Debunking myths about housing affordability, negative gearing

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Various actors from the government and academe confidently assert that the tax system favours property investors over owner-occupiers.

MPs from Labor, Greens, and Coalition; prominent economists like Saul Eslake and Ross Garnaut; and think tanks like the Grattan Institute also believe this partial treatment is contributing to the housing affordability problem.

Graham Young, executive director of the Australian Institute for Progress, put these assertions to the test by modelling the average housing investment over the last five years. His findings were published in the June edition of REIA News.  

The last five years is a period for which the Australian Bureau of Statistics (ABS) and the Reserve Bank have excellent records for average prices, rates, and interest rates.

“The model, using history, not guesses about the future, shows the biggest tax shelter goes to owner-occupiers, not investors,” said Young.

Under current tax laws, an owner-occupier with an initial 20% deposit would have received a 26.83% return per annum after tax. “This compares with the 15.86% an investor would have received on the same average property,” he added.

The reason for this marked discrepancy is the fact that investors pay capital gains tax, whereas owner-occupiers don’t.

“Every suburban real estate agent has the clients who live in the house while they do it up to flip, precisely because they gain capital gains relief they wouldn’t as an absentee developer,” Young said. “Owner-occupiers also gain a benefit from living rent-free in their own property.”

Young also modelled Labor’s proposed negative gearing changes. These changes eroded the returns to investors, but on the 20% deposit scenario, they were still a relatively healthy 11.67% per annum.

“But most of the increase in tax on the property under Labor wasn’t from fiddling with negative gearing, but their proposed 50% increase in the capital gains that an investor would pay,” Young said.

This begs the question: If owner-occupiers are so advantaged, why are they finding it so difficult to get into the market? According to Young, it’s because it’s become exceedingly difficult to save for a deposit.

Once owner-occupiers are in the market, at current interest rates, mortgages are quite affordable compared to rent. However, because of rapid asset appreciation, deposits have never been harder to save.

Young believes the best solution to this problem would be to allow first-home buyers to access their superannuation to complement other savings. This is permitted based on the condition that first-home buyers regard it as a loan that must be repaid back over time.

The superannuation industry does not like this, and Labor leader Bill Shorten has warned that raiding super would deplete people of income in retirement.

Young does not agree with this analysis. “Over the five year period of our model the average return on superannuation funds monitored by APRA was 6.8%, and the absolute best return in that period [was] 10.5%,” he said.

“Compare that to the 26.83% return from the average house bought on a 20% deposit. Every day the potential home owner has to delay buying their house because part of the deposit had been diverted to super is a day they lose money for their retirement.”   

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  • Tommy says on 26/06/2017 01:43:05 PM

    This is could only be written in a bubble market

    Bigger deposits solve nothing as all it does is ever inflate prices and more debt.

    The REAL problem is low interest rates and the fact money is practically free and never has to be paid back.

    as long as there are more fools taking on more debt and pushing up prices. Even deposits can be borrowed

  • Youph says on 28/06/2017 09:01:36 PM

    "Under current tax laws, an owner-occupier with an initial 20% deposit would have received a 26.83% return per annum after tax." - where do such fairy-tale returns come from? Does Young simply assume a 26.83% annual growth in average house price?

    Can you provide a link to his analysis?

  • says on 30/06/2017 02:42:31 PM

    Yes, I totally agree with you and the tragedy is that the poor young unsuspecting home buyers who suffer from " fear of missing out" have pushed prices to stupid unsustainable levels now.
    A reset of values will undoubtedly happen very soon when the 40 to 50 percent of today's values will disappear without trace for upwards of 12 years. Always remember people that ALL BOOMS BUST. I suggest get out now while some unsuspecting buyers are still there.

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