SWB108
Australian Society, Systems and
Policies
Assessment Task 2 Essay
The Role of Negative Gearing in
Australia’s Housing System
Name: Brittany Brooking
Student number: 10139648
Due date: Friday October 26
Word count: 1861 words
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Under Article 25(1) of the Universal Declaration of Human Rights, adequate
housing is listed as a basic human right everyone is entitled to (United
Nations, 1948). For many Australians, this need is not being met under the
current housing policies in place. This is made apparent through the issues
people are facing with housing affordability. Healey (2016, p. 2) defines
housing affordability as the relationship between the cost of housing and the
household income, and affordability becomes an issue when the expenses
cannot be met with the amount of income. This essay examines the role
negative gearing plays in this housing system. It was found that the policy
acts a tax minimisation strategy used by investors, only benefiting those who
are wealthy enough to invest in property in the first place. Additionally, it
drives the price of rents to increase, contributing towards the housing
affordability issue. Based on this evidence, Australia’s housing system is not
equal with negative gearing, and addressing the ideological positions that
underpin the policy is essential in instigating change.
The current Australian housing system can be characterised by issues in
affordability and a dominance of private ownership over public. Demographia
(2018) recently released their annual international study on housing
affordability, ranking Australia’s housing market as the third least affordable
amongst the countries surveyed. This reveals a major economic problem for
Australia, which is further confirmed through additional statistics. Healey
(2016, p. 1) reports that given the income to house price ratio in 1981-82,
three years of income would be enough to purchase a house. That ratio has
now doubled nationally, and tripled in Sydney during the early 2000s property
boom (Healey, p. 1). Assessing housing prices in comparison to income
reveals that the inflation of prices is not balanced by current wages. This
economic crisis has various social impacts for different groups. As Saunders
(2017, p. 743) explains, younger people are struggling to enter the housing
market, and low-income renters face a drain on their ability to meet needs
unrelated to housing, pushing them closer to poverty. Additionally, over
100,000 people in Australia are regarded as homeless (Healey, p. 2). This
statistic is not helped by the lack of public and community housing in
Australia. Orchard (2014, p. 209) notes that 5% of Australians are living in
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social housing, meaning that the remaining 95% of housing is privately
owned. Marston (2014, p. 110) asserts that with such a dominance of private
ownership, policies may often place more importance on the financial value of
housing rather than the integral social value it holds. Market forces overpower
Australia’s housing system, contributing towards unaffordable housing that
affects vulnerable groups.
The negative gearing policy plays a key role in the promotion of privatisation
in Australia’s housing system. Blunden (2016, p. 342) explains that negative
gearing occurs when an investor services a loan to buy an investment
property, but the property related expenses outweigh the amount of income
generated through rent, therefore allowing the investor to claim the loss as a
tax deduction. Furthermore, Montani (2017, p. 433) points out that investor’s
employ negative gearing as a tax minimisation strategy when rental losses
initially incur, but they intend to eventually accrue wealth from the property,
and use it in combination with the Capital Gains Tax (CGT). The CGT grants
investors a 50% tax discount on the sale of an investment property, meaning
only half of the profit is taxed (Healey, 2016, p. 36). The ways in which the
negative gearing policy interacts with the current issues in housing
affordability have been subject to debate.
The benefits and detriments of negative gearing have both been points of
discussion. Proponents of negative gearing argue that without it, there would
be a decline in the amount of investments in housing for rent, and so the
policy facilitates rental-housing supply (Blunden, 2016, p. 341). Montani
(2017, p. 433) refutes this claim, revealing that 93% of property lending is
available for houses that are already established. Healey (2016, p. 37) points
out another commonly used defence of negative gearing, stating that it is
believed that the financial gains only go to investors on middle and low
incomes, as taxation statistics reveal that it is used by people on incomes of
below $80,000. This is proven to be another myth as Pawson (2018, p. 133)
argues that this is a selective statistical breakdown of taxation, and that 82%
of all taxpayers receive an income of below $80,000. She continues to note
that only 8% of people using negative gearing earn an income of under
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$80,000, and that percentage is more than doubled for people on an income
of over $80,000. People on high incomes disproportionately receive the gains
of negative gearing. In terms of the relationship between negative gearing and
the rise of house prices, Montani (p. 433) states that the demand for houses
as investments is artificially inflated by the policy, increasing speculative
growth in the price of housing. Negative gearing exacerbates the issues in
housing affordability, and only serves as a benefit for those who are already
wealthy.
