Gaslighting and Negative Gearing: Why calls for the irrelevance of negative gearing are greatly exaggerated

May 25, 2023


By Matt Lloyd-Cape
Director, Centre for Equitable Housing at Per Capita

It has become something of a trend among some economists to ask that we all please get over negative gearing.

Last week the economist Chris Richardson wrote in The Age that reducing tax breaks for investors are “distractions much more than they are solutions” Similarly, Peter Tulip from the Centre for Independent Studies tweeted (with perhaps not the most sensitive choice of words) that the apparent 1-4% increase that negative gearing adds to house prices is “trivial”.

One can only imagine the fury with which a young first-time buyer, looking at up to an additional $40,000 cost on a $1 million home, would feel about that description.

Consider a counterfactual: imagine if the government were to introduce an additional 4% sales tax on property sales. The gasps of outrage would be audible in every home in the country.

But for now, let’s imagine that the 1-4% increase in ticket price brought about by negative gearing – which is only one of several gifts that taxpayers give to property investors – is indeed trivial. What other reasons could there be to reform negative gearing?

Firstly, any measure that provides support to incumbents in the housing market rather than to those seeking to enter the market is just bad economics. Surely allowing a more level playing field for all market actors is something that all free marketeers should get behind.

Secondly, there is a strong social case for reform. We are seeing a rapid decline in home ownership for younger Australians, with ownership rates among 30-34 year olds having fallen from 68% for those born in the early 1950s to 49% for those born in the early 1990s. Investors tend to be older and to have already gained the benefits of home ownership, so tax incentives like negative gearing allow them a second bite of the cherry at the expense of a young person, who is left looking at their deposit savings and knowing that with every day that passes it can buy them less.

Thirdly, we should remember that the money investors receive through negative gearing and the Capital Gains Tax (GCT) discount represents a loss in government revenue. Landlord tax breaks are set to be the fastest-growing source of lost revenue, with rental property deductions estimated to have cost the Treasury $18 billion in 2021-22. If we had spent even half that on building social housing over the past decade, the current housing crisis would be nowhere near as bad.

Finally, we must look at what those downplaying the impact of negative gearing suggest is the real cause of the problem. They say that supply can only be bought about by reforming the planning system, essentially by removing red tape on developers. Let the market build and the homes will flow, they say.

This is not a convincing solution. We have spent the past four decades winding back government involvement in the housing system, reducing investment in public housing and asking the market to take up the slack, to no avail. Instead of cheap and plentiful housing, catering to the needs of all society, we now have the highest housing debt in our history, a far larger share of the population living unhappily in the private rental market, a marked increase in housing cost-induced poverty.

In the 1980s around 25% of renters lived in social housing, with their rents capped at 25% of their income and the security that they could stay in their home indefinitely. That number is now down to around 9%. People on low incomes have seen their rent costs rise accordingly, from an average of 26% of total income in 1984 to 33% in 2019.

Reforming investor tax breaks isn’t a magic bullet for resolving housing affordability, but it is a critical part of the financialisation of housing that we have for too long relied upon as the solution for producing low-cost housing, despite overwhelming evidence that the private sector won’t deliver what people need.

Systemic reform to our housing market will no doubt have to involve improvements to planning systems – more supply is urgently needed, and in the cities where people want to live and need to work. But more fundamentally we must recognise that this 40-year experiment in financialising the housing market, of which negative gearing is a core component, has failed.