Hildebrand: Why economists hate negative gearing — and Australia needs it now

Australia needs investment properties even more than owner-occupied, so negative gearing’s inherent vice has suddenly become a virtue, writes Joe Hildebrand.

To negative gear or not to gear, that is the question.

And it is a question plenty of Australians were asking themselves this week as another would-be Labor policy was run up the flagpole only to find a strange lack of soldiers saluting.

The sudden reignition of the debate over whether to cut negative gearing is the most improbable alien landing on the 2024 bingo card since Albo got yelled at for the census not asking people if they were gay. My beloved wife had a hand in the latter but I really didn’t see the first one coming.

Negative gearing reform is Labor’s bad penny. They keep trying to ditch it but it keeps coming back.

It cost Bill Shorten the unlosable election against Scott Morrison in 2019 and was consigned to the dustbin of history in the post-mortem review that followed, yet there seems to be a sleeper cell inside the ALP that is convinced it will be a vote-winner next time.

Negative gearing reform is Labor’s bad penny. They keep trying to ditch it but it keeps coming back.

Thus it is to Labor what WorkChoices is to the Liberals: Dead, buried and cremated and yet always on the verge of resurrection – hovering like a ghost somewhere in the back of the party’s mind.

And it spooks people, as most ghosts do. So why is it even here?

Prime Minister Anthony Albanese. Picture: Prime Ministers Office

Treasurer Jim Chalmers. Picture: Will Glasgow

The PM has said himself that he has “no plans” for any changes – at least not at the moment or not anymore. The real question is whether he never had any plans, had plans but changed his mind, or has no plans now but plans to have plans in the future.

It is also perfectly possible that the Treasury modelling was a thought experiment solely commissioned by Treasurer Jim Chalmers who, as the PM explained at the time, was on a plane. Given the reaction, that plane may still be circling the airport.

So why has this zombie policy come back to stalk what should have been a great news week for the government?

The problem is that abolishing negative gearing makes perfect sense in theory. It’s only in practice that it always falls apart.

Negative gearing was never intended to apply to housing property the way it overwhelmingly does today. It was designed to encourage people to invest in the stockmarket and thus boost economic growth while providing a leg-up for mum and dad investors.

But then some unsung hero accountant figured out that if a share was an investment, then a chateau was too, and houses could be treated the same as stocks. For a nation obsessed with home ownership, this was manna from heaven and every government that has tried to rein it in since has done so at their peril.

For one thing, you piss off tens of thousands of people uncannily located in marginal seats, plus hardworking Labor-voting migrants who see property as the safest and surest way of ensuring a strong future for their kids.

In this sense, negative gearing is the event horizon of aspirational Australia.

It means nothing to those who are renting or struggling to pay off the house they live in, nor those who are wealthy enough not to need it or who have their wealth stored elsewhere.

But for those attempting to make that leap from working-class to middle-class and shore up a bit of security for their kids, it is their ladder of opportunity, to quote a certain former Labor leader.

To be clear, I have no dog in this fight – one mortgage is more than enough for me and I have no shares or investments apart from wherever the hell my super is.

But the people I know who are most dependent on negative gearing aren’t doctors or lawyers – they are a down-to-earth couple who are both cops. You don’t get much more blue collar than that.

Economists hate negative gearing because it distorts the market and makes housing less affordable for first homebuyers. Picture: iStock

So while negative gearing was never intended to play the role in our economy that it does now – which is why so many economists hate it – that is almost beside the point. It is like having a retaining wall that has become hopelessly overgrown with roots and vines. Of course you would never design it that way but if you pulled out all the roots and vines now, the whole structure would collapse.

More ironically, the reason why economists hate it is because it distorts the market and makes housing less affordable for first homebuyers. And yet the housing crisis has become so acute that the highest priority is now not ownership but just finding a place to rent.

And this means we need investment properties even more than owner-occupied, so negative gearing’s inherent vice has suddenly become a virtue.

As for the political dangers, proponents point to the redistribution of the stage 3 tax cuts, which was arguably the greatest coup of the Albanese government. The difference here is that that broken promise instantly delivered more money to 90 per cent of Australians with the stroke of a pen.

By contrast, abolishing it may benefit first homebuyers years into the future but such citizens will be sadly incapable of travelling back in time to vote for Labor at the election.

And that, in a nutshell, is the answer to the question: It is completely sensible and utterly insane.

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