A leading Australian economist has called for the Abbott government to put downward pressure on surging house prices by ending negative gearing for new investors.
Negative gearing allows investors to deduct losses made on rental properties from their other income, reducing their overall taxable income.
Saul Eslake is the chief economist from Bank of America Merrill Lynch, and he says negative gearing is contributing to house price inflation and causing a housing bubble situation in the country.
If the government ended negative gearing for new investors it would likely lead to a reduced amount being borrowed, as investors would either pay less for property or not buy as many because the tax incentive is no longer there. Property prices would come down as a result.
The comments come after the RBA warned this month that house price rises are being driven largely by investors buying existing properties using negative gearing, and that the RBA may need to use macro-prudential policies to rein in the nation’s property prices.
The central bank’s Financial Stability Review last week revealed 40 per cent of all home loans were from investors.
Mr Eslake’s comments throw doubt on recent information that has come forward suggesting that foreign investment is a large factor in the nation’s rising house prices.
The federal government asked the House of Representatives Economics Committee to investigate the impact of foreign investors on the housing market in response to that information, and they are still investigating the problem.
Grattan Institute chief executive John Daley told The Age it was Australia’s planning policies that have the most impact on house prices, not foreign investment or taxation.
“The numbers on foreign investment are very difficult to gather, but it certainly looks as thought the are not the major source of investment in Australian housing,” he said.
“The essential problem is that land prices are very high, and land 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.”