Punitive taxes on residential investors will be a disaster for new home supply

21 April 2011

The Federal Government would be making a serious mistake if it imposed punitive taxes on people investing in more than one rental property, according to the Urban Taskforce. The Age newspaper today reports that the Gillard government has sounded out unions on a proposed new sales tax for property investors and restricting negative gearing for investors with multiple properties.


According to the report, there is a belief that new taxes or new restrictions on negative gearing might make housing more affordable.


The Urban Taskforces chief executive, Aaron Gadiel, said such policies would cripple Australias supply of new housing and have severe economic impacts.


Investors are an important source of funding for new home construction, Mr Gadiel said.


“Given that our national undersupply of housing now exceeds 200,000 homes, the government should be encouraging more investor participation in the residential property market, not less.


Investor activity in the residential market-place boosts the housing supply, by funding the construction of new homes that renters cannot afford to own outright.


Mr Gadiel said investors had little impact on the market for detached houses.


In Australias mainland state capitals the market for freestanding houses is largely unaffected by investor activity, with 85 per cent of all such houses owner occupied, he said.


Mr Gadiel said that most residential investment properties are medium and high density homes.


Across the mainland state capitals, 56 per cent of medium and high density homes are occupied by renters, he said.


Mr Gadiel said that an analysis by the National Housing Supply Council showed that construction costs for greenfield houses hover at around $200,000 a dwelling, while the construction cost for higher density homes approaches $300,000 a dwelling.


Construction costs are between 34 per cent and 44 per cent more expensive depending on the city.


Development and interest costs and are also more expensive.


Mr Gadiel said that higher density homes are preferred by many people because of their good locations and their relative ease to maintain.


But they are more expensive to build, he said.


Many people cant afford to fund these higher construction costs, and thats why investors have an important role to play.


Investors fund new housing construction through their off-the-plan purchase, and rent new homes out to people who want well-located, low maintenance housing, but cant afford to fund the construction costs.


Mr Gadiel said tax policy should not aim to force asset prices below their replacement cost.


If tax policy is used to deliberately engineer a collapse in prices for medium and high density homes, property owners, many renters and building workers will be left worse off, as new home construction dries up, he said.


Mr Gadiel said by allowing investors to purchase housing without punitive taxes, new housing supply is possible, which in turn means more homes available to renters.


“This helps mitigate the strong upward pressure on residential rents arising from our chronic undersupply of housing.”


Mr Gadiel said the idea of singling out owners of property portfolios with harsher tax rules was also explicitly rejected by last years Henry Tax Review.


The Henry tax Review found that levying higher land taxes on larger holdings discourages investment in rental housing, Mr Gadiel said.


Mr Gadiel said the best way to make housing more affordable, on a sustainable basis, was to reduce the cost of supplying new homes. This could be achieved through: ¢ lower and more rational development levies; ¢ a simplified planning approvals system that reduces developer holding costs; ¢ a planning system that allows more competition between landowners, to reduce the cost of development site acquisition.


The Urban Taskforce is a property development industry group, representing Australias most prominent property developers and equity financiers.


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