Aussie property perks in crosshairs as boom locks out Gen Y

[CANBERRA] Australian investors enjoy some of the most generous tax concessions in the world when they buy real estate. That could be about to change.

The opposition Labor Party is proposing scaling back tax breaks for landlords that have helped fuel a 50 per cent increase in property prices in capital cities since 2008.

With an election just months away, the proposal has taken center stage in the nation's policy debate and is forcing Prime Minister Malcolm Turnbull's government to give the perks a closer look as part of its review of the taxation system.

With A$6.4 trillion (S$6.32 trillion) of Australians' personal wealth in residential property - almost half of the total - tinkering with the tax breaks for property investment has been a no-go zone for policy makers. The issue risks stoking investor confusion and exacerbating a cooling in the property market.

"The groundswell has been shifting against the system because even people who have been helped by it are now realizing it's harming their kids' chances to own their own home," said Saul Eslake, an independent economist who has studied the Australian economy for more than three decades.

Negative Gearing

About 1.2 million Australians use so-called negative gearing, where they reduce their tax bill by deducting the costs of owning a rental property, including mortgage interest payments, from their taxable income.

Some countries including Britain and the US allow property investors to deduct costs from investment income; Australia is unusual because it allows the deduction against wages.

The central bank in June described the system as "at the more generous end of the range of practice in other industrialized economies" and called for a review as it risked encouraging leveraged investment.

Labor wants to disallow negative gearing for existing homes, which accounted for 93 per cent of the A$155 billion of property investment last year. It argues it would spur new home construction and allow more first-home buyers to enter the market.

Since the current arrangements were introduced about three decades ago, house prices have risen from 3.2 times average annual income to 6.5 times, according to the opposition.

Out of Reach

Labor cites Parliamentary Budget Office costings that say the measures could save government coffers A$32.1 billion over 10 years. It also wants investors to pay more capital gains tax on properties sold.

Currently, 50 per cent of the gains are tax free and Labor wants to reduce that concession to 25 per cent.

Under Labor's proposal, changes to the concessions would only apply to properties bought after July 2017 should it win the election. That's currently looking unlikely. It trails Turnbull's Liberal-National coalition by 4 percentage points, according to a Fairfax/Ipsos opinion poll published this week.

"With prices growing at five times the rate of wages, they are accelerating out of reach of young Australians," said Labor's Andrew Leigh in a phone interview.

The share of Australians between 25 years and 34 years who own their own home has plunged by 21.5 percentage points since the early 1980s to 34 per cent in 2011, according to the Australian Bureau of Statistics.

Market Distortion

Nowhere is the uphill battle for young aspiring home owners more apparent than in Sydney. The median home in Sydney costs 12.2 times the median annual pretax household income, up from 9.8 in 2014, according to the latest global housing affordability survey from Demographia.

Labor's proposal would result in "a very significant distortion of the housing market," Mr Turnbull told reporters Tuesday, though the prime minister hasn't ruled out some reform of negative gearing.

Treasurer Scott Morrison, who claims any changes by the government wouldn't hurt people on modest incomes, said Thursday the opposition's plan would "penalize ordinary mum and dad investors."

The government is considering targeting high-end investors by either capping the number of properties that can be geared or limiting the size of the annual tax deduction that can be claimed, the Australian Financial Review reported Tuesday.

Tim Lawless, head of research at property analysis firm CoreLogic Inc, said that uncertainty in policy would put off investors, which could result in further price declines.

Sydney home prices declined 2.3 per cent in the three months ended December, the worst quarter in four years.

"Buying a home is a huge commitment and if you're lacking confidence, that's certainly going to affect your decision on whether or not you invest," Mr Lawless said.

BLOOMBERG