shutterstock_251435293 (1)The debate about removing negative gearing has been reignited as Bill Shorten announced Labor’s decision to put forward changes to this policy at the next election. It’s been long debated that the tax-advantages of negative gearing increases demand and in turn residential property prices, making it more difficult for first home buyers to enter the market. By removing these tax concessions it’s expected demand for residential property investment should reduce and put downward pressure on prices.

But is it really that simple?

Firstly, what is negative gearing?

Negative gearing means the income received from an investment – usually a rental property – does not cover the interest on borrowing and expenses

related to the property. The shortfall (or income loss) can then be deducted against the investor’s other taxable income. While there may be immediate tax benefits, a loss is a loss, and this strategy is generally undertaken on the expectation that the property will have capital growth.

What do these changes mean to the rental market?

In a negative gearing arrangement an investor is willing to forfeit income on their investment. In turn, this keeps rental costs down. Private investment accounts for 86% of the rental market*. Changes to this tax regime equate to an increased cost to the investor, or conversely a reduced return, making this investment less attractive.

Ultimately, change in tax policy will impact levels of supply and demand in the rental market. Reduced investment is likely to force rental costs higher, significantly reducing affordability. Abolishing negative gearing is nothing new in the Australian political landscape. In September 1985 the Hawke Government made similar changes that are now being proposed, only to back paddle and reintroduce the tax concessions in September 1987. During this period a reduction in residential property investment saw an average increase in rental costs of 21% across capital cities. Property is an investment that differs from most others in that it provides accommodation. Increasing rental costs adversely impacts the exact people the abolishment of negative gearing was intended to help; low-income families and first home-buyers trying to enter the market.

Would it then be the responsibility of the Government to provide accommodation in the form of public housing?

As the name implies, publichousing is funded using the public purse i.e. taxes. Why, then is subsidising individual investors in the form of tax deductions to provide rental accommodation such a bad thing? The individual investor has an incentive to better maintain the property (to the benefit of the renter) and likely be in a better financial position to fund their own retirement.

Who’s to say what the right answer is. However I do know that the solution is not creating uncertainty in a market that directly affects the balance sheet of so many everyday Australians.

 

*ABS, Household Expenditure Survey and Survey of Income and Housing 2009-10

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