Changes were made to the negative gearing policy before it became a widely
known tax minimisation strategy. Montani (2017, p. 432) notes that negative
gearing is allowed under s 8-1 of the Income Tax Assessment Act 1997 (Cth),
the same statement that enables most deductions to occur. Using this tax
provision for rental investment was an unknown strategy in the early 1980’s,
not gaining major attention until changes were made to it in 1986 (Hanegbi,
2002, p. 354). Hulse, Burke, Ralston and Stone (2012, p. 18) expand on this,
explaining that the governments’ concerns about future tax losses instigated
the change of the provision so that losses could only be deducted in the
future, against rental profits and capital gains. They continue to convey that
the real estate industry ran a political campaign against the adjustments,
consequently leading to the reversal of the changes to occur in 1987.
Following this incident, an industry of property advisors, brokers and
marketers developed, attracting investors into the property sector through
enticing advertisement of negative gearing (Hulse et al., p. 18). Negative
gearing was brought to the wider publics attention following the modifications
and controversy that surrounded it.
Discourses around negative gearing and the history of it, shape the publics
perception of the topic. When the changes were made to negative gearing in
1986, the cost of rents fluctuated across the five major cities of Australia
(Montani, 2017, p. 432). This is important to consider as it plays a role in the
current narrative around negative gearing. As Blunden (2016, 343) mentions,
a dominant idea that is put forth is that the changes were the cause of the
rental increase; misleading people to fear a similar occurrence if adjustments
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are made to negative gearing. Montani (p. 432) discounts the argument,
pointing out that the increase was due to local factors, considering the prices
only increased in Perth and Sydney, and actually decreased in Brisbane and
Adelaide. Politicians’ comments on negative gearing also affect the public’s
opinion. For example, Pawson (2018, p. 134) notes that in the 2017 budget,
treasurer at the time Scott Morrison asserted that negative gearing is mostly
utilised by ‘mums and dads.’ She continues to point out that this statement
was designed to appeal to the Australian community, in order to provoke the
sentiment of not wanting to deny hard-working parents an advantage in
acquiring the funds needed to raise children. These examples portray the
ways in which the discussion around negative gearing is framed to assist in
the perseverance of the policy.
The negative gearing policy is underpinned by certain ideologies. Negative
gearing encourages people to invest in properties in order to accumulate
wealth, meaning that the policy is developed around the view of housing as an
economic process (Orchard, 2014, p. 217). Rolnik (2013, p. 1073) refers to
this as the commodification of housing, arguing that it has enabled a
disproportionate amount of wealth to flow towards people on the higher end of
the income scale, affecting the accessibility of housing for others. Pawson
(2018, p. 128) and Marston (2014, p. 110) support this claim, adding that with
policies like negative gearing in place, the housing systems function as a
means to gain capital can take precedence over housing as a place to live
and provide stability. Nicholls (2014, para. 15) believes that negative gearing
is situated within the ‘paradigm’ of policy ideas, which is a set of ideas that
overtime dictate public policy outcomes. In this case, they are pro-market
ideas of neoliberalism (Nicholls, para. 15). The idea around negative gearing
arises from the perspective of housing as an economic process rather than a
social one.
Examining the current circumstance Australia’s housing system is in, it is
evident that inequalities are present, and the negative gearing policy
exacerbates them. Envisioning alternative views of housing that are based in
social justice ideals may begin with looking at the way housing systems in
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other countries operate. For example, Marston (2014, p. 118) points out that
in Germany, renters can stay on the same lease for as long as ten years, and
home ownership makes up less than 50% of the housing system. Australia
differs in this sense as people are mainly either on a lease of six months or
twelve months (Healey, 2016, p. 3). Additionally, 95% of housing in Australia
is privately owned (Orchard, 2014, p. 209). Mollaei and Othman (2013, para.
1) attribute this to the strong encouragement to own a home under the idea of
The Great Australian Dream, which is a product of different policies set in
place after World War II. With this strong push, longer renting periods are not
promoted in Australia as under this goal of home ownership, renting is viewed
as a transitional period. In this example, secure housing is encouraged in
Germany, whereas Australian policies focus on investment and ownership of
housing.
Negative gearing in the housing system is relevant to social work practice as it
impacts practitioners’ ability to assist those experiencing homelessness, and
those struggling under the current Australian housing affordability crisis.
Parsell, Peterson and Culhane (2017, para. 3) note that micro social work
only manages these issues, and macro social work must be adopted to enact
actual change. This may involve spreading awareness of, and clarifying the
misconceptions about policies like negative gearing that play a key role in
creating inequalities in the housing system. In order for any policy work to be
effective, the dominant market-based ideas and neoliberal assumptions that
currently underpin the policies in place must be addressed.
Housing affordability in Australia is a contemporary issue that poses a risk on
peoples ability to access safe and secure housing. The negative gearing
policy does not help this problem but instead exacerbates it, increasing
housing costs and creating a disproportionate flow of income to the highest
percentage of earners. It is based around ideas that promote housing as an
economic process, and is persevered through dominant discourses that
create misconceptions about the policy. The focus for Australia should be on
secure housing and prioritising the vital social value it provides over any
economic value.
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References
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