Short Memory

Alternative Title – Shortened Memory

Negative Gearing and Capital Gains Tax: Foundations of the New
Australian Housing Model

INITIAL DRAFT
16 May 2016

Prepared by Brian Haratsis

Executive Chairman

Strategic Planning • Property Advisory • Economic Analysis • Retail Analysis • Spatial Planning • Policy and Strategy • Financial Analysis • GIS Mapping
MacroPlan Holdings Pty Ltd | ACN: 603 148 545 | ABN: 21 603 148 545
Level 4, 39 Martin Place, Sydney NSW 2000 • T (02) 9221 5211 • F (02) 9221 1284 • info@macroplan.com.au • www.macroplan.com.au
Table of Contents
Executive Summary ......................................................................................................... 3
1. Context ............................................................................................................................... 6
2. Long Term Housing & Rental Prices in Australia ....................................................... 10
3. Impacts of Negative Gearing & CGT on Price & Rental Levels ............................ 20
4. Impacts of Proposed Changes to Negative Gearing & the CGT Discount ........ 32
5. Residential Market Downturn ....................................................................................... 39
6. Appendix 1 ...................................................................................................................... 42
7. Appendix 2 ...................................................................................................................... 43
8. Appendix 3 ...................................................................................................................... 45

Page |2
_Executive Summary
1. The ALP proposal to permit negative gearing of
wage income only on new buildings and to reduce
the Capital Gains Tax discount from 50% to 25% will
have three major short term to medium term
impacts.
2. Over the next decade it will reduce by over 1
million, the number of negative gearing landlords.
This will directly impact on 45% of the 2.25 million
renting households. It will increase rents by 8.8% for
these negatively geared dwellings.
3. Second it will remove 205,000 dwellings from the
rental housing supply stock. Given the current
historically high levels of housing stress (50% of lower
income households were assessed as being in stress
by the ABS (in 2014) and 55% are currently
estimated for 2016 that waiting lists for public
housing are also at historically high levels (150,000
households), an immediate increase in social
housing will be required to replace low income
rental stock.
4. Third it will create a ‘resale price cliff’. Our detailed
study of the Melbourne CBD / Docklands /
Southbank resale of ‘off the plan’ apartments
reveals on average currently a 12 % loss. Around
20% of the sales had losses ranging between 20%
and 40%. Reducing the CGT discount would result
in losses in the order of 17% to 20% for off the plan
purchases driven by an inability of the first owner to
sell to a negative gearing landlord. Two thirds of
apartments are investor owned. Apartment sales
activity levels have reduced between 30% and 40%
in Sydney, Perth and Brisbane and median
apartment prices are dropping in all CBD’s.
5. The proposed ALP policy change will cost a similar
amount as the revenue it collects and in addition
cost renters an additional $1.7 billion per annum in
rental costs. Direct expenditures for a modest
mitigation of the impacts on low income renting
households are:
• $2.5 billion per annum capital costs for social
housing due to the reduction in rental dwellings
acknowledging the historically high 150,000
people on public housing waiting lists
• $0.4 billion in operating costs to support the
additional social housing
• $0.4 billion per annum in Commonwealth
Rental Assistance acknowledging historically
high 50.1% of low income households in
housing stress.
The total cost to the economy is therefore $5 billion
per annum with $3.3 billion direct expenditure from
government. This compares to the average per
annum revenue estimated by the Parliamentary
Business Office of $3.2 billion per annum, resulting
from implementation of the ALP policy framework
6. In addition to the direct costs a wide range of
indirect costs should be considered in the
assessment of the ALP proposed policy framework.
These include:
Higher new dwelling prices in areas with limited
new build opportunities
More focus on properties which can deliver
high capital gains (high end of market) to
compensate for the reduction in the CGT
discount
Higher levels of rental stress for low income
renters, as higher income renters ‘crowd out’
lower income renters seeking to reduce their
rental costs
Page |3
 Lower income rental households forced out of
established areas with jobs, facilities and public
transport to move to outer fringe areas in new
dwellings with no jobs, public transport or
facilities
Increased levels of social dysfunction on the
urban fringe
Increased carbon footprint for low income
renters as affordable private rental stock in
established areas shifts to the urban fringe.
Established house prices are estimated to decline
overall by 3% to 4%.
7. The ALP policy change forecasts 25,000 additional
jobs. No new jobs will be created because in the
long run demand and supply of new dwellings is
influenced by real disposal income, population
growth, employment and mortgage rates. The ALP
proposed negative gearing / Capital Gains Tax
discount will result in a similar total housing supply to
the current policy setting.
8. Property markets in Australia are at different phases
of the economic cycle. Within 24 months,
according to the Australian Construction Industry
Forum key markets of Sydney and Melbourne will
contract by approximately 10%.Sales volumes will
contract by 25% to 35% from 2015, rents will
increase by 1.0% to 3.0% per annum and median
dwelling price increases will moderate from 4% to
6% per annum.
9. The ALP proposed policy change will create market
chaos because it is undefined and will be difficult
to police. For example, is a refurbished building
(e.g. a former office block) for residential purposes
a new building? When is renovating a dwelling a
new building? Further, financial institutions and
valuers will take a conservative approach to the
‘resale price cliff’ anticipating that resales to
positively geared entities only will significantly
reduce the potential buyer market. This will mean
lower loan to value ratios i.e. increased deposits,
mortgage insurance etc and more equity from
purchasers.
10. Considering the following factors:
Australia is in the ‘unwind’ period from the
biggest residential boom in Australian
history
Significant contraction in credit to
domestic investors has already led to a
dramatic drop in investor loans
Significant contraction in credit to overseas
investors has already occurred
The imminent contraction in the residential
construction activity
Reductions in median prices for
apartments has occurred in Sydney,
Melbourne, Brisbane and Perth and market
conditions in regional areas continue to
soften
Pressure on banking shares and banking
profits is increasing
The distortionary impact of the proposed
policy changes is likely to be significant
Market confusion on behalf of both developers
and purchasers, risks to market stability and
volatility in the short term, suggest that retention of
the current negative gearing / CGT discount is the
most rational policy position.
11. The Henry Tax Review (Australia’s Future Tax System,
2010) the last comprehensive analysis into the
reform of negative gearing / CGT discount
recommended that no change be made until
housing supply issues were addressed because of
the likely negative impacts on housing supply. This
policy position, which advocated elimination of
stamp duty and reforms to land tax, remains the
most comprehensive analysis of the best tax mix for
land and resources. The most recent views of the
RBA support the Henry Tax Review proposition. The
RBA stated in its 2015 Submission to the Inquiry on
Home Ownership that, ‘The Bank believes that
there is a case for reviewing negative gearing, but
not in isolation. Its interaction with other aspects of
Page |4
 the tax system should be taken into account’ (p.
23).
12. Negative gearing and the CGT 50% discount has Reduced direct social housing provision
Increased management of social housing
been the foundation of the new Australian Housing
through community housing organisations.
Model, supplying private rental dwellings to
substitute for the real reductions in expenditure on Policy makers proposing to change the negative
public housing. gearing rules and reduce the CGT discount have a
Subsidised home ownership (no CGT) very short memory.
Affordable housing provision by the private
sector with direct Commonwealth Rental
Assistance(CRA) to consumers

