Abolishing negative gearing could create a "housing glut" and make it harder for those looking for a first step on the property ladder, a QUT economist has warned.
Dr David Willis, from QUT Business School, said recent calls for a review of negative gearing from the Reserve Bank of Australia and David Murray, head of the Financial System Inquiry, were aimed at preventing a housing bubble.
However he cautioned that scrapping negative gearing - offsetting lost income on investment properties to save on tax - would not necessarily benefit the economy.
"The idea is that getting rid of negative gearing will stop house prices rising so rapidly and people borrowing beyond their means for investment properties," he said.
"But this is missing some hard truths of the property market. Investment property purchases do add to the demand for houses and could be argued add to house price inflation and issues around housing affordability. But it can also be forcefully argued that the first home grant does the same."
Dr Willis said the Federal Government would have to "tread carefully" before making any changes to negative gearing.
"If capital gain and negative gearing are pared back or cut altogether it may, in the short to medium term, create conditions of a housing glut as investors sell properties they can no longer afford," he said.
"This then affects the wider housing market and can create a situation of house price deflation.
"While this may create affordability in some cases, it could also cause a situation where lending significantly slows and the economy slows with it as banks will be less willing to lend for renovations and purchases given the falling prices."
Dr Willis said of more concern was the risk of rents rocketing as rental properties were withdrawn from the market.
"Higher rents would make renting while saving to buy a house more difficult so, while housing may be more affordable to buy, getting a start on the housing ladder could be just as hard," he said.
"Much less discussed, but equally concerning, is that this will create a widening gap between those looking to rent and houses that are available to rent at an affordable price.
"The Federal Government may immediately save money by abolishing negative gearing, but the states and territories would then be compelled to build a lot more affordable rental housing to cater for this gap.
"Building and maintaining this amount of social housing would come at great cost to the states at a time when they are already carrying substantial debt.
"Negative gearing needs to considered widely on an economic, financial and social basis before it is cut back or abolished, as there could be quite significant social and financial cost to any major changes that would largely fall on the states to resolve."
Media contact:
Rob Kidd, QUT Media, 07 3138 1841, rj.kidd@qut.edu.au
After hours, Rose Trapnell, 0407 585 901
