamelessly committing, you get a terrible policy that will do absolutely nothing for the housing market except distort it terribly and intensify the low or high value of a property.

 

LABOR

Kieren Ash, President of MQU Labor Students

Negative gearing is shaping up to be one of the hottest issues this election year, and for good reason. For its cheer squad in the Coalition, it’s a great mechanism to encourage investment in the housing market, although that might have more to do with the fact that they own 331 investment properties between them. For its detractors, it is an immoral tax rort that destroys housing affordability. For me, it is inarguably one of Australia’s greatest policy failures, and it has to change.

For a policy that purports to encourage investment in housing supply, it fails dismally. 93% of lending for negatively geared properties goes towards established dwellings – that is, people buying up existing houses for investment that people would otherwise be buying to live in. That leaves just a paltry 7% of negatively geared investment in new dwellings, and no one could possibly describe that as a ‘success’.

The way it works is simple. If you purchase an investment property, and your mortgage payments exceed your rental income, you get to deduct that net loss from your taxable income. For investors, this is a great way to reduce the tax you pay in the medium term, while you wait for the house to appreciate. In ten or so years, the value of your house could increase anywhere from 50% to 100%.

Enter John Howard, who in 1999 introduced a 50% discount on Capital Gains Tax (CGT) if you’ve owned a property for more than 12 months before you sell it. Combined with negative gearing, this set off our unbelievable and unsustainable property investment boom. Howard creating a housing market that no longer existed to provide people with their most basic of needs – shelter – and instead turned it into a tax loophole for the very wealthy, and one that has rocketed Australia’s private debt to the highest levels in the world.

Labor will address this by restricting the ability to negatively gear properties to newly constructed dwellings only from July 1 2017 should it win government this year. Closing this immoral tax rort will ensure that the person like your or I who is buying their first house competes on an even playing field with someone who is buying their third or fifth. It will ‘grandfather’ existing arrangements, meaning that nobody who currently has a negatively geared property will lose out, and it will also cut the horrendous CGT discount that encourages rampant speculation in housing. Politicians have been telling lies about negative gearing for years, and now Labor is calling them out. It’s a bold plan for the future, and young people should get behind it.