McKell Institute says critics of negative gearing reform are ‘either misguided or cynical’
The case for negative gearing reform is stronger in 2018 than it was
during the height of the property market boom, a Labor-aligned thinktank
has argued in a new report.
In 2015 the progressive McKell Institute released a report calling for the partial abolition of negative gearing, with grandfathering clauses for existing negatively geared properties and exemptions for new constructions.
The report’s recommendations were subsequently adopted by the federal Labor party in the lead-up to the 2016 election, along with a commitment to halve the capital gains tax discount from 50% to 25%.
The policy has come under consistent attack from the critics since it
was announced. In October the treasurer, Josh Frydenberg, called it a
“wrecking ball”.In 2015 the progressive McKell Institute released a report calling for the partial abolition of negative gearing, with grandfathering clauses for existing negatively geared properties and exemptions for new constructions.
The report’s recommendations were subsequently adopted by the federal Labor party in the lead-up to the 2016 election, along with a commitment to halve the capital gains tax discount from 50% to 25%.
“By getting rid of negative gearing, they will be smashing people’s house prices, they will be driving up rent and they need to now explain to the Australian people why, with housing prices coming back to a more sustainable level, they want to take this destructive policy to the next election,” he said.
But an updated report from the McKell Institute has argued that negative gearing reform is more important now than it was when the policy was first adopted.
Released on Monday, the report argues housing is less affordable in 2018 than it was during the height of the boom because of the size of the housing boom. For example, when the original report was published in 2015, the median house price in Sydney was $880,000, but, despite the decline in 2018, it remains at $945,000.
At the same time, housing cost to income ratios have also got worse in all capital cities except Perth and Darwin.
“In 2015, the median Sydney house price was 16.9 times median income, today it is 17.2 times the median income,” the report states. “On most measures, housing is less affordable now in Sydney and other capitals – like Melbourne and Canberra – than it was in 2015.”
The report also found that, despite the reduction in the number of taxpayers claiming a rental loss, the increase in interest rates – especially on interest-only loans – has seen the commonwealth’s tax expenditures on negative gearing increase by $1.6bn.
Sam Crosby, the executive director of the McKell Institute, accused critics of the policy of being “either misguided or cynical”.
“Anyone saying the current correction in the housing market is a reason to abandon negative gearing reform is either misguided or cynical,” he said. “Using the mood of the day to run a scare campaign against reasoned, long-term structural reform is exactly the sort of shallow, kneejerk politics people are tired of.”
It comes as analysts at the investment bank UBS have predicted a significant impact on the economy from falling house prices.
In a note released on Sunday, the UBS team said that, with house prices set to drop a record 10% or more if lending constraints were not eased, they expected consumer spending to drop.
“We think a recovery in income is not enough to offset the fading household wealth effect … We found the lag of falling home prices to spending is typically six months, so the impact is yet to come.”
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