“A small number of high income investors are accruing a large negative gearing benefit, as the Grattan Institute has headlined”, says Nigel Stapledon, the Andrew Roberts Fellow and Director Real Estate Research and Teaching at the UNSW Business School.
“But what is also true is that those high income investors also have substantial other investment income against which to negatively gear a property,” he says. “So while some high income investors will be affected by the change, a substantial number will not be affected. For this cohort the inevitable rise in rents will probably offset the other hit to investors, the increase in capital gains tax.”
In a CAER research note as part of his series of notes on different topics on housing, he looks at some of likely intended and unintended consequences of the proposed changes to negative gearing.
In his report Nigel Stapledon says that, by contrast with high income investors, low to middle income investors have significantly less other investment income, and the likelihood is that a greater proportion of this group will be adversely affected by the changes to negative gearing. Therefore, they are the most likely to exit the market.
“The NAB Residential Survey also suggests that in 2015 over 30 per cent of first home buyers are entering the market as investors rather than going directly into owner-occupation,” he says. “No doubt some of these first home buyers are on high incomes. But a good number would be low-middle income earners trying to build equity, hedge against future rises in property prices, and retain some mobility as they establish their careers.”
In a report last month Nigel Stapledon had outlined his support for the Henry Tax Review proposal to change the taxes on savings, which would have provided a sounder basis for winding back negative gearing for all investors.
In this report he has also rejected suggestions that the changes in capital gains tax in 1999 caused the rise in prices experienced in Australian housing in the subsequent decade and a half.
“In truth, the big rise in prices which actually started circa 1996 in the Sydney market was primarily drive by the lagged response to a big decline in nominal and real interest rates,” he says.
“While inflation and mortgage interest rates fell in the early 1990s sharply from their 1980s levels due to the recession, borrowers were not convinced that inflation was beaten and that interest rates would not return to the 1980s levels of 17 per cent or more, until the mid-1990s when the then interest rate cycle peaked at ten and a half per cent. By 1999 interest rates had dropped to 6.5%.
“This was a huge stimulus to housing. With the economy on the rise, buyers were prepared to borrow more and jump into the housing market. And so began the big rise.”
Taking an international perspective, the declines in interest rates and rises in prices are hardly unique to Australia. After all, he says, “there were very similar rise in prices in NZ, California and Canada. And the latter two have much tighter tax rules on investors. Conflating the role of investors in the Australian context might be a good blame game, but the truth is the story has been an interest rate story.”
The good news for buyers is that the housing boom seems to be deflating, something which will be looked at more closely in the May report.
For further comment contact Nigel Stapledon on 02 9385 9703 or 0403 921 644.
Julian Lorkin: 02 9385 9887