Page |5
 _1. Context
1. This study analyses the impacts of negative
gearing and the capital gains tax (CGT) discount
in relation to the key objectives set for this policy
setting and the implications of the current CGT
policy setting i.e. a 50% discount.
2. A Recent study by the Grattan Institute (Hot
Property: Negative Gearing and Capital Gains
Tax Reform, 2016) focused on the ‘beneficiaries’
of the CGT discount, and failed to assess the
economic benefits of the current policy setting.
This omission led the Grattan Institute to the
wrong conclusion i.e. that removing or reducing
the CGT discount would provide ‘saving’ to
government. In reality, such a change will
generate no revenue to Government and cost
renters $1.7 billion per annum.
3. These commentators failed to recognise that the
increase in supply of rental housing induced post
the 1999 introduction of the 50% CGT discount
reduced housing stress for low income renters by
over 25% prior to the GFC (2007) in a period
where the supply of public housing was reduced
significantly and demand for housing increased
dramatically to support the mining construction
boom.
4. The Ralph Inquiry (1999) recommended the 50%
discount to stimulate capital markets, in fact, the
first sentence after the recommendation in the
Ralph report (page 598) states: “The Review’s
recommendations for capital gains taxation are
designed to enliven and invigorate the
Australian Equities markets, to stimulate greater
participation by individuals”. The primary
objective for the recommended change was to
increase capital investment in nominated asset
categories including land and buildings.
5. The Reserve Bank of Australia (2003) in a
submission to the inquiry into First Home Ownership
(Productivity Commission, 2014) set some
intellectual foundations for the Henry Tax Review
in terms of neutralising treatment between asset
classes. In 2015 the RBA confirmed that negative
gearing / CGT policy should be integrated with
other tax efficiency and tax mix considerations.
6. The RBA submission highlighted that while
housing prices had increased due the significant
interest rate cuts, rental vacancies had also
increased significantly and real rents were stable
or declining post the 1999 Ralph Inquiry
introduction of the 50% CGT discount.
7. The ‘stimulating effects’ of the Ralph Inquiry
significantly improved rental affordability from 1999
until the chaos of the 2007 boom and 2008 ‘bust’
i.e. the GFC. In this period the number of low
income renters in housing stress declined by over
25% i.e. renters paying more than 30% of gross
household income on rent (Australian Institute of
Health and Welfare). This outcome was achieved
in parallel with significant reductions in the supply
of public housing.
8. ACOSS (2015) and the Grattan Institute (2016)
utilised similar methodologies to assess the impact
of negative gearing and CGT discount. These
methodologies did not assess the costs and
benefits of the CGT, rather their studies simply
sought to ostracise high income individuals, hence
the identification of the direct beneficiaries of the
CGT discount from ATO records without for
example analysing the benefits to low income
renters.
9. The findings that most of the tax benefit
accrued to high income individuals was to be
expected because of their wealth and access to
capital. The broader spectrum of lower income
individuals negatively gearing and utilising the CGT
discount was the real news.
Page |6
 The last comprehensive study of the issue, the
Henry Tax Review, Australia’s Future Tax System
(2010) recommended that no change be made to
the CGT 50% discount until:
Stamp Duty is removed
Land tax is reformed
Housing supply issues are addressed due to
potential impacts on housing supply
In addition, the Henry Tax Review supported a
continued CGT discount which improved neutrality
between asset classes (i.e. property / shares / cash)
and positively geared investors in property i.e.
investors with high levels of equity.
The Henry Tax Review recommendations refined
the CGT discount recommendations from the 1999
Ralph inquiry which introduced the 50% CGT
discount to replace the complex indexation
concession which applied previously.
TABLE 1: HOME OWNERSHIP RATES FOR AUSTRALIAN
HOUSEHOLDS 1976-2011
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
1976 1981 1986 1991 1996 2001
Owner without a mortgage
Owner with a mortgage
Renter
Other tenure
The stimulatory effect of the 50% CGT discount can
be clearly observed in the context of the long term
supply of rental housing in Australia. The overall
trend increase in rental housing supply can be
observed between 2001 and 2011. The increase in
supply of rental dwellings can almost be entirely
explained by market entry from negative gearing
landlords as per table 1.
Source: ABS Census, AHURI (2014)
The stimulus effects of the CGT discount
accordingly are almost wholly responsible for:
A 25% reduction in the number of low income
earning households paying over 30% of their
gross household income in rent from 2000/01
to 2007/08, however after this period the rate
of dwelling construction was unable to match
demand and household income increases
particularly for lowest ranges did not match
rental price increases to 2011/2012. After this
period low wage increases (the lowest post
war) did not match rental increases and
rental affordability deteriorated to 2016 (55%
of low income households assessed as pay
greater than 30% gross household income).
TABLE 2: PROPORTION OF LOW INCOME
HOUSEHOLDS SPENDING MORE THEN 30% OF GROSS
INCOME ON HOUSING COSTS
2006 2011
Significant downward pressure on rental
levels for all renters due to significant increase
in supply.
Negative Gearing and the CGT discount are
critical elements of the new Australian Housing
Model which can be summarised as:
Subsidised home ownership (no CGT)
Affordable housing provision by the private
sector with direct Commonwealth Rental
Assistance(CRA) to consumers
Reduced direct social housing provision
Increased management of social housing
through community housing organisations.
Page |7
The economic benefits of using private capital to The direct provision of social housing still requires parallel
generate affordable rental housing are direct (as in Commonwealth Rental Assistance (CRA) to achieve
the case of lower rents) and indirect in the case of affordable rental outcomes.
reduced government expenditure on social
housing and the opportunity to redirect McKell Institute / ACOSS / Gratton Institute utilised the
expenditure. same technique to analyse impacts on renters of
removing the CGT discount by observing the impact
Even with induced effects of private rental housing on rent in the two year period (1985-1987) when the
due to the CGT discount the Reform of Federation deduction to labour income was removed by the
White Paper (Issues Paper 2, Appendix A 2014) Hawke Government.
argues that there is “A lack of affordable private
rental housing for low-income earners—particularly
in the major cities—has led to an increase in the
number of people living in marginal rental
accommodation, such as caravans, boarding
houses and motels (R Goodman et al., The
experience of marginal rental housing in Australia,
AHURI Final Report No. 210, Australian Housing and
Urban Research Institute, Melbourne, 2013, p. 8).
While on the rise since the 1990s (Goodman et al.,
p. 35.), demand for marginal rental housing has
been exacerbated by the impact of the global
financial crisis (Goodman et al., p. 8.). Marginal
housing tenancies are often poorly regulated and
highly controlled by landlords, resulting in greater
insecurity and disempowerment for tenants
(Goodman et al., p. 2)”

TABLE 3: EXPENDITURE ON HOUSING ASSISTANCE – AUSTRALIA, 1980 TO 2010

3500

3000

2500
$M

2000

1500

1000

500

0
1980 1985 1990 1995 2000 2005 2010
CSHA CRA

Source: J Yates, Évaluating social and affordable housing reform in Australia: Lessons to be learned from
history*, International Journal of Housing Policy, Vol. 134, No2, 2013, p.115

Page |8
The McKell / ACOSS / Grattan Institute impact
analysis is technically misplaced because rental
markets cannot adjust in a two year period.
Grattan acknowledge the need for an
adjustment period in their analysis of the CGT
discount on housing prices. A key learning from
the McKell / ACOSS / Grattan technique is that
impact analysis must have regard to actual
conditions in individual rental markets i.e.
between 1985 and 1987 rents in Perth and Sydney
increased due to boom conditions and rents in
other major capital cities remained stable or
dropped.
Data from the Australian Institute of Health and
Welfare indicates that from mid-2000 to mid-2007
rental stress for low income households reduced
by 25%. This data is supported by analysis in the
reform of Federation White Paper (2014) on
housing which indicates a steep decline in rental
stress up to 2007 and a significant increase to
2011.
From an economic perspective analysts agree
that long term policy settings which influence
demand and supply have a far more significant
impact on housing prices and rentals. In terms of
longitudinal studies, Stapledon and the RBA have
produced analysis which indicates that demand
and supply factors are far more significant than
factors such as negative gearing and the CGT
discount in influencing housing and rental prices.
For analysis of the CGT impacts five timeframes should
be considered:
1985 – 1987 – Housing CGT change to
deductibility of Capital Gains from labour
income
1988 – 1994 – Post stock market crash and
interest rate reduction from 10% to 6%
1995 – 2006 – Population growth. Introduction of
GST. Interest rates decreased from 10% to 6%
CGT 50% discount introduced.
2007-2010 – GFC chaos period
2011 – 2016 – Post GFC housing boom with
interest rates reducing from 5% to 1.75%. In 2015
from 2011 to 2010 credit tightening on investors
/ SMSF’s / foreign investors and increased LVR’s
for owner occupier’s significantly cooling
market. Some markets (e.g. Melbourne, Perth
and Brisbane CBD apartments) are significantly
reducing in value. Banks withdrawing FIRB
funding.
This study focuses on:
The long term determinants of housing prices
and rental levels
Analysis of the period from 1999 to 2006 in
relation to stable economic conditions
Analysis post 2011 and the introduction of ultra-
low interest rates.
Page |9
2_ Long term Housing and
Rental Prices in Australia
2.1_ Introduction
The beginning of the modern era of Australian
house price and rental change is widely
considered to be 1955 (RBA Aug 2014, p.33)
Since that time, house price growth has oscillated
around a real long term growth rate of 3% per
annum and a quality adjusted growth rate of 2.2-
2.5% per annum.
Though this long-term trend has remained
consistent, the cause of house price growth over
time is more complex, being an outcome of
multiple interacting supply and demand side
factors.
TABLE 4: REAL (2014) DWELLING PRICES
An analysis by Peter Abelson et al (2005) found that
“real house prices are related significantly and
positively to real income and to the rate of inflation
as represented by the consumer price index” and
“are also related significantly and negatively to the
unemployment rate, mortgage rates, equity prices,
and the housing stock”(p.1). The changes in these
key demand and supply factors over time are the
cause of housing price change.
Additionally, the study found no “significant
relationships between house prices and income
per capita, real or nominal interest rates, or real
rental rates.” (Abelson 2005, p.12).
P a g e | 10
2_ Long term Housing and
Rental Prices in Australia

2.2_ Introduction (cont.)

The insignificance of rental yield is of particular The Graphs below show that while rents have
note as it points to one of the most fundamental followed economic conditions over the past 20
changes to the housing market over the period – years real house price growth grew more quickly.
housing investment shifted focus to earning
through capital gains, essentially treating housing
stock as if it were an asset.
However, while housing prices took off as
speculative investment in property grew in
popularity and as household wealth and income
were also increasing over the period, rents
remained relatively flat, as demand for rentals
increased but the availability of rental dwellings
increased faster, driven by property investors.

TABLE 5: RELATIVE & RENTAL HOUSE PRICE MOVEMENTS

P a g e | 11
2_ Long term Housing and
Rental Prices in Australia

2.3_ Short-term Disruption, Long-term Change:

Effects of the Mining boom - Demand
The mining construction boom had major effects It is important to underline that the RBA believes
on the entire Australian economy not just a few that several of the key factors that determine
mining terms. housing prices have been disrupted since the mid
2000’s, and that this disruption may have caused a
In its Research Discussion Paper “The Effect of the
one-off permanent change in long term house
Mining Boom on the Australian Economy” (August
prices, driven by an expansion of the entire
2014), the RBA discusses in detail what it believes to
Australian economy.
be the overall impact of the ‘Mining Construction
Boom’ on various metrics, notably on page 15
where it identifies that as of 2013:
The population is 1% higher reflecting the
response of net migration flows to relative
job opportunities
Employment is 3% higher reflecting higher
real wages as well as job opportunities
Real consumer wages 6% higher, and that
Household disposable income 13% higher
reflecting historically high levels of terms of
trade and national income.

