Inconvenient consequences of capital gains and negative gearing changes

Friday, 11 March 2016  Media Alerts

It is impossible to look past the current political debate on negative gearing and capital gains," says Dr Nigel Stapledon, the Andrew Roberts Fellow and Director Real Estate Research and Teaching at the UNSW Business School.

In a CAER research note, the first of what will be a series of notes on different topics on housing, he says that the economics are clear. The only scope for argument is over the orders of magnitude of the increases in rent and decline in prices and the effect on activity in the short run. "The direction for rents and prices with tax changes is clear. Orders of magnitude are less clear," he says.

"Increases in capital gains tax for all dwellings and disallowance of negative gearing for established dwellings will increase the user cost of investors for both new and established dwellings and, other things equal, will mean some combination of higher rents and lower prices; and by default higher rent-price ratios," he says.

"While owner-occupiers could be expected in time to largely fill the gap, the immediate effect will be less investor demand for new dwellings."

Taking the Henry report out of the bottom draw, he proposes a phased reduction in tax rates on savings which would naturally reduce the value of negative gearing. In addition, he proposes a return to inflation-indexing of capital gains and disallowing borrowing by super funds.

He adds: "by cutting negative gearing and increasing capital gains tax, the proposed changes will increase the wedge between high taxes on voluntary savings relative to owner-occupied housing and superannuation. And yet the Henry Tax Review argued that the wedge should be reduced."

Nigel Stapledon suggests that in terms of new housing, the frequently quoted statistic that less than 10 per cent of investor borrowing goes to new dwellings is not correct. Some suggest that it may be as low as 5 per cent.

"While ABS data is quoted as the source for this, the ABS data on owner-occupied borrowers gives data for both construction and purchase of new, but only the former is available for investor borrowing while the latter is mixed in with established and refinancing. This is a major omission." However, he finds a reasonable assessment of the ABS data is that about 20 per cent of lending is for new, roughly in line with the 22 per cent figure for owner-occupiers.

"As a share of new dwellings, investors account for over 30 per cent and, in the current cycle, it is likely to be running in the order of 40 per cent. Even allowing for foreign buyers, the low figures quoted make no sense given the role of investors in the building boom in new units."

He suggests the already larger role played by investors in the new dwelling market, almost certainly skewed to high income investors, results in 'savings' that are likely to be significantly smaller than estimated by the Parliamentary Budget Office.

For further comment contact Nigel Stapledon on 02 9385 9703, 0403 921644​​