Canberra must tread carefully with negative gearing

Put the official housing figures to one side for a moment. Building suburban houses in the major east coast cities is going gangbusters.

Adelaide is sluggish but improving, while Perth is still suffering from the end of the mining boom.

My commentary comes not from the official statistics but from talking to builders, who are experiencing the surge in orders. And remember that we also have an east coast apartment building boom led by Sydney and Melbourne.

The combination of these two events is giving the economy momentum at a time when mining investment and corporate retrenchments would have been a big dampener. Tony Abbott and Joe Hockey need to be very careful about snuffing out this building boom by stopping negative gearing. More on that later.

Let me illustrate what is happening. Everyone knows that Sydney dwellings are booming but at the other end of the scale should be Geelong and surrounding areas where everyone, led by Bill Shorten, expected a slump. No area in Australia has been hit harder, with the closure of both Ford and Alcoa.

Yet my builder friends say that Geelong is one of their brightest stars, led by the large Armstrong Creek development. They say that Geelong is reinventing itself as a tourism, education and health centre of excellence. It is, of course, the home of the Barwon model, which slashes hospital-medical costs but improves the service (see How to save our sick health system without GST hikes, May 21).

So who is building? In lower-cost areas like Geelong there are plenty of first-home buyers but overall the big buying is coming from families who have apartments or small houses and want larger accommodation, plus people buying a second house as an investment.

And negative gearing drives that investment market.

Fascinatingly, Chinese buying is also driving the suburban house building market in certain areas -- they are purchasing near selected state schools that they believe offer quality education.

And where the base residence is in China, there are many Chinese who feel more comfortable owning some land and a house rather than a strata title in an apartment block.

There is now great pressure on the government to abandon negative gearing -- the process by which the net cost of owning an investment dwelling (after rent and other expenses) is deducted from salaried or family business income.

Blocking negative gearing is an obvious way to fill the budget hole, and the Reserve Bank is frightened that negative gearing is pushing up the price of houses and will create a price bubble which will damage the banking system.

But my message is that it is also generating a large amount of employment and buffering the negative employment forces. The government needs to be very careful.