• What would be the effect on property prices if a future government changed the rules around negative gearing? (AAP)
Negative gearing has no productive output, which makes it morally distinct from other sorts of investment, and less obviously fair that people get money out of it.
By
Daniel Halliday

10 May 2016 - 4:02 PM  UPDATED 10 May 2016 - 4:02 PM

It’s set to be a key election battleground: Labor have proposed to limit negative gearing whereas the Coalition has ruled out any changes to the current system.

In most public debate, the question of negative gearing - the right to deduct expenses on rental properties from one’s taxable income - is framed in terms of the affordability of housing. Making it easier for people to buy homes as rental properties may be pushing prices up so that renters can’t become owner-occupiers.

Prices always depend on a range of factors, and the impact of negative gearing is therefore contested. But there’s an enduring issue that will remain whatever the facts about how house and apartment prices work. This has to do with what sort of role investment should play in society.

The Assistant Treasury Minister Alex Hawke has said that property speculation is “a fundamental of Australia’s wealth creation”. Wealth creation? What is meant by this? Clearly negative gearing can help some people get financially better off. So, that’s wealth.

READ MORE
Grattan Institute dismisses government's negative gearing claims
The Grattan Institute has proposed changes to negative gearing and capital gains tax that would save $5.3 billion a year.

What does property investment actually create?

If I invest by buying shares in a company, or by purchasing a working property like a shop or petrol station, then there is clear productive output. My financial return is my share of that output that was created by putting my investment to work (paying workers’ wages and covering other production costs). Even a failed investment needn’t be a dead loss to society, as it might have kept someone in a job for a certain amount of time.

There is good reason why we do not refer to the national stock of houses and apartments as an ‘industry’. The reason is simple: Homes are useful, but their use is primarily in their ability to just sit there so that people can live in them.

If I buy an existing home and let it to tenants, then nobody gets employed (a single letting agent will typically manage numerous homes) and nothing tangible gets produced. My financial return is not a portion of anything that my investment helped to produce.

Instead, I get an income from my ability to extract money from people who need a place to live but couldn’t afford to outbid me at the auction.

This is wealth that my tenants have already created, probably through earning wages on which they must also pay tax. They didn’t need me to own the roof over their head for this to happen.

READ MORE
Negative gearing memo 'not RBA position'
Finance Minister Mathias Cormann says a Reserve Bank memo critical of negative gearing isn't their official position and shouldn't be misrepresented.

Is it fair that I get a share when I, and my money, have not really done anything?

For sure, property investment can provide a productive role in some contexts.

Investors sometimes provide the money for building new homes, and large cities tend to have some transient population who do not want to buy and settle down.

It may be fair to reward such investments, which are actually providing the housing. This is because inequalities are more likely to be fair when they help produce a larger ‘pie’ - even if some get larger slices than others.

But in any case, such accommodations could be attainable without a wide legal right to negative gear on existing properties. Stamp duty, for example, is already waived for new builds. It’s also worth remembering that tenants might improve homes if they knew the property was theirs to keep, a guarantee that renters do not enjoy.

READ MORE
Comment: Think of the children - why the housing market has to change
Home ownership is becoming a far away dream for many who are not lucky enough to still be living with their parents at the age of 30 and saving every penny. Something has to give.

Most property investment is not a way of creating new wealth

Too often, it is a way of concentrating existing wealth in the hands of those able to play the investment game, and who (quite understandably) wish to avoid the risk of investing in real industry.

This is not a new story. It’s been around since the discipline of economics got going in the 19th Century, and it’s a story that the Prime Minister, Malcolm Turnbull, used to tell.

Do we want to be a society that creates wealth or one that sets up a tax policy so that workers subsidise owners?

Shouldn’t income from investment be treated differently when it helps create jobs or new goods and services from when it doesn’t?

Tax policy could easily be designed to better reflect these different ways in which people get their share of the national wealth, even if reforms would need to be phased in gradually.

The question of what causes house prices to rise and fall will remain difficult, just like many questions about causation in the economy.

But negative gearing is not just a question about causation. It is also a question about justice and fairness, which is why it is proving emotive. Rather than letting emotions cloud our judgment, we will do better if we can recognise the problem for what it is. It might even make it easier to answer.

Dr Daniel Halliday is from the School of Historical and Philosophical Studies at the University of Melbourne.

This article has been co-published with ElectionWatch.