Based on a counterfactual analysis i.e. what would

have occurred if the mining construction boom did
not happen

TABLE 6: EFFECTS OF THE MINING BOOM ON HOUSEHOLD INCOME

P a g e | 12
2_ Long term Housing and
Rental Prices in Australia
TABLE 7: EFFECTS OF THE MINING BOOM ON CONSUMER PRICES – SELECTED COMPONENTS

TABLE 8: EFFECTS OF THE MINING BOOM ON UNEMPLOYMENT

P a g e | 13
2_ Long term Housing and
Rental Prices in Australia
2.4_ Short-term Disruption, Long-term Change:
Effects of the Mining boom - Supply
While demand-side changes have perhaps played
a larger role in housing market expansion since the
GFC, supply in the market has proven relatively
inelastic to this ‘surge of demand’ (p19. RBA Aug
2014 The Effects of the Mining Boom on the
Australian Economy). Accordingly the mining boom
was impacting real rental prices and vacancies in
the entire Australian economy.
This has had the secondary effect of keeping rental
vacancy rates much lower than they would have
been without the mining boom.
The RBA also points out that this lack of a supply side
response to demand has led to rapidly rising rental
prices in line with economic conditions.
TABLE 9: HOUSING VACANCY & RENTS
The RBA also accounts for the impacts of high rents
and house prices on suppliers, stating that
“Although high rents and house prices encourage
housing construction, these effects are more than
offset by higher interest rates after 2009”. (p19. RBA
Aug 2014)
Thus even though demand was strong “the supply
of housing contracted compounding the
downward pressure on vacancies and upward
pressure on rents.” (p19. RBA Aug 2014)
The paper estimates that “without the mining
boom, the vacancy rate would barely have fallen
below 2% during 2006/07 and rents would have
roughly kept pace with inflation”
P a g e | 14
2_ Long term Housing and
Rental Prices in Australia
2.5_ Long term Price Drivers
Three major studies have been undertaken estimating
long growth in real house price indices and the ratio of
house prices to income (Abelson, Stapledon, RBA), these
are summarised in tables, 11, 12 and 13.
These studies demonstrate that post war, housing prices
moved with general economic conditions reflecting
demand and supply until the late 1990’s when banking
deregulation occurred and economic growth in
Australia increased dramatically driven by the mining
construction boom. The increases in housing prices have
been driven by mortgage rates, supply shortages
caused by zoning and regulation, and increased wealth.
In the short to medium term economic cycles occur
which impact on housing and rental prices.
The RBA has sought to quantify some of the shorter term
factors and this is summarised in Table 10 (2014, RBA)
which demonstrates that ultra-low mortgage rates are
currently driving housing prices.

TABLE 10: CONTRIBUTIONS TO REAL HOUSE PRICE GROWTH

Source: Is Housing Overvalued RBA 2014, p. 21 Fig 4

P a g e | 15
TABLE 11: HOUSING PRICE INDICES 1970-2003

TABLE 12: STAPLEDON

TABLE 13: REAL (2014) DWELLING PRICES

P a g e | 16
2_ History of Negative Gearing and
capital Gains Tax
Abelson (2004, p. 9) argues “Home owners were exempt
from capital gains tax (CGT) throughout the period.
Investors were also exempt from CGT up to 1985 when
the government introduced a CGT on real gains for
investors. In September 1999 the government replaced
this CGT with a tax of 50% of the nominal gain. Many
people, including the Productivity Commission (2004),
perceived the change in 1999 to be a further subsidy to
investors.
Actually, when the nominal gain is more than twice
the real gain (as often happens), the new CGT
increases the tax liability. · Investors were allowed
full negative gearing rights throughout the period,
except between August 1985 and September 1987,
when negative gearing was disallowed and
investors had to carry forward losses. Rental
investment declined in this period”. Further Abelson
(P.12 argued) (The study) found no significant
relationships between house prices and income per
capita, real or nominal interest rates, or real rental
rates.”
P a g e | 17
Impact analysis in relation to negative gearing and
the CGT discount should focus on current market
conditions. Impacts will occur in the short to
medium term, however in the long term factors
other than negative gearing and the CGT are far
more significant in determining housing prices.
Rental prices are currently dissociated from
housing prices and impacts need to be assessed
independent of house price impacts.

The fast growth in the apartment market post 2006

particularly in CBD / Inner areas, which is
approximately two thirds investor presents a major
short term issue due to its rapid increase in price
and major dependence on high degrees of
leverage.

However, due to current policy settings restricting

Greenfield development demographic change
and changes to consumer preference, higher
density dwellings have come closer to construction
cost parity with Greenfield developments, though
at a higher price to the consumer. The result of this
is a long-term trend towards higher density
development in Australian cities, and significantly
higher proportions of household incomes devoted
to repayments on housing loans.

TABLE 14: CONSTRUCTION COSTS TABLE 15: APARTMENT & MEDIUM-DENSITY HOUSING

P a g e | 18
TABLE 16: REPAYMENTS ON NEW HOUSING LOANS

P a g e | 19
3_Impacts of Negative Gearing and
Capital Gains Tax Discount on Price and
Rental Levels

1. The relationship between housing prices and TABLE 17: HOUSING PRICES TO INCOME
rental levels in Australia diverges in different
time periods due to different economic
conditions, different taxation and investment
frameworks, different investor objectives and
differing renter preferences.

2. Rental levels in Australia are primarily driven by

the supply of rental stock available and the
ability of renters to pay. Investors determine the
stock of rental housing available. Consumers
(renters) determine ability to pay via the
amount of rent they are willing to pay. Rental
levels are an input, though not a particularly
significant input into housing prices in Australia,
unlike the international experience. In Australia
investors primarily seek capital gains. As rents
are determined by the dynamics of demand
supply i.e. is not responsive to changes in
and supply not the returns that owners are
demand and hence rental levels can spike
seeking.
quickly given that the available pool of rental
dwellings cannot expand quickly.
3. Rental levels in Australia post 1980’s tracked
with CPI (and below) until the mining 4. Post the 1999 Ralph Inquiry change to the
construction boom. Investment housing is an Capital Gains Tax discount1, the number of
asset with its own investment attraction and investors negatively geared increased and the
investment criteria compared with other asset number of positively geared investors remained
classes as already demonstrated in section 2 of relatively stable. It is reasonable to assume that
this report. The housing supply in Australia is the long run increase in rental (investor) stock
relatively inelastic in relation to demand to was stimulated by the 50% CGT discount given
the take up of negative gearing and parallel

1 The CGT discount was set at 50%, replacing the former

framework which indexed values. The Ralph proposal
intended to stimulate investment and to create certainty

