Interest rates that are at record lows and likely to remain so present a rare opportunity for the federal government to help new owner-occupiers acquire a property by restructuring investor tax arrangements.
This situation has even led to renewed property industry warnings of adverse political consequences of any such action.
Despite these claims, the government’s funding problems and Reserve Bank’s concern about a housing price boom increase the attractions of changes that focus on expanding the housing stock while limiting the future cost of negative gearing. Following long established grandfathering arrangements, protecting existing geared investments from the changes would moreover protect the interests of current investors.
Any changes would thus only apply to new investments and could be extended across all asset classes. If the over-riding goal is to expand the rental housing stock to help limit both price and rental increases, a cost-effective option would be to focus new negative gearing outlays only for purchases of newly constructed properties until they are resold.
The ongoing losses on new purchases of existing properties and of other investments could then, as is the most common approach overseas, be either offset against other investment income or carried forward to future years.
Changing the tax arrangements for investment housing borrowing would also have more chance of reducing the competition from investors than APRA’s attempts to limit the growth in lending to investors. That effort to reduce the growth in bank lending to investors faces major obstacles.
Investors, especially those using other assets including their owner occupied home as collateral, offer far better risks to lenders than do many owner occupiers. Investors are much more attractive propositions for lenders because of their additional cash flow from their net rental income and the ongoing tax refunds from their losses and generous depreciation allowance deductions. This places them in a superior position to owner occupiers whose ongoing interest costs have to be funded out of their own after-tax income.
Because of the tax incentive not to repay tax deductible interest loans quickly, investors have a cash flow advantage from their annual tax refund and their greater flexibility of using fixed rate interest only loans. Investment borrowers can as they did in the earlier bank regulation period easily source their loans from non-APRA supervised entities such as mortgage trusts and solicitor’s trust funds.
Concerns that changing negative gearing arrangements would reduce the available rental stock and increase rents would only be relevant if draconian retrospective changes were to be made.
Focussing future taxation assistance to new investment construction would expand the available housing stock with the advantage of encouraging economic activity which subsidising investment purchases of existing properties does not.
Daryl Dixon is the executive chairman of Dixon Advisory