Australian house prices will fall if negative gearing goes, study says | Australia news

Three-quarters of Australian households will be better off if negative gearing is abolished, a study presented to the Reserve Bank of Australia shows.

Close to 75% of households could own their own homes if the policy was axed, and house prices would soften by 1.2% while rents would rise “only marginally”, it said.

The economic modelling undertaken by Melbourne University economists was presented to a Reserve Bank workshop last month, and publicly released on Friday.

The paper, by department of economics researchers Yunho Cho, Shuyun May Li, and Lawrence Uren, found that eliminating negative gearing would lead to an overall welfare gain of 1.5% of gross domestic product.

It found home ownership rates could be lifted to 72.2% of households, the highest level since 1991. The current level is 66.7%, the lowest level since the mid-1950s.

“We find that removing negative gearing would result in lower house prices, higher rents and homeownership rate … the welfare analysis suggests that eliminating negative gearing would lead to an overall welfare gain of 1.5% for the Australian economy in which 76% of households become better off.

“However, the welfare effects are heterogeneous across different households. Renters and owner-occupiers are winners, but landlords, especially young with high earning landlords, lose. Improvements in homeownership rate are observed predominantly among young and middle-aged households who are relatively poor.”

The report authors stressed that the paper was “preliminary and incomplete”.

The release of the Melbourne University paper follows an especially intense week of political speculation over negative gearing.

The Labor party took to the 2016 election a policy of restricting negative gearing for new dwellings and reducing capital gains concessions on houses from 50% to 25%.

The Turnbull government has fiercely opposed the proposals, claiming during that campaign that they act like an “axe” and a “chainsaw” on the housing market, and bring the Australian economy to a “shuddering halt”.

But this week, leaked documents revealed that the New South Wales premier, Gladys Berejiklian, was advised by her own Treasury officials in 2016 that the federal government should conduct a comprehensive study of negative gearing and capital gains tax arrangements “and consider alternative policies that would improve outcomes for Australians”.

She was accused by the federal shadow treasurer, Chris Bowen, of having “stood by in silence” while the Turnbull government conducted a “scare campaign” over housing tax reform.

Also this week, confidential federal Treasury advice – released under freedom of information after a two-year fight by the ABC – contradicted claims by the treasurer, Scott Morrison, that changing negative gearing and the capital gains tax discount would act like a “sledgehammer” on the housing market.

The documents show Morrison received advice from his own department that Labor’s negative gearing overhaul was likely to have a “small” impact on house prices, causing “some downward pressure” but “a relatively modest impact” on prices.

Australia’s negative gearing regime – where losses from an investment property can be claimed as a tax deduction to reduce an overall tax bill – is an anomaly against comparable economies globally. Only a few OECD countries, including New Zealand and Japan, have largely unrestricted negative gearing systems similar to that of Australia.

The federal finance minister, Kelly O’Dwyer, has released for public consultation draft legislation for the establishment of a new commonwealth entity, the National Housing Finance and Investment Corporation.

The new body would administer a $1bn national housing infrastructure facility to help increase housing stock.

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