P a g e | 20
 expansion of rental stock. This is an important boom), suggests rental levels would have
fact because the supply of rental housing tracked the CPI if the boom had not occurred.
increased from 20% to 25% of total housing (Downes P. Effect of the Mining Boom on the
stock from 1991 to 2006. Rental yields declined Australian Economy, June, 2014 RBA)
substantially and vacancy rates remained
steady through this period. 9. Unpacking rental housing supply from 1996 to
2006, then to 2011 indicates that the new
Australian Housing Model is working well by
5. The significant increase in total rental stock
world standards in terms of generating
occurred in parallel with the Ralph Inquiry 1999
affordable rental levels. The percentage of
CGT discount change but the trend supporting
households under housing stress i.e. paying
increased landlords negatively gearing was
more than 30% of gross household income in
well established in the early 1990’s. This
rent reduced by 25% in the early period. This
indicates that increasing wealth, increasing
remarkable outcome was caused by an
demand and changing consumer preferences
increase in low income housing stock and a
were more important in stimulating supply and
significant increase in household income. This
demand than the 1999 introduction of the 50%
outcome is documented by the Australian
discount alone.
institute of Health and Welfare and by Yates
(2004). Between 1996 and 2001, the income
6. The rental stock supply response
circumstances of private renter households
accommodated real demand over the period.
improved considerably, thereby bettering their
As the demographic impacts of the mining
overall ability to pay for housing (2004, p38).
construction boom receded, the number of
people negatively gearing residential property
flattened out by 2014 (see table 20). 10. The affordable rental housing supply situation
(Reynolds, Yates, 2014) in 2011, after the largest
trade episode in Australian history was still
7. The supply of rental housing was an important
remarkably robust. Estimating the rental supply
contributor to the mining construction boom.
for quintiles 1 and 2 (i.e. the lowest 40% of
Without the incentive for a significant supply,
household incomes) the authors concluded,
partly induced by the 50% CGT discount,
‘using what is in effect a cumulative shortage
important housing requirements in resource
of affordable and available stock for Q1 and
areas such as the Pilbara and Bowen Basin
Q2 households, there was a surplus of
would not have been fulfilled. The public sector
affordable dwellings nationwide of 174,000 in
failed to produce housing when it was required
2011, significantly down from 260,000 in 2006’.
and rentals of $1,500 per week for a 3 bedroom
The new Australian Housing Model was clearly
dwelling were common in the Pilbara.
working, however benefits did not accrue to
8. Capital cities also required apartments for
the lowest income households because
miners and support workers as well as
affordable dwellings were being occupied by
international students. As the RBA (June, 2014)
higher income households.
analysis has indicated the 2004-2010 mining
construction boom is the largest in Australian
11. From 2011 to 2016 rental levels increases were
history, yet the Australian housing model
modest and tracking CPI, but they were
underpinned by negative gearing was almost
however higher then wage price increases.
able to cope. RBA counterfactual analysis (i.e.
Together with a post GFC increase in
what would have occurred without the mining
unemployment housing stress for low income
P a g e | 21
 rental households increased significantly so that
by 2016 around 55% of low income rental 16. The approach utilised by McKell / ACOSS /
households are in rental stress. Grattan has not been to assess the major rental
benefits in current policy setting, in particular
12. Negative gearing and the CGT 50% discount the 25% reduction in housing stress for low
were important policy settings underpinning income households to 2006. Rather each of
growth in the supply of rental dwellings and these analysts has (strangely) analysed rental
moderating growth in rental levels. Given that impacts from 1985 to 1987, when the Hawke
the 2004-2011 trade episode was the most Government restricted negative gearing so
significant in Australian history the rental market that rental losses could not be used to reduce
operated exceptionally well. tax payable on labour income, then reversed
the decision. Clearly rental supply and rental
levels have almost no chance of responding to
13. The new Australian Housing Model was
a change in tax parameters in 24 months. The
successful inducing the supply of private rental
graph utilised by Grattan is reproduced below.
housing as the supply of public rental housing
contracted.
TABLE 18: RENTS DID NOT RISE WHEN NEGATIVE
GEARING WAS REMOVED
14. Rental stress for low income households
reduced dramatically to 2006 but due to the
mining construction boom impacts on the
entire Australian economy re-emerged, by
2011 low income rental stress requires targeted
policies to find solutions. Yates (2004 and 2014)
suggests government direct investment
developing a market to enable institutional
investment (p.49) or rental regulation and/or a
reduced CGT discount. Eliminating negative
gearing would significantly increase
expenditure requirements on social housing or
increase tax expenditure on low income
housing. Neither of these budgetary costs have
The key objective of these analysts is to
been assessed in estimation of the net budget
demonstrate that negative gearing / CGT
costs of changing negative gearing / CGT
discount has no impact on the supply of rental
discount as recommended by the ALP.
housing and the price of rent. This proposition is
at odds with the facts. As the graphs indicate
15. The significant positive impacts of negative rents in capital cities moved in disparate
gearing / CGT discount are not calculated in directions. This outcome was to be expected
terms of the supply of rental housing and lower because demand and supply factors
rental costs, despite the fact that this is clearly significantly outweigh any impacts of negative
influenced by the current policy setting. The gearing / CGT discount. This should have
ALP proposed policy change does not factor in informed the current ALP proposal which is to
the costs associated with higher private rentals be implemented at a time when residential
reduced rental stock and housing markets are contracting significantly and most
displacement. CBD and Inner apartment markets are in

P a g e | 22
 serious decline in terms of sales activity and
price. (see Table 24)
17. The Grattan Institute argues in relation to the
period 1985 to 1987, ‘Beyond these historical
lessons , economic theory and empirical
research show that negative gearing and/or
increasing taxes on capital gains does not
change rents much’ (p.34, 2016). This is at odds
with the facts. The Grattan Institute analysis of
the impact of CGT discount argues that almost
100% of the increase in rental dwelling numbers
was caused by the CGT discount. Data
analysing the period 1996-2006, i.e. pre the
peak of the boom and the ensuing GFC
demonstrates that rental housing supply
increased and rental levels remained around
CPI. The Grattan proposition is put in the
20. Ongoing growth in highly productive services
negative i.e. removal of negative gearing /
CGT discount will not reduce the number of
rental properties (p.34). This proposition (without
evidence) is at odds with the long run
evidence of the impacts of the 50% CGT
discount which has contributed to a significant
increase in rental stock induced by (as Grattan
indicates) an increase in negatively geared
properties almost wholly induced by the 50%
CGT discount.
to a significant increase in rental housing
supply, supported by a change in consumer
preferences (at higher income levels) to rent
dwellings. This reflected significant increases in
labour mobility, differing personal relationship
preferences and structures, family breakdown,
increased income for young professionals and
increased preferences to live in CBD’s / Inner
areas which increased human capital via
increased job opportunity and increased
educational opportunity. These significant
benefits are reflected in very high levels of
labour productivity in inner areas of the CBD.
This needs to be considered against the tax
expenditure generated by negative gearing
CGT discount.
export industries such as student housing and
tourism require the ongoing increase in supply
of inner city apartments. Detailed analysis by
Dr. Peter Brain indicates that growth in the
central city needs to keep pace with capital
cities to maintain productivity levels (ACOLA,
2015). Important niche markets such as student
housing are in part driven by negative gearing.
TABLE 19: NET IMMIGRATION

18. Grattan turn to ‘special pleading’ for their case

against the negative gearing / CGT discount.
This includes the (incorrect) statement that
negative gearing reduces rates of home
ownership (p.6, Grattan 2016) and made it
harder for owner occupiers to afford to buy
homes (p.27, Grattan 2016). In fact home
ownership remained relatively constant (68%)
and private rental dwellings substituted for the
reduction in public rental dwellings.

19. Assessing long term rental trends and likely

impacts of taxation on rental levels (Stapledon,
Abelson, RBA) analysis leads to the conclusion
that negative gearing / CGT discount has led

P a g e | 23
 TABLE 20: NUMBER OF LANDLORDS BY TYPE OF GEARING, 1994-2014
Positive gearing definition: Mortgage costs < rental income
Negative gearing definition: Rental income < mortgage costs, Government refunds
disparity from taxable income

2,500,000

2,000,000

1,500,000

1,000,000

500,000

0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Positive Rental Income Negative Rental Income

Source: Grattan Institute (2016)

TABLE 21 & 22: RENTAL VACANCY & RENTAL GROWTH

P a g e | 24
 TABLE 23: ANNUAL GROWTH IN REAL RENTS - AUSTRALIA

21. Since the post 2008-09 economic shocks, rental

vacancy rates have risen marginally (RBA 2014a,
graph 3) but, at around 2 % in 2016, whereas 3
years old include up to date data still below
what is generally regarded in Australia as a
market clearing rate (of 3%).
22. Over time, the cost of living in Australia has
increased. This uncontroversial statement is not
often viewed by the average Australian as a
problem directly affecting their wellbeing or
their lifestyle. However, a recent release
published by the Australian Bureau of Statistics
sparked both concern and debate when it
released its most recent update to its regular.
The ABS Wage Price Index showed that, in the
December 2015 quarter, Australia had endured
its lowest growth in wages since they began
recording it. Unfortunately, this new data was
just the most recent episode of a longer
downturn in wage price growth.

P a g e | 25
 TABLE 24: QUARTERLY CHANGES, TREND, TOTAL HOURLY RATES OF PAY EXCLUDING BONUSES

Source: ABS Cat. 6345.0, December 2015

To put this in the context of the housing and rental markets,

data from the ABS (Cat. 4130, 2015) shows that since the
GFC, real rental costs have spiked dramatically, displaying
growth rates well above long-term trends – and the ability
of lower income household to keep up.

P a g e | 26
 TABLE 25: REAL RENTAL COSTS OVER TIME (2013 / 2014 AUD)

500
450
400
350
300
250
200
150
100
50
0

Owner without a mortgage Owner with a mortgage

Private landlord

In the summary of its findings, the Rental Affordability

Index Release Report (Nov 2015) stated that “households
falling into the lowest 40% of income consistently face
severely and extremely unaffordable rents”, going on to
point out that this “is the case in all regions of Australia –
including all cities and all regional areas”. What this
effectively means is that rising rents and dropping wage
growth is having a serious impact at the margins, forcing
some people to pay as much as 60% of their earnings
towards housing.

TABLE 26: PROPORTION OF LOW INCOME HOUSEHOLDS EXPERIENCING HOUSING STRESS

60
%
50

40

30

20

10

Lowest quintile Second quintile

Third quintile ABS "Lower income households"

Source: ABS Cat. 4130, MacroPlan Estimates

P a g e | 27
This worrying trend is corroborated by ABS data – in its
2015 release ‘Housing Occupancy and Costs, 2013-14’
(cat. 4130) it depicts a significant increase in lower
income households paying over 30% of their income
on housing costs since 2007/08. This is particularly
noteworthy given that over the period the ABS has
recorded this statistic, it had until recently remained in
a narrow band between 39% and 45%, and had been
trending down in the long term.
MacroPlan estimates that since 2013/14, the growth in
this metric has remained consistent, which means that
55% of low income households are paying more than
30% of their income towards housing costs.
TABLE 27: HOME OWNERSHIP RATE
RBA Key house price metrics (put in a footnote):
In ‘Is Housing Overvalued?’ (2015) the RBA
‘decomposes housing values into contributions
from rents, interest rates, expected
appreciation and other factors’ (p.1), though
they note that ‘given that the supply of
housing is fixed in the short run, prices are
determined by how much buyers are willing to
pay’(p.1)
Source: Table 11, Abelson et al (2005), Table 12,
Stapledon (2012)
P a g e | 28
23. After 2010 there was a spike in rental levels amid
the chaos of the GFC. Rental vacancy rates
stabilised by 2016 and were beginning to
increase. This is reflected in the reduced level of
inner city apartment rental growth (which
despite being influenced by increasing numbers
of international students) demonstrated the
impact of the increasing supply of apartments.

