Debt and negative gearing

Jun 17, 2014

Many have grown tired of the exaggerations by the Coalition about debt and deficits. The fact is that, as least as far as public debt is concerned, we don’t have a problem. The public debt emergency is confected. Our public debt is about $300 billion which in world terms is a very low figure.

But the real debt we have is household debt which is approaching $2 trillion, one of the highest in the developed world. Our household debt is 1.8 times household disposable income. This compares with 1.1 times in the US.

A contributor to this enormous household debt is negative gearing. Under our tax system an investor can borrow on a property or asset even if the income generated is unlikely to cover the interest on the loan. Losses on the so-called ‘negatively geared’ properties are income tax deductable. These deductions are estimated to cost the budget about $15 billion p.a. The main beneficiaries are people on higher incomes. The Abbott Government didn’t go near this problem in his budget. Successive Labor governments have also avoided it.

There is not only the loss to the budget of about $15 billion p.a. Negative gearing also skews the market. According to the Reserve Bank, almost 95% of investors in dwellings buy existing and not new dwellings.  This results in increased prices for existing dwellings.  The proportion of investors buying new dwellings has fallen spectacularly since negative gearing was introduced I 1987.This makes it very difficult for first-home buyers to afford a home. With so little negative gearing going to new buildings, there is little boost to the supply of new houses.

This issue must be addressed on both budgetary and equity grounds. Politically it should be possible to ‘grandfather’ arrangements for existing investors and only allow negative gearing in future on new dwellings. This wouldn’t save the $15 billion mentioned above but there would be a saving to the budget in the early years of about $4 billion pa.

Negative gearing makes big calls on the budget. It forces up prices of existing buildings and it makes it very difficult for new home buyers to get into the market.

Domestic household debt, encouraged by negative gearing financed by the banks, is a far greater problem than the low level of public debt that the Coalition keeps telling us about.

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