As property prices continue to rise across Australian capital cities, in particular Melbourne, the debate around, how to address housing affordability is intensifying.

Melbourne house prices have jumped more than 11.8% since January; after two consecutive quarters of decelerated growth, said Christina Zhou from Domain.

The issues of Capital Gains Tax (CGT) and negative gearing have become hot topics for the 2016 Federal election.

Abu Siddique, Associate Professor of Economics at UWA believes that “negative gearing is driving genuine first home buyers out of the housing market and the investors who are reasonably wealthy are getting an upper hand. Consequently, it is leading to a significant wealth gap between the current investors and future generations.”

What makes housing unaffordable?

 For people earning modest incomes, purchase affordability is an issue of access rather the choice. The ABS defines housing affordability as mortgage repayments being no more than 30% of gross household income. With increasing house prices this threshold is being exceeded. Negative Gearing and CGT are areas of contention when talking about housing affordability.

A property is negatively geared when the cost of owning it outweighs the income it generates year on year.  

Reporters Dan Conifer and Francis Keany earlier this month reported on The Reserve Bank memo, which states negative gearing and capital gains tax rules affect property more than other investments, “as it can be purchased with higher leverage than shares”.  In February 2016, reporter Sarah Miller, quoted Financial adviser Bruce Brammall, saying that this tax rule is available for other investments; however it is primarily used for property investments.

There are many factors that influence housing affordability, which include the “price of homes, interest rates and level of household income’ said the ABS. In the present climate with interest rates at all-time lows, housing affordability is still a hot topic, said Abu Siddique.

What’s on the table?

The three major political parties, namely, The Liberal Party of Australia, The Australian Labor Party and the Australian Greens have different stances about reforming negative gearing.

Under a Coalition Government, which is an alliance between the Liberal Party of Australia and the National Party of Australia; there is no plan to reform either CGT or negative gearing tax arrangements.

Whereas, Labor is proposing to remove negative gearing for existing dwellings purchased after 1 July 2017. The new capital gains regime will be applicable to new homes.

This proposal is quite moderate when compared with Greens tax reforms policy. They intend to end negative gearing and phase out CGT by 2020.

The Sydney Morning Herald points out that under both the Labor and Greens policies forward estimates predict that abolishing negative gearing and capital gains concession will improve the budget’s bottom line by $32 and $87.4 billion, respectively over the next decade.

With the 2015/2016 fiscal deficit of $21 billion, they argue that we need to look at reforms that will boost the coffers.

Positive fiscal management

The Coalition argues that both the Labor and the Greens policies will drive a “sledgehammer” through the economy and burst the “housing bubble”.

It is quite difficult to estimate what impact the changing CGT and negative gearing loopholes will have on housing affordability. But the Grattan Institute report, Hot Property: Negative Gearing and Capital Gains Tax, claims these changes will improve housing affordably by two percent. These estimates are far below the scare mongering tactics The Coalition is proposing will happen to the property market if these changes were made.

The Grattan Institute believes that Australia should come in line with international practice, and not allow losses derived from passive investment to be deducted from salary and wage income. Grattan estimates the government would raise an additional  ‘$2 billion a year in the short term, falling to $1.6 billion as losses start to be written off against positive investment income if negative gearing were removed.

Trip down memory lane

The Government’s present argument claims that removing this tax concession will force rental prices up.

There is only one example in Australian history that proves that the removal of negative gearing doesn’t affect rents. However, most of us won’t remember the brief period between 1985 and 1987 where negative gearing was completely removed.

Fact Check indicated that during this period only Sydney and Perth experienced strong growth in real rental prices. Some of this increase may be attributed to the removal of negative gearing, but this market also had tight vacancy rates.

Other major reforms that could be implemented to improve housing affordability include: ‘ eliminating stamp duty, limiting the time that potential developers can lock -up land for development purposes, reducing the deposit amount required by banks for first homes buyers, government assistance to low income earners in order to access the housing market and increase the supply of residential land to build residential dwellings’, said Professor Abu Siddique.

What is the response from State Governments?

Even though this conversation is happening at the federal level many states are having similar housing affordability debates.

For instance, lawyers from Clayton Utz reported that stamp duty would increase from 3% to 7% for foreign buyers and the land tax surcharge on absentee owners from 0.5 % to 1.5%, under the 2016/2017 Victorian Budget.

“No Victorians will pay these surcharges. This is about ensuring foreign owners pay their fair share,” said Victorian treasurer Tim Pallas.

“Since we introduced these surcharges last year. There has continued to be a welcome and steady stream of foreign interest in our residential real estate. The surcharges ensure that buyers will continue to benefit from the best services and infrastructure.”

It is estimated that these measures will raise an additional $486 million over the next 4 years.

NSW has approached this issue from a different angle. There is a proposal on the table to end stamp duty.

Stamp duty “was an inefficient, volatile and unfair tax that punished first home buyers and inhabited mobility”, said report co- author Peter Bentley.

The McKell Institute paper “A plan to end stamp duty: Making property taxation fairer in NSW”, proposed ongoing annual land tax bill of $5250 or 0.75 percent of the value of their land instead of an upfront stamp duty tax. This new tax arrangement would not be retrospective to protect recent purchases.

The question of housing affordability is not new but there is currently pressure on both the federal and state governments to introduce major tax reforms in order to improve housing affordability.