24. By late 2015 and early 2016 the combination of

tightening credit standards (APRA) and reduced
credit to SMSF’s for residential investment, credit
growth to residential investors dropped to a 10
year low (excluding the GFC).

TABLE 28: HOUSING CREDIT GROWTH

25. Inner City apartment prices increased

dramatically post 2011 reflecting on asset
allocation preference for investors post GFC in
conjunction with a significant change in
consumer preferences to live in apartments,
and strong CBD / Inner jobs growth (health,
tertiary education, tourism) This growth in

P a g e | 29
demand outstripped supply until 2015 (see
Appendix 3) and both sale prices and rental
levels are dropping in real terms.

TABLE 29: INNER CITY APARTMENTS

Source: Financial Stability Review – April 2016

P a g e | 30
Conclusion

26. Rental levels in Australia are driven by demand

and supply not dwelling prices. As the data 27. Post 2011, population grew at historically fast
indicates the impact of negative gearing when rates (over 300,000 persons per annum) and
the CGT 50% discount was applied was to the real cash rate was negative. This fuelled
stimulate a long term increase in the supply of demand for rental dwellings with a delayed
private rental dwellings. This occurred as part of supply response and a consequent short term
the new Australian housing model as private spike in rental levels. Without negative gearing
rental dwellings replaced public rental / CGT 50% discount the supply of rental
dwellings and home ownership remained dwellings would have been considerably lower
around 68%. Analysis of the period to 2006 and a housing crisis would have emerged. As
indicates that the percentage of low income the analysis of the mining construction boom in
households in rental stress (paying more than section 2 demonstrated, without the boom
30% of gross household) reduced by over 25% rents would have been 25% lower and
in this period and by 2011 the percentage of vacancy rates would have remained about
households in rental stress was still lower than 2%.
1994. The Ralph Inquiry outcome setting the
CGT discount had clearly met its objectives.

TABLE 30: PROPORTION OF LOW-INCOME HOUSEHOLDS SPENDING MORE

THEN 30% OF GROSS INCOME ON HOUSING COSTS

Strategic Planning • Property Advisory • Economic Analysis • Retail Analysis • Spatial Planning • Policy and Strategy • Financial Analysis • GIS Mapping
MacroPlan Holdings Pty Ltd | ACN: 603 148 545 | ABN: 21 603 148 545
Level 4, 39 Martin Place, Sydney NSW 2000 • T (02) 9221 5211 • F (02) 9221 1284 • info@macroplan.com.au • www.macroplan.com.au
4_Impacts of Proposed Changes to
Negative Gearing and the Capital Gains
Discount on House Prices and Rental Levels
‘….changing the taxation of investment
properties could have an adverse impact in
1. A number of reform models have been
the short to medium term on the housing
proposed for negative gearing and the capital
market. As such reducing net rental losses and
gains tax discount.
capital gains concessions may in the short term
reduce residential property investment. In a
2. The Henry Tax Review (Australia’s Future Tax
market facing supply constraints, the reforms
System, 2010) recommended a comprehensive
could place further pressure on the availability
set of reforms to improve housing affordability.
of an affordable rental accommodation within
Henry found, though the reviews proposed
the private rental market. These reforms should
reforms to taxes, in particular Stamp Duty and
only be adopted following reforms to the
land tax, could play significant roles in
supply of housing and reforms to housing
addressing housing affordability, other policies
assistant’. (Authors underlining, AFTS, 2010 E4-3,
are likely to have a move pronounced impact
p2)
on the responsiveness of housing supply’.
(Australia’s Future Tax System, Final Report E4-3,
5. Three most recent reform agendas have been
1.3)
proposed changes for negative gearing and
the capital gains tax in isolation.
3. The key policies recommended by the Henry
Tax Review in relation to land and resources
6. The McKell Institute, Grattan Institute and
taxes were:
Australian Labour Party have all mistakenly
Removal of Stamp Duties
relied on a ‘Robin Hood economics’ approach
Broadening of Land Tax
i.e. taking from the ‘rich’ and giving to the
Reform of the CGT discount to reduce
‘poor’ to tax reform, rather than focusing on
deductibility of 100% of net income from
tax efficiency. This type of approach as the
property investment to 60% and reduction
Henry Tax Review (2010) indicated is likely to
of the capital gains discount from 50% to
cause significant short term impacts on housing
40%.
and rental levels. In 2015, the RBA also argues
that change to negative gearing / CGT
4. The Henry Review set the key objectives of the
discount should not occur in isolation from
reform package to improve housing
other taxes.
affordability, responsiveness of supply and to
tax rental investment in a way more consistent
with other forms of investment. The ‘package’ 7. The failure of McKell, Grattan and the ALP to
of reforms approach was a critical element of argue for the broader policy context is
the proposed policy reform. Critically the Henry surprising. The Grattan 2015 Property Taxes
Review argued report recommends a broad based property
levy to be implemented by the states to collect
$7 billion annually. Grattan note that (p4, 2015)

P a g e | 32
 ‘The Commonwealth Treasury’ nominates
Stamp Duty as Australia’s least efficient tax. The
proposed broadly based property tax ‘might’
provide a pathway for eventual’ abolition of
State Stamp duties (2015, p.4) and should have
formed part of the Grattan (2016) proposal to
change negative gearing / CGT discount.
TABLE 31: PROPERTY TAXES ARE ONE OF THE FEW
‘GROWTH TAXES’
TABLE 32: SOME TAXES DRAG LESS ON
ECONOMIC GROWTH THAN OTHERS
2 Grattan (2015 Game-Changers p.67 modelled the impact of
replacing Stamp Duty with land tax and estimated a GDP
Further Grattan argue that stamp duty reform is
a ‘game changer’ (2015 p.33-35 and p.67
Game-Changers: Economic Reform priorities
for Australia), yet negative gearing / CGT
discount was not2 identified as a game-
changer.
8. Instead of proposing a widely acknowledged
requirement for comprehensive reform McKell,
Grattan and the ALP focus on the tax
‘beneficiaries’ i.e. the income profile and
extent of tax benefit accruing to each income
level. The Ralph Inquiry objective (1999) was to
stimulate capital expenditure. The surprise in
the analysis of is not the fact that those with
capital will spend it to secure a capital gain as
anticipated by Ralph. The real surprise is the
large number of individuals around the $80,000
income level taking advantage of the
discount.
9. The Grattan Institute reform proposal is as
follows:
Reduce the CGT discount for individuals
and trusts to 25%
o Phase in a 25% discount over five years
through reducing the value of the CGT
discount by 5 percentage points each
year
Limit negative gearing. Quarantine passive
investment losses so they can only be
written off against other investment income
o Do not allow losses on passive
investments to be written off against
unrelated labour (wage and salary)
income.
o Allow losses on passive investment to be
written off against all current year and
future positive investment income,
including interest, rental income and
capital gains.
increase of $5M. The criteria for game-changers (p.62) are the
size of the opportunity and confidence in change.
P a g e | 33
 o Continue to allow losses from
unincorporated business – sole traders
and partnerships – to be written off
against wage and salary income,
subject to current restrictions.
o Do not create other exceptions such as
allowing the write-off of losses up to a
limit, on one or two properties, or on new
properties.
o Phase in over five years by reducing the
proportion of losses that can be written
off against wage and salary by twenty
percentage points each year.
In the longer term, aim to align the tax
treatment across different types of savings
o Reduce taxes on other savings income
such as net rental income and bank
deposits so as to align with the tax
treatment of capital gains
o Reduce and target the tax incentives for
superannuation in line with the
recommendations in Grattan’s Super Tax
targeting report
Grattan estimate that in implementing their reform:
Reducing the capital gains discount would
raise about $3.7 billion per annum
Non deductibility of investment income is
estimated to raise $2 billion per annum
reducing it to $1.6 billion
Grattan do not estimate costs of their
proposed reforms in terms of additional
rental levels, additional Commonwealth
Rental Assistance stress, additional
expenditure on social housing due to a
reduced rental pool, the cost of social
dislocation, the impact of moving
households from rental liked areas with
jobs, public transport, schools and
community facilities and so on.
Grattan estimate a small reduction (2%) in
house prices. This could be considered a
negligible contribution to affordability. In
the short term no impact on rent is
forecast and no estimate of long term
impact on rent is estimated despite
acknowledging that (p.34, footnote 111) a
sharp increase in rentals could occur in
the short term. Given that over 1 million
negative gearing landlords must exit over
the next ten years as the ground furthered
properties become positively geared and
as landlords buy new stock significant
impacts on private rental levels is assured.
Applying Abelson + Joyeux parameters (10%
increase in tax on rental incomes would lead to a 7
percent increase in rents) to Grattan ((2016) Box 6
p.32 Calculations) theoretically short term rents
would increase by 4.5% to 5.5%. We note that the
Grattan arithmetic appears incorrect and that
MacroPlan calculations utilising a discounted cash
flow model and all Grattan parameters suggests
that future return would be 8.7% lower (versus 6.3%
p.32). Further the Grattan analysis and arithmetic
relating average return to average price of 2.2%
excludes established dwellings (70% of the
number). In reality if the Grattan assumption are
correct the weighted average price decrease of
rental dwellings would be 6.7%.
10. Grattan acknowledge the Henry Tax Review
but fails to acknowledge the risks identified in
that work in relation to short term impacts on
housing supply and rental levels. Grattan do
not analyse the current negative state of the
residential markets, significant reductions in the
price of apartments in CBD’s and the imminent
reduction in residential construction activity.
Grattan argues that ‘There is little evidence
that negative gearing has the socially desirable
outcome of reducing rents…’(p.27 2016).
11. The ALP reform proposal is specifically rejected
by Grattan, who argue that (p.2) restricting
negative gearing to new properties would
improve the current regime, but would leave
too many problems in place and introduce
unnecessary distortions.
P a g e | 34

