RBA and Negative Gearing

May 16th, 2016
Negative gearing continues to make headlines in the lead-up to the federal election, as one of the key economic issues dividing the two major parties. While the government will not make changes to current policy, Labor have plans to wind back both negative gearing and the capital gains tax discount if elected. The Reserve Bank has long been uneasy about the state of negative gearing, saying more than once that it has created unnecessary financial risks for the Australian housing market.

Debate over negative gearing was recently reignited after the ABC published an internal briefing note from the RBA saying, "Any change which discourages negative gearing may be good from a FS [financial stability] perspective." While Labor jumped on the statement, which was published before their policy to restrict negative gearing was announced, the government have described it as "an old document", "an internal document" and "not an official position of the RBA". ;

According to Treasurer Scott Morrison, the internal RBA note was produced prior to changes made by APRA (the Australian Prudential Regulation Authority) in 2014 to introduce tougher lending standards for investors. However, while these measures have been effective in cooling the housing market over the last few months, investor loans continue to grow across Australia according to new data from the Australian Bureau of Statistics (ABS). Investor loans rose in value by 1.5 percent in March after recording 3.1 percent growth in February, in contrast to owner-occupier loans which had a 1.2 percent decline in value. ;

While an official RBA position is hard to quantify, they have seemed uneasy about the combination of negative gearing and 50 percent capital gains tax since it was introduced in 1999 by Peter Costello. Speaking at last year's home ownership inquiry conducted by the House of Representatives Economics Committee, the RBA said: "Financial stability considerations would suggest that tax and regulatory frameworks should avoid encouraging over-leveraging into property, whether by owner-occupiers or investors." and "The bank believes that there is a case for reviewing negative gearing, but not in isolation."

The case against negative gearing is not clear cut, however, with the RBA making this statement at a Senate inquiry into affordable housing in 2014: [We] "see a case for the outright prohibition on negative gearing for investment in residential property... We wish to make it clear that we are not challenging the validity of the concept of negative gearing, whereby losses on one economic activity - in this case, being a landlord - can be offset against a person's principal source of income."

While the government have admitted that high housing prices are a problem for many Australians, they have plans to cool the market by increasing housing supply and cracking down on union corruption. In contrast, Labor are proposing to restrict negative gearing to newly constructed homes from July 2017 and cut capital gains tax concessions from 50 percent to 25 percent, with existing property assets unaffected.

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