Modelling two recommendations made in the Henry Review of Taxation (2010), this study considers the impact of the recommendations on rents, rental supply and housing affordability.
The Henry Review recommended two key changes to taxation arrangements to promote more balanced investment in private rental accommodation and improve housing affordability:
- Recommendations 14–15 are directed at reducing the net benefit of negative gearing for rental investors by introducing a Savings Income Discount (SID) of 40 per cent for net rental income (including capital gains) from non-business assets.
- Recommendations 51–54 involve the removal of stamp duties and levying of land tax on a per land holding basis.
The study uses the AHURI-3M micro-simulation model to simulate the recommended changes.
In the first report, the study authors found that negatively geared investors are adversely affected by the SID reforms with their average after-tax economic cost rising by 50 basis points from 8.0 to 8.5 per cent. However the average after-tax economic cost for equity investors (i.e. those not negatively geared) falls by 50 basis points to 7.5 per cent. It is predicted that these lower costs flow through into long-term average annual rents, which would fall by just over $300. Most of the benefit is predicted to go to those in the more expensive part of the rental market.
Other modelling suggests that unleveraged and equity oriented investors are more inclined to retain investments under the SID reforms while negatively geared investors would be more likely to realise their investments. Because these supply responses would offset each other, a ‘flight of investors’ from private rental housing seems unlikely.
The second report shows that imposition of a reformed land tax will be felt most keenly where pressure on land use is most acute, and will speed up development in areas where land is more expensive. The removal of stamp duty might also affect the timing of development as its abolition will speed transfers of property, as ‘empty nesters’ now find trading down is a more effective method of releasing housing equity.
It is estimated that the average plot with a land value of $335 000 (at 2006 prices) will decline by $24 000, or approximately 5 per cent. However, the expected decline in land value will be greatest in those suburbs in and around the CBD (at around 12%), where land is currently most expensive. In suburbs further away from the CBD, the percentage decline in mean land value will be lower at 8 per cent or less.
Authors: Gavin Wood, Rachel Ong, Melek Cigdem and Elizabeth Taylor.