12. The ALP proposal is as follows:
Negative Gearing
Labor will limit negative gearing to new housing
from 1 July 2017. All investments made before
this date will not be affected by this change
and will be fully grandfathered.
This will mean that taxpayers from 1 July 2017
will continue to be able to deduct net rental
losses against their wage income, providing the
losses come from newly constructed housing.
From 1 July 2017 losses from new investments in
shares and existing properties can still be used
to offset investment income tax liabilities. These
losses can also continue to be carried forward
to offset the final capital gain on the
investment.
Capital Gains Tax
Labor will halve the capital gains discount for
all assets purchased after 1 July 2017. This will
reduce the capital gains tax discount for assets
that are held longer than 12 months from the
current 50% to 25%.
All investments made before this date will not
be affected by this change and will be fully
grandfathered.
This means that from 1 July 2017:
Negative gearing of labour income will
only apply to new dwellings
The Capital gains tax discount for new
dwellings will reduce from 50% to 25%
13. According to the ALP policy document the
Parliamentary Budget Office ‘…..assumes that
following the changes, negatively geared
investment in new dwellings will almost double
(download 7/5/2016 ALP Positive Plan to Help
3There are no reliable estimates of the actual number of
negatively geared dwellings actually constructed annually.
Housing Affordability3). The PBO has not
published this analysis. According to the ALP
document the PBO estimate improves budget
revenue by $565 million over the forward
estimates (i.e. to 2018-19) and $32.1 billion over
a decade. Further the ALP document suggests
that ‘….independent analysis from the McKell
Institute estimates that these policy settings
would result in an additional 25,000 jobs. (ALP,
7/5/2016 p.13).
14. The ALP policy framework is similar to the
McKell (2015) scenario 4 (p. 9) which (p. 28)
suggests that a ‘plausible 10% increase’ in the
185,000 homes currently required and overall
this would add $45 billion to GDP. This is a
misunderstanding of supply and demand
versus tenure. No new jobs will be generated
because as this study has demonstrated total
dwelling numbers depend on a demand /
supply balance in the long run.
15. The McKell (2015) study attributed budget
benefit is $29.3 billion compared with the ALP
policy of $32.1 billion.
16. The key facts to assess in terms of economic
impacts are as follows:
Timing
The introduction of the new negative gearing
provisions and CGT discount reduction is initiated
on 1 July 2017. The Parliamentary Budget Office
analysis indicates minimal budget revenue impact
by July 2018, yet significant price impacts for off the
plan (OTP) purchases would occur from July 2016 if
the ALP were elected. It is critical to understand
current market conditions to assess short term
impacts on the housing market given that the
Australian housing market has peaked and is
deteriorating.
Impacts
This is explained in detail by the RBA (2015) Submission to the
Inquiry into Home Ownership p. 17-21.
P a g e | 35
 Lack of ALP policy specification (what is defined as
new?) will create market indecision.
Market instability post July 2016 will occur as
investors seek to understand the resale price of
existing assets that have been negatively geared
and the impact of ‘off the plan’ purchases that
have been committed but not yet settled. For
example Melbourne CBD apartment prices have
already dropped by 12% on average on the first
resale. The loss increases to 17% for FIRB purchasers.
The market distortions created by focusing policy
on ‘new’ dwellings is likely to follow three phases.
Initially investor demand will soften as both investors
and financiers seek to understand price impacts on
the first resale. It is likely that credit will tighten
(higher LVR requirements) as financiers seek to
avoid ‘negative equity’ outcomes. The second
phase will occur when the impacts of resales
pursuant to the new policy actually occurs. The
third phase will occur when a new market
equilibrium is established and a new market
structure evolves.
17. The key points to make are that the proposed
policy changes will have a negligible impact
on housing affordability and will accentuate
the steep decline in residential construction
already underway. This means that no
additional jobs will be created in the short term
(or long term). In addition rents will rise.
18. It is likely that ‘chaotic’ marketplace conditions
will prevail as the proposed ALP policy is
specified, financiers understand likely resale
price movements and some investors transfer
purchasing from established to new dwellings.
Given the sharp reductions in ‘off the plan’
resale values market adjustments and
stabilisation will occur slowly.
4
This is based on the Wood + Ong (2011) research which
shows that a typical landlord would have a 47% probability
(p.29) of retaining a property over a 4 year period. It also
accords with the work of Seelig Et.al. (2009) that indicates a
high degree of investment irrationality is exhibited by private
rental landlords.
19. The shift in the public sector from direct
provision of public housing to Commonwealth
Rental Assistance for private renters became
an increasingly important issue in mid-1980’s.
This puts into context the perceived problems
with Hawke Government elimination of
negative gearing against wage income and
the view (partly true) that this policy change
had caused a rental crisis.
20. The proposed ALP negative gearing / CGT
discount policy framework will have major
economic and equity impacts on low income
renter households.
21. The reduction in the number of landlords
negative gearing and utilising the 50% discount
for wage income under the current framework
of retention and purchase will, based on Wood
and Ong research (2011)4 reduce from 1.3
million to 287,000 within 10 years i.e. over 1
million less negative gearing landlords. . Utilising
Grattan institute assumptions, based on 80%
negative gearing and 47% marginal tax rate
with 3% nominal income return and 5% nominal
capital gain, properties typically become
positively geared in approximately 12 years.
22. This reduction in negative gearing landlords
represents just under half of the 2.25 million
renting households in 2013/14 (ABS).
23. Based on estimates of Abelson & Joyeux (2006)
that a 10% increase in costs will lead to a 7.0%
increase in rents then rents for 1.01 million
dwellings will increase over this period before a
new equilibrium in a highly distorted market is
reached.5 In total based on the Abelson &
5Utilising for consistency the Grattan Table 1 calculations, the
pro rata drop in returns for negatively geared properties is
around 12.6% and 6.8% for positively geared properties. This
implies a 8.8% increase in rentals for negatively geared
properties
P a g e | 36
 Joyeux calculation rents rise by 8.8% for
negatively geared properties. This equates to
$1720 per dwelling or $1.7 billion per annum.
24. In addition to the real rental losses there will be
a requirement to build additional social
housing. Based on the Abelson and Joyeux
(2006) estimates a 9.1% reduction in the supply
of rental dwellings will occur. This would
translate into 205,000 dwellings being removed
from the low income rental housing stock. The
ALP proposal retains negative gearing / 25%
CGT discount for new dwellings which will
moderate this impact. It is however, particularly
having regard to the extreme levels of housing
stress and historically high waiting lists for public
housing to assume that at least 50,000
additional dwellings for public rental be
provided (16% increase). This would equate to
$2.5 billion per annum over 10 years in capital
costs. According to the Productivity
Commission6 this will add $0.4 billion per annum
in operating costs.
25. In addition Commonwealth Rent Assistance
should be adjusted on a one-off basis by 8.8%
(Currently $4.4 billion per annum). This would
add $400 million per annum to achieve
minimum housing equity outcomes.
26. Costs to be directly borne can be summarised
as follows7:
$1.7 billion per annum in additional rental
costs
$2.5 billion capital costs per annum in
additional social housing due to the
reduction in rental dwelling numbers and
acknowledging the historically high
160,000 people on public housing
waiting lists (AIHW, 2014)
7A ten year time for market equilibrium to be re-established is
assumed. Given the distortionary nature of proposed ALP
policy Framework particularly in relation to resales of new
$0.4 billion per annum in operating costs
to support the additional social housing8
$0.4 billion per annum in Commonwealth
Rental Assistance acknowledging the
historically high levels of rental stress (50.1
% of low income households (2013/14)
using the new ABS definition) and the
criticality of an equitable housing
outcome.
27. In total $5.0 billion in costs would be generated
for the Australian economy with $3.3 billion
direct expenditure from the Australian
Government.
This compares to the average $3.2 billion per
annum revenue estimated by the Parliamentary
Budget Office.
28. The costs of market instability and market
distortions will be high compared to the
estimated average revenue impact. The PBO
revenue estimates exclude:
Higher rental levels paid by low income
renters
Higher dwelling prices in areas with
limited new build opportunities as owner
occupiers compete with a larger pool of
negative gearing landlords seeking new
dwellings
Even more focus on properties which are
likely to generate a capital gain due to
the lower CGT discount. This is likely to
attract investment in higher quality
properties in deep markets. The major
impact will be smaller markets, and
regional areas which have a shallow
pool of buyers where impacts will be
accentuated
Higher levels of rental stress for low
income renters as higher income renters
‘crowd out’ lower income renters for
property purchased after July 1, 2017 this is a reasonable
assumption.
8 2015 Report on Government Services 17.26 The annual
operation costs per dwelling is $8101
P a g e | 37
 lower rent dwellings. This will occur at a
time of extreme housing stress and will
generate demand for increased levels of
social housing and significant increases
in Commonwealth Rent Assistance
Geographically, lower income
households will be forced to shift from
established areas with jobs, facilities and
public transport to outer fringe areas with
lower rent new housing. This situation is
likely to be untenable and generate
demand for better located public
housing.
Increased levels of social dysfunction on
the urban fringe
Increased carbon footprint for low
income and renters as affordable private
rental stock which is negative geared is
increasingly located on the urban fringe.
29. The real budget costs of the ALP policy
platform are significantly higher than the
revenue gains.
30. The claimed increase in construction
employment of 25,000 jobs is incorrect. Job loss
will occur in the short term as the Australian
Industry Forum forecasts indicate (see
32. It is likely that residential market chaos will be
Appendix 2). In the medium to long term
demand and supply conditions will dictate
housing completions. This means that total
employment in the residential sector can only
be ‘brought forward’ by taxes and incentives.
For example First Home Owner Scheme
incentives have largely been abandoned
because that cause short term spikes in
demand and price but in the medium term
demand from owner occupiers and renters is
driven by population growth and household
formation.
31. The proposed ALP negative gearing / CGT
discount should have had regard to the Henry
Tax Review, the RBA and the Grattan Institute
recommendations in that:
Reforms to negative gearing / CGT
discount can cause short term
reductions in residential property
investment. In a market facing supply
constraints, reforms could place further
pressure on the availability of affordable
rental accommodation within the
private rental market. Those reforms
therefore should only be adopted
following reforms to the supply of housing
and reforms to housing assistance (p. 2/3
E4-3 Australia’s Future Tax System 2010)
and RBA (2015 Submission to the Inquiry
into Home Ownership p. 23). This is
precisely the situation in Australia today –
the ABS broad definition of low income
households in stress is historically high at
just over 50% of low income households.
Grattan absolutely cautioned against
restricting negative gearing to new
properties which although they argue
would ‘improve the current regime’,
because nevertheless it would leave too
many problems in place and introduce
unnecessary distortions (Hot Property,
2016 p. 2)
created by the proposed ALP negative
gearing / CGT policy framework over the next
24-36 months. Given the current contractionary
phase of residential markets occurring in
parallel with historically high levels of rental
stress and historically high public housing
waiting lists there is a high probability that the
proposed negative gearing / CGT discount
policy framework will be quickly discarded by
the ALP when the severity of the impacts are
understood. This is consistent with the
experience of the Hawke Government reforms
which lasted only from 1985 to 1987.
P a g e | 38
5_The Residential Market Downturn
1. The residential construction market is and a major banking crisis. By contrast, the falls
influenced by a number of demand and in the 2000’s were slight and temporary as the
supply factors. In the long run Stapledon has boost to the economy from the resources
demonstrated that the relationship between boom, which began in the mid 2000’s,
growth in adult population (which drives appeared to offset the Global Financial Crisis
household formation) and growth in housing of 2008’. (Stapledon 2012, p. 294)
stock has a strong relationship and can help
explain many housing boom and busts.
3. In 2016 we have a combination of factors in
Stapledon (2012) makes the point that,
place:
‘housing downturns have frequently preceded
Reducing population growth rates
and ‘been a major cause of recessions’.
Significant reduction in investor purchasing
(Stapledon, N. Trends and Cycles in House
of dwellings
Prices, 2012 Australian Economic History
Ultra-low interest rates
Review). This relationship is documented in
Dwelling completions forecast to contract
Table 29 which indicates that the rate of
in the next 12 to 24 months
growth in adult population and dwelling stock
Major reductions in lending to overseas
is converging.
investors
Sales periods for new inner city apartments
2. The current cyclical position of the Australian
extending significantly
economy can be described as fragile. For
Median prices in CBD apartments in
example Stapledon has concluded that ‘the
Sydney, Melbourne, Brisbane and Perth
two key cycles in Australian housing are the
declining
boom-bust cycle of the 1880’s and 1890’s and
Banking sector profits and shares are under
the boom of the late 1990’s and 2000’s. In the
pressure
latter cycle, real house prices rose by 88 % in
Sydney and 161% in Melbourne compared with
32 and 64%, respectively in the 1880’s. The
1890’s saw price declines of 36% and 51% in the
two markets and sharp decline in housing
activity, a depression in the broader economy

