Experts say negative gearing is having a greater impact on Australia’s rapidly rising house prices than Chinese investment.
But that statement comes with a qualification – it is very difficult to know what the level of Chinese investment in Australia’s residential real estate is because authorities do not have data that breaks things down that much.
One of Australia’s most respected economists on Tuesday called for the Abbott government to rein in surging house prices in Australia’s capital cities by putting an end to negative gearing for new investors.
Saul Eslake, chief economist from Bank of America Merrill Lynch, said negative gearing was contributing to the inflation of property prices to the point where Australians could find themselves in a “bubble situation.”
He said the Abbott government ought to consider ending negative gearing for new investors because it would help to reduce the amounts that are being borrowed.
If that happened, new investors would either start to pay less for properties or not buy as many because the tax incentives wouldn’t be there, and that would help to reduce property prices.
Negative gearing allows investors to deduct losses made on rental properties from their other income, thereby reducing their overall annual tax liability.
Mr Eslake’s call comes after the Reserve Bank warned this month that macro-prudential policies may be needed to keep a lid on the country’s soaring house prices.
The RBA said house price growth was being driven by investors, a large proportion of which are buying existing dwellings, rather than new dwellings, using negative gearing.
In its Financial Stability Review released last week, the Reserve Bank said strong demand by investors meant investor housing loans now accounted for about 40 per cent of all home loans.
It said it had become so concerned about Australia’s overheating property markets that it was openly questioning whether bank lending practices were “conservative enough”.
But the RBA’s warning, and Mr Eslake’s criticism of negative gearing, comes after repeated warnings from real estate agents about the level of Chinese investment in local real estate markets.
Real estate agents have been warning that foreigners have been circumventing Australian laws to buying existing properties in Australia, pushing prices up and forcing locals out of the market in the process.
That’s despite Foreign Investment Review Board data, from 2012/13, showing overall foreign investment in local residential property has fallen 18 per cent in the past two years.
The federal government responded to those warnings from real estate agents this year by asking the House of Representatives Economics Committee to investigate the impact of foreign investors on the housing market.
That committee is still investigating the problem.
On Monday night, Liberal MP Kelly O’Dwyer, chair of the House committee, said the Foreign Investment Review Board had failed to prosecute any foreigners for illegally buying Australian homes since 2006, and that it needed to be called to account.
But she could not say how many foreigners were buying Australian homes illegally.
And when asked about negative gearing, Ms O’Dwyer said she had no problem with the practice.
“I don’t see there being any need to actually change those rules [on negative gearing],” Ms O’Dwyer said.
“There are lots of unintended consequences that flow from changing rules such as negative gearing.”
But Mr Eslake said on Tuesday that negative gearing was a greater problem for rising house prices than foreign investment.
In the absence of reliable and detailed information on the extent of foreign investment in Australia, it was “almost impossible” to know how much Chinese investors – and investors from any other country – were investing in local real estate, he said, he said.
The Grattan Institute says negative gearing costs the federal government $2.4 billion a year, and there is “little justification for it”.
But Grattan Institute chief executive John Daley said Australia’s planning policies have the biggest impact on house prices – much bigger than foreign investment or the tax regime.
“The numbers on foreign investment are very difficult to gather, but it certainly looks as though they are not the major source of investment in Australian housing,” Mr Daley said.
“The essential problem is that land prices are very high, and land high prices are very high because land is a scarce resource and we’re making it much more scarce by making it very difficult to subdivide it.”