Actual figures show tax system favoured owner-occupiers over investors

Dear ,

We have just published analysis of the residential housing market using ABS figures for the period 2011-2016. In contrast to the public debate it shows that home owners are signficantly advantaged over investors by the current tax system. It also shows that over that period investment in buying your own house outperformed the median super return by almost 3 times (26.83% v 6.8%)

The paper is at https://aip.asn.au/2017/05/housing-investment-the-last-five-years/.

Summary of the major points is:

• 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.
• 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 (26.83% v 6.8%). 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. Super returned a median of 6.8%, with the absolute best return being 10.8% in one small company fund.
• 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 indicates 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.

For further information contact Graham Young 0411 104 801