Some advice to Malcolm Turnbull on negative gearing.

On 7.30 last night, Leigh Sales quizzed, rather than grilled, you on negative gearing. You didn’t look too good, not because Sales gave you a particularly hard time, but because your defence of negative gearing is fundamentally flawed, demonstrating that you either doesn’t understand it or you’re deliberately misleading the public.

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The Age reports that:

He offered no modelling, only “common sense” to justify his negative gearing policy, telling the ABC’s 7.30 host Leigh Sales that figures showing top earners had the most to gain were “beside the point”.

Seventy per cent of people who negatively geared in Australia owned just one property, and another 20 per cent owned two, according to the Prime Minister.

“Most of them are on average earnings or less,” he said.

“This is a matter of common sense,” Mr Turnbull answered.

“Around a third of the buyers for residential property currently are investors. What Labor is proposing will take all or almost all of them out of the market.

“If you take a third of the buyers out of the market, prices, values will fall. That’s common sense,” he said.

I don’t know if you’re listening Malcolm, but there are a couple of things you got really badly wrong.

The first is that, if the Labor Party policy on negative gearing were to be implemented, it would only affect new investments on existing properties. What that means is that investments  in existing properties may slow or possibly even (in your book) dry out completely. But it will only affect new investments.

What it doesn’t mean, and what you implied that it did mean, is that people with existing investments in property would leave the market. This is highly unlikely to happen as their   existing negative gearing arrangements will not be subject any change.

This is why your claim that the Labour Party policy will affect 30% of investors and that they will sell their properties driving down house prices, is wrong.

If you don’t know that this is the case, then you are dangerously misinformed. If you do know that this is the case and stated otherwise, you’re telling porkies.

The second problem with what you are saying is the statement “Most of them are on average earnings or less” and  “There are well over a million Australians, most of whom are on average earnings, who have an investment property and they are negative gearing”.

In part, this is because higher income earners are able to reduce their taxable income through negative gearing. If you take that factor out, you get a better picture which is: The top 10 per cent of earners collect almost half the negative gearing tax deductions and three-quarters of the concessionally taxed capital gains.

This equates to $13 billion per annum which is handed to the 1.26  million people who have negatively geared property. If you do the sums, that’s 10% of the population of taxpayers (around 12 million). I presume you realise that $13b billion is about one third of the current deficit.

There is a wider issue in this debate which should also be considered.

Who will buy the properties that investors put on the market as a result of changes to negative gearing? There’s a good chance it will be first-time buyers, many of whom are currently locked out of the market.

And this is where you’ve got the politics are wrong.

Most Australians would probably understand that negative gearing benefits a small group of wealthy people. Many of us have children who cannot get into the housing market and maybe still living at home well into their 20s and 30s. For these people, housing affordability (and its feral little brother, negative gearing) is the major problem.

Informed opinion is lining up against you.

The Guardian’s Catherine Murphy writes Negative gearing changes won’t drive all investors from the housing market – here’s why

Former Commonwealth Bank boss David Murray’s sweeping review of Australia’s financial system singled out negative gearing as one of a number of tax arrangements that “distort the allocation of funding and risk in the economy” and may “adversely affect outcomes in the financial system”.

And John Daley, Chief Executive Officer of the Grattan Institute is no great fan.

Politically, negative gearing is an issue that is racing on three legs and you keep backing it.  It’s a loser and everybody else realises this. The only other group that is backing it is the real estate industry. Shouldn’t that tell you something.

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