P a g e | 39
 TABLE 33: Annual growth rates in adult population and housing stock
Source: Stapledon, Housing Related Data, Adult population is persons 20+ years.
4. The forecast contraction in residential
construction by the Australian Construction
Industry Forum is based on the current policy
mix for negative gearing and CGT discount
currently in place. The new policy mix
proposed by the ALP will not have a significant
impact on this contraction because in terms of
total dwelling construction domestic residential
investment purchases are likely to track down
from 35% to 25% as a result of more stringent
credit requirements. The more significant
decline in owner occupier demand will
continue to drive contraction in residential
dwelling construction.
5. The Australian Construction Industry Forum
(May 12, 2016) is forecasting a 5% reduction in
total residential construction to 2018/19 and a
10% reduction in apartments/units (i.e. New
Other Residential). Sydney and Melbourne are
both forecast to experience contractions in
residential building of 5% to 10%. This is
particularly significant because Sydney and
Melbourne are the meter of growth in the
exportable ‘services’ sectors i.e. tourism,
international education, fintech, medical
technology, information technology and
professional services.
6. The ALP negative gearing / CGT discount will
create significant disruption in the market due
to the ‘off the plan’ apartment ‘resale cliff’.
Retailed analysis of genuine resales in
Melbourne CBD, Southbank and Docklands
utilising resales for apartments within towers
predominantly less than three years old
indicates that the first resale on average is 12%
below the ‘off the plan’ price. A large
percentage of the sales (around 20%) are 15%
to 25% lower than the ‘off the plan’ price. This
means that a very high percentage of equity
(the initial deposit) is wiped out thus exposing
financial institutions to losses if prices further
reduce. (see Appendix 1)
7. Focusing negative gearing / CGT discount on
new dwelling construction will accentuate the
‘resale price cliff’ as on the one hand negative
gearing investors seek new stock, thus pushing
up prices. On resale these dwellings will be sold
into a market which cannot negatively gear.
Depending on gearing assumptions this would
P a g e | 40
 increase the ‘resale price cliff’ by a further 5%
to 8% over the current average loss for off the 9. The ALP proposed policy framework would
plan sales i.e. the ‘resale price cliff’ would be of create chaos in the Melbourne, Sydney,
the order of 17% to 20%. Brisbane and Perth apartment markets.

Financial institutions as a result will increase Considering the following factors:

loan to value ratios to 25% to 30% to reduce
exposure to potential losses. This will reduce The historically significant top end nature of
demand for negative gearing in due to lack of the residential price cycle
capital available to make a deposit and also The pending contraction in the residential
reduce the benefit of negative gearing due to construction sector
lower losses to write off and also due to the Significant contraction in credit to investors
CGT discount being reduced to 25%. Significant contraction in credit to overseas
investors
8. Apartment markets throughout Australia have Pressure on banking shares and banking
declined dramatically in the number of sales profits
(e.g. Sydney down 46%, Brisbane down 38%, Market confusion from developers and
Perth down 46%) and median prices have purchasers.
turned negative (see Appendix 3). Sydney had
the first monthly median price drop in eleven
Risks to market stability and volatility in the short
quarters in March 2016, and year on year,
term are significantly higher changing the
median prices are down 11% in Brisbane from
current policy setting rather than remaining
the peak (September 2014) and down 29% in
with the current policy setting.
Perth from the peak (June 2013, see Appendix
3). Apartment markets could be described as
being in the early stages of ‘bust’ conditions.

P a g e | 41
Appendix 2
Residential Building Forecasts

Source: Australian Construction Industry Forum May 2016

P a g e | 43
ACIF RESIDNETIAL CONSTRUCTION FORECASTS MAY 2016

P a g e | 44
Appendix 3
Sales Activity Levels and Median Price Movements Sydney, Brisbane, Perth and Melbourne:
CBD & Inner Area (2011 – 2016)

Source: Core Logic

P a g e | 45
City of Sydney

Number of Median
Year Period Land Use Sales Sale
Mar-11 2011 Mar RESIDENTIAL STRATA UNITS 1478 $585,000
Jun-11 2011 Jun RESIDENTIAL STRATA UNITS 1784 $577,100
Sep-11 2011 Sep RESIDENTIAL STRATA UNITS 1633 $580,000
Dec-11 2011 Dec RESIDENTIAL STRATA UNITS 1773 $575,000
Mar-12 2012 Mar RESIDENTIAL STRATA UNITS 1145 $600,000
Jun-12 2012 Jun RESIDENTIAL STRATA UNITS 2045 $595,000
Sep-12 2012 Sep RESIDENTIAL STRATA UNITS 1414 $615,000
Dec-12 2012 Dec RESIDENTIAL STRATA UNITS 1851 $630,000
Mar-13 2013 Mar RESIDENTIAL STRATA UNITS 1595 $623,000
Jun-13 2013 Jun RESIDENTIAL STRATA UNITS 1853 $650,000
Sep-13 2013 Sep RESIDENTIAL STRATA UNITS 2397 $690,000
Dec-13 2013 Dec RESIDENTIAL STRATA UNITS 1988 $681,000
Mar-14 2014 Mar RESIDENTIAL STRATA UNITS 1596 $695,000
Jun-14 2014 Jun RESIDENTIAL STRATA UNITS 1548 $700,000
Sep-14 2014 Sep RESIDENTIAL STRATA UNITS 1563 $738,500
Dec-14 2014 Dec RESIDENTIAL STRATA UNITS 1579 $745,000
Mar-15 2015 Mar RESIDENTIAL STRATA UNITS 1441 $770,000
Jun-15 2015 Jun RESIDENTIAL STRATA UNITS 1465 $810,000
Sep-15 2015 Sep RESIDENTIAL STRATA UNITS 1483 $832,000
Dec-15 2015 Dec RESIDENTIAL STRATA UNITS 1197 $825,000
Mar-16 2016 Mar RESIDENTIAL STRATA UNITS 784 $785,000

