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Targeting the right kind of new rental housing with negative gearing policy changes

On Thursday the McKell Institute released a report titled Changing Gears. It's a document which looks at five different policy options in relation to negative gearing and perhaps most disappointingly it does not give strategic planning policy much of a look in.

First and foremost, the McKell Institute are a NSW-centric policy institute and much of the report views the issues with the existing negative gearing system through Sydney-coloured glasses - a quick word find search of the document yields 53 references to Sydney and 3 to Melbourne.

In saying that however, I welcome its favoured policy response of grandfathering existing negative gearing arrangements and allow new negative gearing only for new housing stock.

As I mentioned in the opening paragraph, very little attention is paid to strategic planning and much of the preferred policy response focuses on using negative gearing to drive more broadacre supply. Is it smart to accelerate metropolitan fringe growth thus further lengthening the time between when residents move in and infrastructure - be it community-related, transport-related or health/education-related - is put in place?

Building new houses on the fringe without adequate infrastructure and locking new residents into auto-centricity from day one is the peak definition of sprawl.

Melbourne's urban growth boundary underwent a review of 'logical inclusions' in 2012 and subsequently another 6000 hectares was added to the supply pipeline. In 2010, the then Planning Minister Justin Madden added a mammoth 40,000 hectares. Just those two changes alone is enough land for upwards of 700,000 houses (at 15 houses per hectare).

Melbourne does not have an issue with broadacre supply.

Rewinding back to the Guy Planning era and the reformed planning zones, regardless of how well it has been implemented by individual councils, it was an attempt to drive more supply into brownfields development across the existing metropolitan area. And this is what the McKell Changing Gears report doesn't appear to address: different states have different strategies.

States and cities around the country vary when it comes to housing and planning policy, some have urban growth boundaries, some don't. Some encourage large pockets of high-density development, some have planning schemes which encourage medium density development across a broader metropolitan area. If a great big axe is to be wielded by Canberra (the McKell Institute is aligned with the ALP) then Canberra must ensure this negative gearing policy switch aligns with the wishes and planning policies of the states.

Given that the ability to deduct interest expenses from a person's income only applies on property which is not the individual's principal place of residence then we're talking about increasing the supply of rentals on the fringe within the context of the Changing Gears report.

But this is where this policy should be tweaked: it should apply to new 3+ bedroom apartments only, especially in areas throughout the metropolitan area where new planning zones allow it.

In the apartment boom of early last decade, 1 bedroom apartments were more common than 2 or 3 bedroom apartments - this decade it's safe to say most new developments split 1 and 2 bedroom configurations evenly with a small smattering of larger apartments. If we're going to attempt to intervene on an apparent market failure, rather than increase the supply of rentals on the fringe, it should be targeted at the dwelling type we have a lack of - and that's family-sized apartments.

Lead image courtesy mckellinstitute.org.au.

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