The Turnbull government has doggedly defended negative gearing, the policy by which the losses on investment properties can be offset against other income, most recently through Treasurer Scott Morrison before the May federal budget. Many experts blame the policy, in part, for rising house prices, which keep many younger first-home buyers out of the property market. It lowers the taxable income of such investors and thus hurts the overall budget bottom line, too.
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But the policy is also popular with many investors, almost to the point that the idea of having an "investment property" has developed something of a cult following. For some people, it seems a way of life that promises otherwise unachievable prosperity.
There is no magic bullet to reining in rising house prices that squeeze out young home buyers in favour of investors. But to just about every responsible party besides the government, reforming negative gearing should be on the table as part of a possible solution. It is the government's apparent obduracy rather than the call for change that which needs explanation.
The politics of negative gearing makes an ideal case study for students of politics and public policy. There are many different perspectives from which to start unpacking the issues but perhaps the best place to begin is the philosophical underpinning of the whole idea.
Both negative gearing and home-buying are about personal aspiration and upward economic mobility, involving individuals, couples and families. But those who already own a home appear to have trumped those who are yet to crack the housing market and are either renting or living with their parents.
Home ownership is an Australian dream and owning a house on a quarter-acre suburban block is part of Australian legend. It also fits in with the dream of Robert Menzies' so-called "forgotten people", a core Liberal Party value.
That surely doesn't apply, though, to owning multiple homes and investment properties. But Morrison's recent statements in support of negative gearing almost portray it as un-Australian not to own an investment property, such is his praise for the "mum and dad investors" who he says are at the heart of the negative-gearing community, rather than well-off Australians.
Just the use of the term "mum and dad investors" should be a warning that the Treasurer's spin merchants are trying to take over the debate, just as so-called "taxpayers' money" is always thrown into debates about public spending by those who want to restrict it. The terms are heavily value-laden. There are many relevant issues other than who and how wealthy the "negative-gearers" are, but Morrison is trying to hijack the issue of fairness by implying they are disproportionately so-called ordinary Australians, like school teachers and police officers, on relatively low taxable incomes ($80,000 a year or less). Of course, the attractiveness of lowering your taxable income is partly what negative gearing is about.
Morrison is also trying to widen the constituency that may support the government retaining negative gearing by emphasising the negative effects – i.e. increasing rents – that reform may have on the private rental market, much of which is negatively geared. Such a scare campaign may turn out to be good politics if it confuses the debate by sowing confusion among renters who are trying to buy their first home.
The issue also has an important federal-state relations dimension. The Treasurer is sticking to the government's line on both negative gearing and capital gains tax concessions that housing unaffordability is a problem of supply rather than demand. The added benefit for the government of this approach is that housing supply is largely a matter for state and territory governments. The state and territory governments are responsible for new land releases, regulating housing developers and the building industry, and providing utilities.
Federal-state politics is often about blame-shifting. Further land releases are certainly part of any solution and must be part of any federal-state policies packages. But the unfortunate couples or families who are being priced out of the market are left not knowing whether to blame the federal government, state and territory governments, or the private sector.
Rising house prices mean the issue won't go away. In lieu of reform of negative gearing, the federal budget may announce other measures, including the current favourite, which is giving home buyers early access to their superannuation savings to help pay for a deposit on a purchase. But that will be fraught with dangers and controversies, even if it buys off a proportion of intending first-home buyers with an apparent answer to their problem.
For the government, finding a political solution is always a balancing act between competing interests. In politics, the interests of those who have most to gain or lose usually prevail over those whose gains/losses are smaller, even if the latter is a majority.
There are at least three types of competing non-government interests in this case study. One is that of the general citizen and taxpayer who is reduced to powerless observer status, although they are the largest group. The second is that of the negatively-geared individuals (apparently more than 1.3 million) who find that the policy suits their financial needs and aspirations. Their voice is likely to be loudest and strongest. The third group, almost certainly larger, is that of the younger and more disparate couples and families who are struggling fruitlessly to realise their dream of entering the housing market and looking for help from government.
John Warhurst is an emeritus professor of political science at the Australian National University. john.warhurst@anu.edu.au
