Photographer: Brendon Thorne/Bloomberg

Property Obsession Becomes Key Aussie Election Battleground

  • Turnbull turns real estate tax break into key election issue
  • Housing policy `has to be dealt with very carefully': HSBC

Australians’ obsession with property has moved from dominating conversations by the barbeque to potentially helping decide its next government.

A popular tax law that gives a break to landlords is poised to be a key issue for voters in an election tipped for early July. The measure, known as negative gearing, has helped stoke a surge in property prices. The flip side: rising unaffordability -- which the opposition Labor Party is trying to capitalize on with a pledge to curb the tax break.

Prime Minister Malcolm Turnbull, whose popularity is sliding, has spied an opportunity. He’s betting that Australians -- among the most privately indebted people in the world -- will recoil from any threat to their home’s value. The leader, who owns a portfolio of investment properties himself, has berated Labor’s policy as a “reckless” threat to most families’ biggest asset, and one that could savage the entire housing market.

“Housing is one of the main areas where the two political parties differ significantly,” said Callam Pickering, who runs consultancy CP Economics and previously worked as an economist at the Reserve Bank of Australia. “It almost feels like a bit of a referendum on the housing market -- depending on how you feel might affect the way you vote.”

About 1.2 million Australian real estate investors use negative gearing, which allows them to lower their tax bill by deducting the costs of owning a rental property, including mortgage interest payments, from their taxable income.

Labor wants to ban the practice for existing homes, which accounted for 93 percent of the A$155 billion ($120 billion) of property investment last year. It argues the change would spur new home construction and allow more first-home buyers to enter the market. The party also plans to curb a discount on capital gains tax paid when a property is sold.

More than two months after the opposition released its policy, the government made its stance official on Sunday. Turnbull held a media briefing outside the home of a young couple who had bought an investment property to fund the purchase of a home for their child. He said that Labor’s proposal will deliver to Australian home owners a “reckless trifecta” of lower home values, higher rents and less investment.

The Grattan Institute, an economic think tank, said in a report this week that scrapping negative gearing and a reduction in the capital gains discount would reduce home prices by only as much as 2 percent.

“Distortions in our current tax system encourage households to over-invest in residential property, so there is a case for reform,” said Paul Bloxham, chief Australia economist at HSBC Holdings Plc in Sydney. “But there’s really no escaping that housing is a critical part of Australia’s economy and has to be dealt with very carefully.”

Battle Lines

Real estate props up the country. About 65 percent of Australian bank loans are mortgages and property comprises 55 percent of the nation’s household wealth, according to Bloxham, who previously researched housing for the central bank. The household debt-to-income ratio rose to 186 percent in 2015 from 167 percent in 2011. By comparison, the U.S. household debt to disposable income ratio was just under 105 percent at the end of last year and just over 140 percent in the U.K.

The numbers give ample ammunition to Turnbull, who on Sunday said that Labor’s policy will be a “sledgehammer” to Aussie home owners. As the prime minister spreads fear that winding back concessions will smash prices in the country’s A$6 trillion housing market, the battle lines are drawn and clear.

Property Heat

In one corner: Aussie youth. Curbing negative gearing could remove some heat from the property market, where inflated values have made housing unaffordable for younger people. Just a third of Australians aged between 25 and 34 own their own home, down more than 20 percentage points since the early 1980s, according to the Australian Bureau of Statistics.

In another corner: their parents. Since 2006, the proportion of property investors aged 55 years and over has risen to 36 percent from 28 percent, according to a University of Melbourne study.

“Many Australians’ underlying view is that the only way you make money in this country, outside working for someone, is to buy property,” said Andrew Hughes, a lecturer at the College of Business and Economics at Australian National University. “Challenging that view, and taxing the means middle-ground voters have used to get ahead financially, is very risky.”

Uphill Battle

Nowhere is the uphill battle for young aspiring home owners more apparent than in Sydney. Buyers there are currently having to pay 12.2 times the median annual pretax household income for a place to live, compared with 8.5 in London, and up almost a third from 9.8 in 2014, according to the latest Demographia global housing affordability survey.

While that means Turnbull may struggle to woo the younger vote in Australia’s most populous city, he’s still betting that opposing Labor’s proposal and keeping the tax break will help return him to power. His Liberal-National coalition trailed Labor 49 percent to 51 percent on a two-party preferred basis in the latest Newspoll.

“People care a great deal about their houses,” said Pickering. “The possibility that housing could collapse is probably going to scare them more than almost anything else.”

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE