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Analysis of Changes to Negative Gearing and Capital Gains Taxation

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Analysis of Changes to Negative Gearing and Capital Gains Taxation Analysis of changes to negative gearing and capital gains taxation Analysis of changes to negative gearing and capital gains taxation Prepared for the Property Council of Australia July 2019 1 Analysis of changes to negative gearing and capital gains taxation Contents Glossary i Key Points ii Executive summary iii 1 Introduction 11 1.1 What is negative gearing and the capital gains tax? 11 1.2 Objectives of the proposed changes 12 1.3 Broader debate around CGT and Negative Gearing 13 1.4 What have we been asked to do 16 2 State of the housing market 18 2.1 Housing market outlook 18 2.2 Profile of a typical renter 21 2.3 Profile of investors 27 2.4 Investor activity in the market 29 3 Economic theory and empirical literature 32 3.1 What can economic theory tell us about the likely impact of changes to negative gearing and CGT? 32 3.2 Empirical evidence from the US 34 3.3 Empirical evidence from Australia 35 3.4 Empirical models of the Australian property market 36 4 Approach to modelling the policy changes 38 4.1 Overview of the modelling 38 4.2 Market dynamics 40 4.3 Calculating user cost 41 4.4 Estimating model parameters 42 4.5 Model calibration and distributional analysis 46 5 Results of the modelling 48 5.1 Increase to user costs 49 5.2 Effect on property prices 52 5.3 Effect on commencements and housing stock 56 5.4 Effect on rents 59 5.5 Effects in the current market 60 5.6 Limitations of the analysis 61 6 Economy wide impacts of the policy change 63 6.1 Introduction and modelling framework 63 6.2 Inputs 64 6.3 Results (central scenario) 65 Deloitte Access Economics is Australia’s pre-eminent economics advisory practice and a member of Deloitte's global economics group. For more information, please visit our website: www.deloitte.com/au/deloitte-access-economics Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), its global network of member firms, and their related entities. DTTL (also referred to as “Deloitte Global”) and each of its member firms and their affiliated entities are legally separate and independent entities. DTTL does not provide services to clients. Please see www.deloitte.com/about to learn more. Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Asia Pacific Limited and the Deloitte Network. ©2019 Deloitte Access Economics. Deloitte Touche Tohmatsu Analysis of changes to negative gearing and capital gains taxation 6.4 Results (scenario 2) 67 6.5 Results (scenario 3) 69 6.6 Comparison to other studies 70 7 Distributional impacts 72 7.1 Effect of prices and rents 73 7.2 Government policy considerations 77 8 Policy responses to smooth the transition 78 8.1 First home buyer concessions 79 8.2 Changes to property taxation 80 8.3 Policies to encourage additional construction activity 80 References 82 Limitation of our work 95 General use restriction 95 Disclaimer in relation to CoreLogic data 95 Deloitte Access Economics is Australia’s pre-eminent economics advisory practice and a member of Deloitte's global economics group. For more information, please visit our website: www.deloitte.com/au/deloitte-access-economics Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), its global network of member firms, and their related entities. DTTL (also referred to as “Deloitte Global”) and each of its member firms and their affiliated entities are legally separate and independent entities. DTTL does not provide services to clients. Please see www.deloitte.com/about to learn more. Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Asia Pacific Limited and the Deloitte Network. ©2019 Deloitte Access Economics. Deloitte Touche Tohmatsu Analysis of changes to negative gearing and capital gains taxation Charts Chart i Long term price and commencement effects by region, ALP policy scenario vii Chart ii Potential transition dynamics; existing dwelling prices viii Chart 1.1 Taxes and transfers by final household income quintile, % of gross household income, 2015-16 16 Chart 2.1 Dwelling price index, February 1989 to February 2019 19 Chart 2.2 Annual dwelling approvals per head of population growth, Eight capital cities 19 Chart 2.3 Housing construction activity in Australia, rolling annual totals, March quarter 1999 to March quarter 2019 20 Chart 2.4 Gross rental yields 21 Chart 2.5 Share of Australian households who are owner occupiers by age, 1961 to 2016 22 Chart 2.6 Comparison of renter and owner occupier housing type, capital city and rest of state, 2016 23 Chart 2.7 Cumulative distribution of age of household head, split by owner occupiers and renters, 2016 24 Chart 2.8 Cumulative distribution of weekly income, split by owner occupiers and renters, 2016 24 Chart 2.9 Housing tenure type by household net wealth quintile, 2015-16 25 Chart 2.10 Housing costs for renters and owner occupiers, 2015-16 $ per week 26 Chart 2.11 Housing costs as a proportion of gross household income by equivalised disposable household income quintile, 2015-16 27 Chart 2.12 Proportion of individuals who are investors by income decile, 2016-17 28 Chart 2.13 Proportion of realised capital gains by taxable income (excluding capital gains), all asset types, 2016-17 29 Chart 2.14 Realised net capital gains by asset type, share of total, 2016-17 29 Chart 2.15 Investor share of total housing and constructions loans 30 Chart 2.16 Number of investment units and houses owned by investors, 1 March 2019 31 Chart 4.1 The long run relationship between user costs and rental yields 41 Chart 5.1 User costs by buyer type and property type under policy scenarios 51 Chart 5.2 Potential transition path for existing dwelling prices, the ALP policy scenario 56 Chart 5.3 Potential transition path for new dwelling commencements, the ALP policy scenario 58 Chart 5.4 Historic relationship between dwelling prices and commencements 61 Chart 6.1 Impact on real gross domestic product, Australia (billions, 2021-2031) 65 Chart 6.2 Impact on real gross national product, Australia (billions, 2021-2031) 66 Chart 6.3 Employment effects, relative to the baseline, average FTE per year (2021-2031) 67 Chart 6.4 Impact on real gross domestic product, Australia (billions, 2021-2031) 68 Chart 6.5 Employment effects, relative to the baseline, average FTE per year (2021-2031) 69 Chart 6.6 Employment effects, relative to the baseline, average FTE per year (2021-2031) 70 Chart 7.1 Average net housing wealth by household age cohort, 2015-16 73 Chart 7.2 Average principal outstanding on housing loans by household age cohort, 2015-16 74 Chart 7.3 Tenure type by household equivalised disposable income, 2015-16 75 Chart 7.4 Housing costs as a share of gross income, bottom 40% of income earning households, 2015-16 76 Analysis of changes to negative gearing and capital gains taxation Tables Table i Projected impact for Australia relative to the baseline vi Table 5.1 Change in average dwelling prices by dwelling type (% relative to the baseline, 2030) 53 Table 5.2 Impact on average dwelling prices by region (% relative to the baseline, 2030) 53 Table 5.3 Change in dwelling commencements by dwelling type (% relative to the baseline, 2030) 57 Table 5.4 Impact on new housing commencements and stock by region (% relative to the baseline, 2030) 57 Table 5.5 Impact on rents by region (% relative to the baseline, 2030) 60 Table B.1 Price equation estimates - dwellings 88 Table B.2 Commencement equation estimates – dwellings, houses and units 89 Table B.3 Completions equation estimates – dwellings, houses and units 90 Table B.4 Rent equation estimates – dwellings, houses and units 91 Table B.5 Share of owner-occupier equation estimates – dwellings, houses and units 92 Table C.1 Parameterising user cost 93 Figures Figure i Overview of the modelling approach v Figure 3.1 Illustrating changes to after-tax rates of return for investors using demand and supply diagrams 34 Figure 4.1 Overview of approach to modelling 39 Figure 4.2 Relationships that drive market dynamics 41 Figure 4.3 Flow of housing market relationships 43 Figure 4.4 Summary of relationships estimated from the econometric modelling 46 Figure 4.5 Process of model calibration and distributional analysis 47 Figure 6.1 Stylised diagram of DAE-RGEM 64 Analysis of changes to negative gearing and capital gains taxation Glossary Acronym Full name ABS Australian Bureau of Statistics ACT Australian Capital Territory ALP Australian Labor Party ATO Australian Tax Office CDE Constant Differences of Elasticities CES Constant Elasticity of Substitution CGE Computable General Equilibrium CGT Capital Gains Tax CPI Consumer Price Index CRESH Constant Ratios of Elasticities Substitution, Homothetic DAE-RGEM Deloitte Access Economics Regional Equilibrium Model FHB First home buyer FTE Full time equivalent FY Financial Year GDP Gross Domestic Product GFC Global Financial Crisis GNP Gross National Product GST Goods and Services Tax NG85 Negative Gearing changes in 1985 NPV Net Present Value NSW New South Wales NT Northern Territory QLD Queensland RBA Reserve Bank of Australia SA South Australia SA4 Statistical Area Level 4 Tas Tasmania TTT Timely, temporary and targeted VIC Victoria VMR Variable mortgage rate WA Western Australia i Analysis of changes to negative gearing and capital gains taxation Key Points This report analyses the likely impact of the policies on negative gearing and capital gains tax proposed by the Australian Labor Party as part of the 2019 Federal election on house prices and rents, housing construction, investor incentives, and on the broader economy.
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