Negative gearing lifts housing prices by up to 4pc

Federal MP Jason Falinski has acknowledged that negative gearing pushes the price of housing up by as much as 4 per cent but defended the tax break for property investors, saying the diversity of ownership it creates is good for the country and the economy.

A report to be tabled in Parliament on Friday is likely to recommend negative gearing be retained while recognising the measure’s effect on housing affordability. The inquiry into housing supply and affordability was chaired by Mr Falinski.

Labor plans to abolish negative gearing and halve the capital gains tax discount were key proposals the government successfully fought at the election in 2019.

In an address to the Urban Development Institute of Australia, the Member for Mackellar on Sydney’s northern beaches said econometric analysis showed negative gearing increased the cost of apartments by as much as 4 per cent and that of housing on a city’s outskirts by about 0.1 per cent.

He also acknowledged problems in the private rental sector, saying “some mum and dad investors are not very good landlords,” even though the majority were good.

Even so, Mr Falinski said, the benefits of private home investment outweighed the downsides.

“The diversity of ownership, the classlessness that that creates, the equality of wealth that provides, the sense of ownership in a state, in your country and the economy that that gives you so outweighs the costs of somewhere between 0 and 4 per cent that I think we would be pretty silly to get rid of negative gearing,” he said.

The federal election due in May is unlikely to see the same arguments over negative gearing and capital gains tax deductions for property investors as it did three years ago because Labor dropped its policy on the issue last year.

But housing affordability has worsened as a result of sustained record-low interest rates that have inflated asset prices, including residential property, and driven up values faster than wages have grown.

Fresh Australian Bureau of Statistics figures on Tuesday showed the country’s housing stock rose in value to $9.9 trillion in the December quarter.

Even if the political debate is over, concerns about the effect of tax breaks for property investment remain.

“The core argument that this is a good thing flies in the face of argument that you want higher home ownership,” said Brendan Coates, the Grattan Institute’s economic policy program director.

In a submission to the inquiry last year, Mr Coates said the abolition of negative gearing and a reduction in the capital gains tax discount would trigger a “modest” discount to property prices in the order of 2 per cent and that lower priced properties would probably fall by more.

“If you want high home ownership, then people need to own their own homes,” he said.

“If you’ve got investors in the market, then you’ve got lower rates of home ownership by definition.”