Victoria, Australia – June 4th, 2016 – There are many theories as to why Australian housing prices have soared over the past decade, most of these so called experts look to peripheral factors with flimsy evidence to back up their claims.
Negative gearing is one of their pet factors they claim has caused residential housing prices to soar however, this has been government policy for over 25 years and their claims are flawed as I will explain later in this article. Negative gearing was originally designed to increase the rental housing supply and figures indicate that the policy is an outstanding success for both tenants and investors. Investment housing as indicated below in graph 1 now matches home owners in value and thus any disruption to this policy will cause a major downturn in the Australian housing market.
The obvious cause of soaring housing prices is the collapse in interest rates over the past 8 years, falling by as much as 6%, from 7.75% in 2008 to 1.75% in March 2016 as indicated in graph 2. The collapse in interest rates allows home buyers to borrow more against their current homes or investment property thus increasing the value of the housing stock. This spiral upwards is to the despair of first home buyers who struggle to catch up with the ever increasing values. Retirees also suffer as bank interest is no longer an option for retirement income.
The Australian Labour Party (ALP) have seized on a flawed report on Negative Gearing by The Grattan Institute to push their cause. The Grattan Institute fails to address interest rates as the main case of the property boom and naively suggests investors should buy new homes on the fringe of suburbia where capital growth is lowest and any resales compete directly with the cost of construction rather than demand.
Furthermore, the ALP policy would also reduce the number of buyers in the property market by around a third with the property sector being split equally in three areas, Tenants, Investors and Home Owners. This naive policy to change the current negative gearing policy is at the peril of most Australians as the stampede to sell early will have catastrophic consequences on the Australian economy and unemployment, with a third of all property purchasers vacating the property market to look for more lucrative investments and Tenants finding accommodation almost impossible to secure.
Also, had The Grattan Institute simply looked across the ditch, they would find that the New Zealand taxation system doesn’t have a Capital Gain Tax at all and personal taxation rates are significantly lower than Australia’s being 10.5% = $0 to $14,000; 17.5% = $14,001 to $48,000; 30% = $48,001 to $70,000 and 33% thereafter. Other countries in our region (Singapore 17%, Hong Kong 16.5%) similarly have significantly lower taxation rates than Australia’s.
Finally, The Grattan Institute article seems to be a naïve attempt to increase taxation on flimsy evidence where in contrast, the majority of evidence is that Australia’s taxation system as simply uncompetitive with the rest of the world.
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