Thursday, June 24, 2004

As housing becomes unaffordable, both major parties reject reforms: "The Federal Government has rejected a recommendation by the Productivity Commission to review the effect of the tax system on the housing market after it blamed capital gains tax discounts and negative gearing for inflating prices.

"The commission's report, ordered by the Government last August and released yesterday, said the interaction between negative gearing, the halving of capital gains tax in 1999 and high marginal tax rates had helped fuel house price rises beyond what could be explained by other factors. It said a review should focus on the capital gains tax but also assess the impact of negative gearing - where investors gain a tax break when their interest costs exceed rental income - and the capital works deduction provision for buildings.

"'Interactions between negative gearing, capital works deductions, post-1999 capital gains provisions and marginal income tax rates have lent impetus to investment demand during the housing boom,' the report said. The proportion of first-home borrowers has fallen recently to record lows of about 12 per cent of all home borrowers, as the boom has put a first home even further out of reach. The frenzy of residential property investment has been blamed for locking out first-home buyers."

"The commission said the surge in house prices since the mid-1990s has been bigger than previous booms and affordability had plummeted. Prices had overshot and future "softening of prices" was inevitable, with serious consequences for some investors. "For investors with a large number of heavily geared properties, the financial consequences could be severe, even requiring the forced sale of the family home."

"Mr Costello also rejected the commission's recommendation to target the first-home buyers' grant at low-income earners. The commission said the bulk of the payouts - $7000 to all first-time buyers - goes to households with above-average incomes. "Assistance should be targeted to the housing needs of lower income households by restricting the eligibility," it said. The commission also called for a national inquiry to examine the housing needs of low-income earners, but Mr Costello said this was not required and that the Government provided "significant resources to address the housing needs of low-income households". The commission said stamp duty on properties was inefficient and should be replaced by more efficient levies such as land tax."

"Labor would "carefully consider" the report but, like Mr Costello, had ruled out any changes to capital gains tax or negative gearing."

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