Current Australian taxation policy heavily favours owner-occupiers over investors, although that is not the common view. Our study of the housing market over the last 5 years shows it’s not negative gearing that is freezing first home buyers out of the market.
Rather, the evidence points towards the relative ease with which investors, who generally own their own home, can use that equity as a deposit, compared to the first home buyer who has to save a deposit from scratch, being the factor that makes affordability an issue in this country.
We have suggested in earlier research this could be solved by allowing first home buyers access to their superannuation savings to supplement their other savings for the deposit on a first home.
Critics, like Opposition Leader Bill Shorten, say “…rather than raid superannuation and starve people of income in retirement, you need to reform negative gearing in capital gains tax deduction”.
What this study shows however, is that superannuation has been a relatively poor investment in the recent past, and investing their savings in their own home is the best investment an average Australian could have made, by a factor of almost 2.95 times!
It also shows that Labor’s changes to negative gearing and capital gains tax, would not remove investors from the market.
Labor’s proposed policy heavily penalises investors but it is likely they would still be active in the housing market because based on the last 5 years, a geared investment in housing would still beat an investment in superannuation by up to 71% after tax!
For owner occupiers, under Labor or Coalition policies, the after-tax return on housing was up to 26.83%, while for investors the maximum after-tax return was 15.86% under the Coalition and 11.67% under Labor.
The absolute best superannuation return over the same period was 10.8% (only available to employees of Goldman Sachs and JB Were) down to -0.3%. The median was 6.8%.
The major findings of this study are:
- Existing tax policy significantly advantages owner occupiers over investors with the after-tax return being as much as 74% better for the owner-occupier than the investor.
- The startlingly better rate of return received by owner occupiers over investors indicates owner occupiers are not being outbid by investors because of the tax arrangements. This leads to the conclusion it is the relative ease with which parties can secure a deposit which makes the difference. Increasing access to savings for a deposit is the only measure likely to increase housing affordability for first home buyers without prejudicing the savings of other Australians by decreasing the price of housing. (Supply side measures, as well as interest rate movements, will also have an impact, but over time, and not without side-effects that might be said to be undesirable.
- A geared investment in housing over the period 2011 to 2016 returned up to 2.95 times more than a comparable investment in superannuation would have over the same period. This made borrowing as much as possible a winning wealth maximisation strategy, irrespective of the tax arrangements supporting investment.
- In the last 5 years the net savings of Australians would have been adversely affected by directing money into superannuation in preference to housing, thus adversely affecting them in their retirement.
- The ALP policy of quarantining losses against income from the property would increase the tax advantage that owner-occupiers have, but investor returns would still be sufficient to encourage discretionary investment in housing by non-owner-occupiers because the returns for most would still have been better than superannuation.
- The major increase in tax revenue under the ALP plan occurs because there is a 50% increase in the tax paid on capital gains, while the increase in revenue from quarantining deductions is largely due to timing. This means the policy will encourage investors to hold on to properties to avoid the capital gains tax, all other things being equal. This is likely to lead to a less liquid, and more expensive, real estate market.
- The significant increase in the capital gains tax should also have ramifications for investment in other industries, and act as a disincentive to investment.
- Returns increase with gearing. This means that gearing by investors is encouraged in general because it results in higher returns. As increased taxation rates reduce the returns for investors, they encourage them to gear up to compensate.
- The better after-tax returns that obtain for lower income earners indicate that not only are owner-occupiers advantaged by the system, but so are lower income earners, which explains the fact that most negative gearers appear to have a modest income. If you are the stereo-typical medical specialist on a million dollars a year, there are undoubtedly higher returning investments you could make.
To download the whole paper, please click here.