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Is negative gearing to blame for house unaffordability?

Mark Bristow avatar
Mark Bristow
- 6 min read
Is negative gearing to blame for house unaffordability?

Negative gearing allows investors to claim any losses they incur on an investment property against their personal tax income and is often accused of driving up the price of property by encouraging investors to enter the market. Some economists have called for it to be abolished, and many blame it for Australia’s housing unaffordability.

But how exactly does negative gearing work? What are the arguments against it, and in its favour? And should it cop the blame for Australia’s housing affordability crisis?

What is negative gearing?

According to the Australian Taxation Office (ATO), negative gearing can be defined as follows:

A rental property is negatively geared if it is purchased with the assistance of borrowed funds and the net rental income, after deducting other expenses, is less than the interest on the borrowings.

The overall taxation result of a negatively geared property is that a net rental loss arises. In this case, you may be able to claim a deduction for the full amount of rental expenses against your rental and other income (such as salary, wages or business income) when you complete your tax return for the relevant income year. Where the other income is not sufficient to absorb the loss it is carried forward to the next tax year.

If by negatively gearing a rental property, the rental expenses you claim in your tax return would result in a tax refund, you may reduce your rate of withholding to better match your year-end tax liability.

In other words, if you spend more on maintaining a mortgaged investment property than you earn in rental income from it, it’s possible to write off the loss on your taxes.

What are the arguments in favour of negative gearing?

Negative gearing applies the general taxation principle that you can claim work or investment-related expenses as deductions to property investment. Allowing property investors to claim investment losses on their tax means these landlords are less likely to raise rents to ensure their property is always positively geared, making renting more affordable.

Also, by encouraging more Australians to become property investors, it puts more rental supply into the market, providing more affordable housing for the growing population.   

The Real Estate Institute of Australia (REIA) has long argued in favour of negative gearing, and welcomed the bipartisan support of the policy at the 2022 federal election following increased pressure from COVID lockdowns:

“Many mum-and-dad investors have borne the brunt of the rental eviction moratoriums and stepped up to provide social and affordable housing through this period,” Kelly said. “The vast majority of property investors are everyday Australians looking to provide for their own retirements, who are also instrumental in providing the rental accommodation that is needed by the 27% of Australians who rent their home.”

Similarly, the Housing Industry Association (HIA) has argued that negative gearing plays an important role in maintaining Australia’s supply of available private rental housing:

“Without a reliable pool of residential investors across Australia, hundreds and thousands of households would find it harder to put a roof over their heads. Australians need to have the ability to access affordable housing, whether as a renter or as an owner occupier.”

What are the arguments against negative gearing?

It is argued that negative gearing encourages Australians to treat real estate as an investment asset rather than essential accommodation, as even if you lose money, you can still benefit. 

Even though an investor is losing money on a negatively geared property, the tax deductions mean they may end up paying less tax on their other sources of income. And as the value of property investments often increases over time, the investors may still come out ahead when they choose to access this equity or sell the property at a profit in the future (even taking Capital Gains Tax into account – investors get a 50% CGT discount).

As more investors buy up the limited supply of properties available in the country, prices are pushed upwards and first home buyers and owner occupiers are more likely to be priced out of the market.

The Henry Tax Review of 2010 recommended a change to negative gearing to allow only 40% of any negative gearing loss to be recognised. However, the government of the time did not implement any of the recommendations.

The Grattan Institute argued in 2019 that only 10% of taxpayers use negative gearing, and that “winding back tax concessions that do not have a strong economic justification means the government can reduce other taxes, provide more services or improve the budget bottom line.”

The Grattan Institute also argued in 2016 that “the interaction of a fifty per cent capital gains tax discount with negative gearing distorts investment decisions, makes housing markets more volatile and reduces home ownership.”

Rich Dad Poor Dad author, Robert Kiyosaki, described negative gearing in 2022 as a reward for making bad decisions:

“I have another name for negative gearing: stupidity. It gives you a tax break for losing money, which makes no sense at all to me… Negative gearing only works as long as the price of property continues to go up and when it slumps, like we saw in the crash of 2008, it’s a terrible strategy.”

Economist Saul Eslake also argued that claims rents would increase dramatically without negative gearing are baseless, and that wealthy individuals are far more likely to benefit from the policy than “mum and dad” investors, reducing housing affordability for first home buyers:

“The figures show that someone in the highest tax bracket of over $180,000 a year is three times more likely to be negatively geared than someone below it. And when you have first-home buyers competing against investors who can negatively gear, it’s no contest. In 1991-2 the share of mortgage loans by first home buyers was 19.4 per cent, compared to 8.6 per cent for investors, with the others taken out by existing property owners. The latest December 2021 figures show that’s changed to 17.3 per cent first home buyers to 31.5 per cent investors.”

Should we blame negative gearing for housing unaffordability?

While negative gearing may be a contributor towards unaffordable housing in Australia, it is far from the only factor in play. 

Other contributors may include:

  • Population growth and immigration
  • Limited housing supply
  • Interest rates
  • Government policies
  • Debt to income ratios

Removing negative gearing or changing how it works could potentially affect housing affordability by reducing some of the incentive to buy property as an investor rather than as a first home buyer or other owner occupier. That said, there is also a real risk that this could lead to fewer investment properties, reducing the supply of rental accommodation.

Other potential options for managing the housing crisis could also include: 

  • Increasing housing supply by building more homes, including public housing
  • Adjusting zoning and planning regulations to encourage development in more areas
  • Offering different types of well-targeted government assistance to first home buyers and renters

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This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.