Data from CoreLogic, to be released later this morning, is expected to show another leap in national house prices.
That will please millions of Australians who own their own home or investment property, but it also puts housing further out of reach for first-time buyers.
Bill Shorten, who made housing affordability a centrepiece of Labor’s 2019 federal election strategy, noted: “This nation can’t keep giving away money to property investors to make losses on property.”
The former Labor leader had wanted to change the rules surrounding the popular negative gearing tax break, which allows more than a million Australians to claim net rental property “losses” against their non-real estate income.
Under Mr Shorten’s plan, negative gearing would have been restricted to new homes, and the capital gains tax discount — which allows investors to flip properties at a profit without hefty tax bills and costs the federal budget just shy of $10 billion annually — would have been reduced from 50 per cent to 25 per cent.
But last week, as Labor leader Anthony Albanese reportedly sold his Marrickville investment home for $2.35 million, he announced the party would dump both policies ahead of the next federal election, at the same time as abandoning Labor’s opposition to the federal government’s stage 3 tax cuts.
“We need to ensure that the policies we take to the next election are going to be able to assist first home buyers to get into the market.”
Australian households ‘exposed’ to risk
Low interest rates and generous tax breaks for housing have seen more investors like Darryn Stone make their way back into the property market.
In the early 2000s, the self-employed builder purchased an investment property close to his home in Karrinyup, north of Perth’s city’s centre.
Now he is looking to buy another.
“Anything you look at, there’s definitely overpaying going on in certain sites.”
Mr Stone is currently positively geared thanks to low interest rates, but it will not stay that way forever.
He hopes tax breaks are here to stay to ensure the investment delivers the financial return investors like him need.
“The tax benefit is an advantage, and if that advantage is taken away you’d really have to look closely in terms of the metrics of the income you’re going to produce,” he said.
But economist Saul Eslake has long argued against Australia’s existing housing tax breaks, saying they cause people to speculate and push house prices to unstainable levels.
“The risks — as were clearly exposed during America’s housing meltdown, in the lead-up to the global financial crisis of a dozen or so years ago — are that people who go into home ownership with very thin margins of equity can be in serious trouble if house prices fall and can also be in serious trouble if interest rates go up significantly.”
Investors flock back to the market with higher loan-to-value ratios
Data from the banking regulator, the Australian Prudential Regulation Authority (APRA), shows the portion of new housing loans going to investors is once again rising.
The portion of new mortgages lent on interest-only terms has also gone up from pre-pandemic levels to 19.3 per cent in the March quarter.
The portion of new home loans made with lower deposits is likewise on the rise.
Those with a loan-to-value ratio of 80 per cent or more has increased to almost 42 per cent across all borrowers, making it the highest on record.
Mr Eslake said some of that could be explained by an increase in the proportion of loans being made over the past 12 months to first home buyers, who typically had lower deposits than investors.
“But that can’t explain all of the increase in lending to people that have deposits of 20 per cent or less, nor can it explain a significant increase, from a lower base, in the proportion of loans that are being made to people with deposits of 10 per cent or less,” he said.
“On top of that, in the most recent budget, we’ve had the government announcing new or expanded schemes encouraging people with deposits of as little as 2 per cent to take out housing loans, which I think carries some very significant risks for those people, as well as adding at the margin to the risks to the financial system as a whole.”
Mr Eslake said the policies locked many young Australians out of home ownership.
“And I suspect that when the 2021 census numbers come out, which they should do about this time next year, they’ll show that the home ownership rate has declined even further since 2016, and especially among people under the age of 40.”
High-income men over 40 biggest beneficiaries of negative gearing
Senior economist at the Australia Institute, Matt Grudnoff, backed that up.
He has done analysis that shows the financial benefits of negative gearing mainly go to high-income, middle-aged men.
“More than half of the benefit of negative gearing goes to the top 20 per cent of households by income, while the bottom half get less than 20 per cent,” Mr Grudnoff said.
While there are a significant number of people on middle incomes who negatively gear, the way the tax break is structured means the actual benefit is skewed to those on high incomes.
This is because the benefit from each dollar of negative gearing is based on an individual’s marginal rate of tax.
“A high-income earner on $200,000 per year faces a marginal tax rate of 47 per cent, which means they get back 47 per cent of their rental loss,” Mr Grudnoff said.
“Someone on a more middle income of $80,000 faces a marginal tax rate of 34.5 per cent, which means they only get back 34.5 per cent of their rental loss.”
He added that high-income earners also had the extra income to sustain rental losses.
The latest available data from the Australian Taxation Office (ATO) for 2018-19 showed that of the 2.2 million taxpayers owning at least one rental property, 1.3 million declared a net rental loss that financial year.
In total, landlords reported gross rental income of $47.8 billion in 2018-19, but more than offsetting this were deductions of $24 billion for rental interest, $4.1 billion for rental capital works deductions and $22.8 billion in other rental deductions.
There are still many landlords owning multiple properties and getting deductions on them.
The ATO data shows the bulk — almost 1 million people — had only one property negatively geared.
But there were 11,226 individuals who had negatively geared at least six properties in 2018-19.
CGT discount goes mainly to top 10pc of households
Mr Grudnoff said the capital gains tax (CGT) discount was also “very unfairly distributed”.
“More than 70 per cent of it goes to the top 10 per cent of households by income and almost 80 per cent of it goes to the top 10 per cent of households by wealth,” he said.
And age and gender also matter in terms of who benefits.
“Almost 80 per cent of the benefit goes to those aged 50 and older,” he said.
“Only 12 per cent goes to those under 40 and just 1 per cent for those under 30. It also mainly goes to men, with women getting less than 40 per cent of the benefit.”
He said the CGT discount had made the payoff for negatively gearing a house much more profitable, and also encouraged people to focus their investments on assets they thought would go up in value.
“This is speculation,” he said.
New Zealand’s government looking to make housing more affordable
Australia is not the only country with unaffordable housing.
In New Zealand, house prices have leapt almost 30 per cent over the past year.
But its government, led by Prime Minister Jacinda Ardern, has axed its version of negative gearing in a bid to cool investor demand and make it easier for first home buyers to enter the market.
Chief economist at ANZ New Zealand, Sharon Zollner, said even though the policy’s impact on house prices had been “muted” thus far, “it would be a mistake to assume that the policy is toothless”.
“It makes interest rate increases more powerful, in terms of slowing things down, and increases the risk that more people decide to sell.”
She said that would mean the Reserve Bank of New Zealand would need to tread fairly carefully when it raised interest rates “to make sure they don’t cause an accident”.
In 2019, the Property Council of Australia commissioned modelling that showed the economic consequence of pulling back housing tax breaks.
Its chief executive, Ken Morrison, said modelling undertaken for the council by Deloitte Access Economics found that Labor’s previous policy would have reduced gross domestic product by $1.5 billion, shrunk the construction sector by $766 million, and failed to meet its stated objectives of improving housing affordability and increasing housing supply.
He said most Australians who used negative gearing were “not rich property barons with dozens of properties”.
The Grattan Institute’s chief executive, Danielle Wood, said scrapping housing tax breaks alone would not stop the market from overheating or be the “silver bullet for affordability”.
“You might only wipe a couple of percentage points off the overall price [of housing],” Ms Wood said.
“But what it does is mean that you’re going to have more homeowners in the mix and fewer investors.
“It’s about shifting the kind of balance of who’s buying houses.
“And if you believe that home ownership is important … particularly for young people, then this is a way that we can even the playing field.”