P a g e | 46
Inner Brisbane

Number of
Year Period Land Use Sales Median Sale
2011 Mar BUILDING UNITS (PRIMARY USE ONLY) 360 $445,250
2011 Jun BUILDING UNITS (PRIMARY USE ONLY) 500 $441,125
2011 Sep BUILDING UNITS (PRIMARY USE ONLY) 442 $442,250
2011 Dec BUILDING UNITS (PRIMARY USE ONLY) 554 $418,220
2012 Mar BUILDING UNITS (PRIMARY USE ONLY) 544 $427,250
2012 Jun BUILDING UNITS (PRIMARY USE ONLY) 597 $453,500
2012 Sep BUILDING UNITS (PRIMARY USE ONLY) 648 $455,000
2012 Dec BUILDING UNITS (PRIMARY USE ONLY) 579 $449,000
2013 Mar BUILDING UNITS (PRIMARY USE ONLY) 559 $456,500
2013 Jun BUILDING UNITS (PRIMARY USE ONLY) 750 $460,750
2013 Sep BUILDING UNITS (PRIMARY USE ONLY) 842 $463,750
2013 Dec BUILDING UNITS (PRIMARY USE ONLY) 726 $479,500
2014 Mar BUILDING UNITS (PRIMARY USE ONLY) 628 $499,500
2014 Jun BUILDING UNITS (PRIMARY USE ONLY) 678 $514,950
2014 Sep BUILDING UNITS (PRIMARY USE ONLY) 678 $515,000
2014 Dec BUILDING UNITS (PRIMARY USE ONLY) 496 $483,750
2015 Mar BUILDING UNITS (PRIMARY USE ONLY) 500 $480,000
2015 Jun BUILDING UNITS (PRIMARY USE ONLY) 541 $499,000
2015 Sep BUILDING UNITS (PRIMARY USE ONLY) 517 $495,000
2015 Dec BUILDING UNITS (PRIMARY USE ONLY) 488 $473,500
2016 Mar BUILDING UNITS (PRIMARY USE ONLY) 310 $458,750

P a g e | 47
Inner Perth

Year Period Land Use Number of Sales Median Sale

2011 Mar RESIDENTIAL 129 $465,000
2011 Jun RESIDENTIAL 150 $453,000
2011 Sep RESIDENTIAL 122 $440,000
2011 Dec RESIDENTIAL 123 $425,000
2012 Mar RESIDENTIAL 163 $449,000
2012 Jun RESIDENTIAL 145 $455,000
2012 Sep RESIDENTIAL 140 $460,000
2012 Dec RESIDENTIAL 147 $447,000
2013 Mar RESIDENTIAL 169 $510,000
2013 Jun RESIDENTIAL 216 $632,500
2013 Sep RESIDENTIAL 149 $475,000
2013 Dec RESIDENTIAL 160 $540,000
2014 Mar RESIDENTIAL 143 $501,250
2014 Jun RESIDENTIAL 146 $500,000
2014 Sep RESIDENTIAL 156 $492,500
2014 Dec RESIDENTIAL 137 $500,000
2015 Mar RESIDENTIAL 150 $540,000
2015 Jun RESIDENTIAL 112 $495,000
2015 Sep RESIDENTIAL 94 $470,000
2015 Dec RESIDENTIAL 86 $501,000
2016 Mar RESIDENTIAL 82 $491,500

P a g e | 48
Inner Melbourne

Number of Median
Year Period Land Use Sales Sale
Res Company Share Unit (within multi-storey
2011 Mar Dev) 1009 $490,000
Res Company Share Unit (within multi-storey
2011 Jun Dev) 1305 $515,000
Res Company Share Unit (within multi-storey
2011 Sep Dev) 1569 $511,000
Res Company Share Unit (within multi-storey
2011 Dec Dev) 1357 $487,000
Res Company Share Unit (within multi-storey
2012 Mar Dev) 991 $511,000
Res Company Share Unit (within multi-storey
2012 Jun Dev) 1178 $517,000
Res Company Share Unit (within multi-storey
2012 Sep Dev) 1132 $486,250
Res Company Share Unit (within multi-storey
2012 Dec Dev) 1067 $502,000
Res Company Share Unit (within multi-storey
2013 Mar Dev) 1092 $505,000
Res Company Share Unit (within multi-storey
2013 Jun Dev) 1271 $505,000
Res Company Share Unit (within multi-storey
2013 Sep Dev) 1175 $508,000
Res Company Share Unit (within multi-storey
2013 Dec Dev) 1053 $500,000
Res Company Share Unit (within multi-storey
2014 Mar Dev) 882 $498,000
Res Company Share Unit (within multi-storey
2014 Jun Dev) 1127 $529,000
Res Company Share Unit (within multi-storey
2014 Sep Dev) 921 $500,000
Res Company Share Unit (within multi-storey
2014 Dec Dev) 766 $509,750
Res Company Share Unit (within multi-storey
2015 Mar Dev) 776 $510,000
Res Company Share Unit (within multi-storey
2015 Jun Dev) 858 $503,750
Res Company Share Unit (within multi-storey
2015 Sep Dev) 750 $500,000
Res Company Share Unit (within multi-storey
2015 Dec Dev) 665 $515,000
Res Company Share Unit (within multi-storey
2016 Mar Dev) 430 $462,750

P a g e | 49
Bibliography

• RBA, Submission to the Inquiry into Affordable Housing Senate Economics References Committee, February 2014

• Stapledon, N., Trends and Cycles in Sydney and Melbourne House Prices From 1880 to 2011, Australian
Economic History Review, Vol. 52, No. 3, November 2012, University of New South Wales

• Kohler, M., van der Merwe, M., Long-run Trends in Housing Price Growth, RBA Bulletin, 2015

• Reform of the Federation White Paper, Issues Paper 2: Roles and Responsibilities in Housing and Homelessness,
December 2014

• Burke, T. et al, Generational change in home purchase opportunity in Australia, AHURI Final Report No. 232
November 2014

• Daley, J., Wood, D., Hot property: Negative gearing and capital gains tax reform, Grattan Institute, April 2016

• RBA, Financial Stability Review, April 2016

• ABS Cat. 4130.0 - Housing Occupancy and Costs, 2013-14, October 2015

• Abelson, P. et al, House Prices in Australia: 1970 to 2003 Facts and Explanations, 2005
• R Goodman et al., The experience of marginal rental housing in Australia, AHURI Final Report No. 210, Australian
Housing and Urban Research Institute, Melbourne, 2013
• Fox, R., Tulip, P., Is Housing Overvalued?, RBA Research Discussion Paper, June 2016

• Melbourne, Docklands, Southbank ‘Off the Plan’ and Resales Data, Herron Todd White 2016

• Sales Activity Levels and Median Price Movements Sydney, Brisbane, Perth: CBD & Inner Area (2011 – 2016),
Core Logic

• AIHW 2014. Housing assistance in Australia 2014. Cat. no. HOU 275. Canberra: AIHW

• Daley, J., Coates, B., Property Taxes, Grattan Institute, July 2015

• Daley, J., Wood, D., Fiscal Challenges for Australia, Grattan Institute Working Paper, July 2015

• Treasury, Australia’s Future Tax System: Report to the Treasurer, December 2009

P a g e | 50
• Australian Council of Social Service, Fuel on the Fire: Negative Gearing, Capital Gains tax and housing
affordability, 2015

• Hulse, K. et al, Supply shortages and affordability outcomes in the private rental sector: short and longer term
trends, AHURI, Swinburne University of Technology, June 2015

• Eslake, S., Australian Housing Policy: 50 Years of Failure, Submission to the Senate Economics References
Committee, December 2013

• Treasury, Financial System Inquiry Final Report, November 2014

• Yates J 2004 'Affordable housing and first home ownership - the Productivity Commission's draft report', p. 10-11

• Treasury, Review of Business Taxation: A Tax System Redesigned, July 1999

• Hulse, K., Reynolds, M. and Yates, J. 2014 'Changes in the supply of affordable housing in the private rental
sector for lower income households, 2006–11', AHURI Final Report No.235. Melbourne: Australian Housing and
Urban Research Institute.

• Holden, R., Switching Gears: Reforming Negative Gearing to Solve our Housing Affordability Crisis, The McKell
Institute, June 2015

• Downes, P., et al, Effect of the Mining Boom on the Australian Economy, RBA Research Discussion Paper, June
2014

• SGS, Rental affordability index: RAI Release Report, Community Sector Banking, Shelter Australia and SGS
Economics and Planning, November 2015

P a g e | 51