Killing negative gearing would hurt FHB market

Last week, Bank of America Merrill Lynch chief economist Saul Eslake said a “simple answer” to the boom in investor lending would be for the government to ‘grandfather’ negative gearing.

But AMP Capital chief economist Shane Oliver disagrees, arguing that removing the tax break for property investors would negatively affect market segments, particularly those looking to buy their first home.

Mr Oliver’s comments come after questions were raised about the accuracy of first home buyer (FHB) borrowing data from the Australian Bureau of Statistics, which last week admitted its unemployment numbers were incorrect.

“The ABS came out the other day and basically said their first home buyer stats were not worth looking at,” Mr Oliver told Mortgage Business.

“My feeling would be that you’ve got quite a lot of first home buyers who have gone down the investor route,” he said.

“So if you curtail negative gearing, you would also close off an avenue of access to the property market by first home buyers, who would be going in as investors.”

Speaking at the Finsia annual conference last week, Mr Eslake argued that negative gearing is a key driver for the recent rise in speculative property investment.

“People don’t want to borrow against increases in the value of their house to spend more,” he said.

“They might want to borrow against the increase in the value of their house so they can speculate on the possibility of another house,” he said. “I just don’t think that is doing anyone any good.”

But Mr Oliver disagrees, saying that investors do not have the same expectations about property now as they did a decade ago, when investor lending last experienced a boom.

“The market seems less speculative today than it did a decade ago when you had the investor share at around current levels,” he said. “Back then it seemed a lot more speculative.

“That was partly because we had had five or six years of very strong property growth.

“This time we have only had one year of strong property price growth, so investors are likely to have gone in with different expectations than they would have had a decade ago.”

Despite what advocates like Mr Eslake say about the removal of negative gearing, it could actually end up harming certain groups, Mr Oliver said.

“I’m not a great fan of that,” he said.

Meanwhile, the issue of accurate FHB figures from the ABS continues to plague the industry at a time when the Reserve Bank is seriously considering the use of macroprudential tools to curb investor lending.

According to the ABS, a preliminary investigation has been conducted to evaluate the robustness of estimates of loans to FHBs.

The ABS has asked lenders to report all FHB loans after concerns were raised that under-reporting could occur if some lenders were only able to accurately report on those buyers receiving a FHB grant.

“That was something that came up in our Deloitte mortgage report roundtable last year,” Deloitte partner, financial services, James Hickey told Mortgage Business.

“A few of the lenders said to us that the figure is possibly understated,” Mr Hickey said.