Slashing tax deductions for property investors would erode housing affordability and drive up rents, a new report says.

The report, commissioned by the Housing Industry Association, argues that if the federal government reduces incentives such as negative gearing, people could be less inclined to invest in housing.

The current undersupply of homes could also be exacerbated, pushing up rents.

The report comes ahead of the federal government’s White Paper on tax reform, which it announced plans for during the last election campaign.

Cuts to negative gearing were recommended by the Henry Tax Review in 2010.

Negative gearing allows investors to fully deduct costs associated with a rental property against their income, reducing their tax liability.

It has long been criticised as a policy that hurts housing affordability and pushes up prices.

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The Henry review recommended reducing the level of tax deductions available from negative gearing by 40 per cent.

But the HIA report, compiled by Independent Economics, argues that any reductions would worsen housing supply issues and drive rents almost one per cent higher.

It also claimed that negative gearing helped offset the $7 billion paid out in stamp duty on residential property in 2011/12.

Abolishing stamp duty and replacing it with a higher GST would actually slash rents by 5.3 per cent, it said, and remove a key
disincentive to property investment and moving house.

But Saul Eslake, chief economist at Bank of America-Merrill Lynch, said negative gearing did nothing to improve housing supply because most geared investors buy established housing.

“The proposition that negative gearing does anything to improve the supply of affordable rental housing is nonsense and without foundation,” he told AAP.

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“The impact of negatively-geared investors is to drive up the price of existing properties rather than to induce increases in the supply of properties.”

However Family First Senator Bob Day welcomed the report, saying it showed that negative gearing had been falsely accused of causing housing affordability problems.

“In fact, it is a net contributor towards more affordable housing,” he said.

Senator Day said negative gearing was just one of the distractions put up to detract from the real causes of Australia’s housing affordability “crisis” – a lack of supply.

“Government charges (like stamp duty) and land restrictions have forced these prices up, and those supply constraints are what must go,” he said.

Mr Eslake said the suggestion of abolishing stamp duty and replacing it with GST or a broader land tax would be a positive development, but he’d like to see negative gearing axed.

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“Investor demand for (established) properties would be less, they’d become cheaper, first-home buyers would be more able to buy them and therefore they wouldn’t need to rent, so the demand for and supply of rental housing would fall by equal amounts – what’s the problem,” he said.

“The idealist in me would love to have negative gearing abolished altogether.

“The realist in me says that with 15 per cent of taxpayers having negative gearing and voting, that’s never going to happen.” AAP

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