Property & Home

Would you give up tax concessions to improve social housing?

Nov 09, 2017

Australia has a frighteningly low percentage of social housing. Source: Pexels

According to a new report from Industry Super Australia, the government is “dishing out” $14 billion in individual tax concessions each year, and the money would be better spent on affordable housing projects for those who are unable to purchase their own home or enter the rental market.

While the Assisting Housing Affordability report says that incentives like negative gearing fuel “unsustainable growth in property markets”, many Australians rely on these tax incentives as a way to turn short-term profit-loss pain into long-term gain.

Statistically, Australia has one of the lowest proportions of social housing (4.2 per cent) in the Organisation for Economic Co-operation and Development (OECD), which is made up of 35 countries including the United States, the United Kingdom, Canada, New Zealand, South Korea and Greece.

As a result of our lack of social housing, many are being “locked out” of the property game.

“Young Australians are either up to the eyeballs in debt and in fear of losing their jobs; or destined to forever service someone else’s mortgage,” Dr Stephen Anthony, report author and Industry Super chief economist, says.

Young Australians are not the only group of concern here; there have been increasing reports of older Australians, particularly single females, who are facing homelessness because they cannot afford to rent and there is no sufficient social housing for them.

It’s a troubling situation for our country to find itself in. So what would actually happen if property owners gave up negative gearing in an attempt to improve social housing for others? For the answer to that, we can look back on the past.

Currently, the act of negative gearing means that if an owner makes a loss on their rental property, whether due to natural depreciation or insufficient rental income, they can claim that loss against other sources of income, such as the salary they receive from their day job. This means they could either potentially get the loss back in their tax return, or they could lower the amount of additional tax required to be paid at the end of the financial year.

In the 1980s, the Hawke government had a bit of a back-and-forth about whether or not negative gearing should be allowed to be claimed against other sources of income. In 1985, negative gearing rules were changed so that negative gearing could only be claimed against rental income.

It was an unpopular move with Australian property owners, many of whom claimed that the loss of negative gearing was forcing them to increase rental prices to a level that renters could not afford. When the houses could not be rented, property owners sold them off, thereby decreasing the amount of rental opportunities available to those who could still afford it.

The decision was reversed in 1987, and negative gearing was once more allowed to be claimed against other sources of income, which is the system we have today.

If things played out in the same way as they did some 30 years ago, removing negative gearing concessions could land us right back in the same position, with only a few differences: rental properties come off the market, houses are sold at higher prices to recoup losses, more people are left without rental opportunities, and we then need more social housing because a greater percentage of people cannot afford to enter the rental market.

Anthony’s report includes the suggestion that the government consider concessional land release. The problem with concessional land release is that many of the capital cities in states and territories are running low on places to develop without moving further and further afield.

So while the cities would technically just get bigger, people would either have to travel extensively for centralised jobs (thus incurring more transport fees) or better infrastructure would be needed closer to these land releases.

Even if we reallocated every cent of the $14 billion by cutting all those individual tax concessions, the cost of land release and the required associated development (schools, hospitals, public transport and roads just for starters) could far outweigh the savings.

We also have the added issue that many Baby Boomers have been entering the investment property market because they’re worried the pension will be unreliable and they’ll have to fund their own retirement. So if negative gearing is curbed and those Baby Boomers lose out on a potential income stream or are taxed to the hilt for a property that was supposed to improve their livelihood, they will then be forced to rely more heavily on the government to see out their years.

Treasurer Scott Morrison said in January 2017 that changes to negative gearing were not the answer, and that similar options to those employed by the Hawke government would not work. Morrison also said he and the government were looking to the private sector to improve the situation.

“Here [in the UK] you’ve got institutional investors, you’ve even got Australian superannuation funds investing in affordable housing in the UK,” Morrison said. “We need to ensure we have an environment where they’ll do the same thing in Australia.”