Dennis Jensen (Tangney, Liberal Party) Share this | Link to this | Hansard source

Labor's proposed changes to negative gearing put jobs and growth at risk. One-third of all new dwelling construction is financed by investors every year. Changes to negative gearing will result in a loss of investment, and it will impact on housing supply. A typical new house involves up to 40 tradespeople—from bricklayers to carpenters, to electricians, to plumbers. This is the real economy that negative gearing underpins. It is at risk if the government tinkers with something that has been an integral part of the tax system for 100 years.

Two million Australians own an investment property. Two-thirds of property investors who benefit from negative gearing earn a taxable income of less than $80,000 annually. There are ten times more negative gearers who are nurses, teachers and Defence Force personnel than those who are surgeons, anaesthetists and finance managers—more than 100,000 claimants compared to less than 10,000.

Just like their infamous mining tax, Labor's proposed change to negative gearing promises big but raises very little revenue. Investors accessing negative gearing will have only one option—of going to the new home market. If you are a first-home buyer, you will be competing with all of them. And there are unintended consequences. With negative gearing and low interest rates triggering frenzied investor speculation, conservative estimates now put the Sydney market, at a minimum, 25 per cent over valuation, whereas they had it around fair value in late 2012. Now that housing has boomed again on the back of falling rates—at least in Sydney and Melbourne, our two biggest markets—the fuse is set for a property implosion. Moreover, the Reserve Bank now has no ammunition left to head off a housing crash if that fuse is lit.

It is obvious that removing the negative gearing tax benefit would set off price falls, as many heavily negatively geared investors would rush to offload one or more of their properties because they simply could not afford to hold them without the tax write-offs. With average rental losses of almost $10,000 per negative gearing taxpayer, it is impossible not to see how tens—if not hundreds—of thousands of investors would simply have to sell if negative gearing was removed entirely. The higher the losses, the less likely an investor can sustain them without being able to offset them against their annual income tax bill.

The market could easily take a couple of years to clear the sales of those looking to get out. Renters will be waiting for prices to drop before they buy; it will take a while for landlords to get their properties on the market—and the sales and loan approvals process takes months in itself. There is also the risk that, with falling prices, prospective buyers will be hesitant to catch a falling sword—that is, the falls could be larger and more sustained than analysts expect before the market hits bottom. It is important to note that the current framework allows one to go into what would otherwise be a negative cashflow investment. Negative gearing does mean you are losing money. But many innovative technology companies and software companies lose money in the early stages.

The Hawke-Keating government tried to get rid of negative gearing in the eighties. What they found was that property investors were not prepared to wear the losses, so rents spiked. It also meant that people got out of the property market, so prices went down. What such a change would likely mean for the housing sector now is that investors would want to see higher rental returns than those currently on offer. Furthermore, the government may have to play a larger role in providing social housing if investment levels are reduced. Labor would do well to heed George Santayana's advice: those that fail to learn from history are doomed to repeat it.