The pros and cons of negative gearing



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With one in every seven Australian taxpayers owning a property investment, it is hard to deny the prevalence of this type of investment in Australia. Could negative gearing be responsible for this widespread investment practice, and what does it mean for the non-investors among us?

A tax benefit available in only a handful of countries including Australia, negative gearing allows investors to offset losses from their investment properties to reduce their taxable income, effectively “saving” money on their tax bill.

Great if you’re an investor, but a growing number of economists argue that negative gearing is making property unaffordable for potential homebuyers by encouraging speculation in the property market and therefore pushing up prices. Quite simply, whether you’re a seasoned investor or about to sign up for your first mortgage, negative gearing is having an impact on your property purchase.

In recent months, there have been renewed calls on the federal government to tighten the negative gearing system, but supporters argue changes would cause investors to abandon the market and drive up rental prices as a result.

The president of the Real Estate Institute of Australia President (REIA), Peter Bushby, is against any changes to negative gearing, saying it would adversely affect renters – particularly those on low incomes. “Recent chatter suggesting there are changes in the wind is extremely concerning and would negatively impact on the supply of housing and the level of rents in an already tight rental market,” Bushby said.

“We need to remember what happened in 1985 when the Hawke Government abolished negative gearing for property, only to bring it back in 1987. During that period rents increased by 57.5 percent in Sydney, by 38.2 percent in Perth and by 32.0 percent in Brisbane.”

According to REIA, the view that negative gearing only benefits wealthy investors is not accurate with ATO data showing that around 80 percent of people who claimed a tax deduction on property earned less than $80,000 per annum.

Critics of negative gearing, such as investment adviser Scott Pape, contend it makes it harder for first home buyers to compete against property investors. Writing on his Barefoot Investor blog, Pape argues: “Contrary to real estate rhetoric, it does little to increase the supply of new homes, since the majority of investors buy established properties. What’s more, it costs the Australian taxpayer billions of dollars in forgone revenue.”

The recent federal budget left negative gearing provisions untouched, but there is no doubt its benefits and drawbacks will remain a hot topic. For potential home buyers, the best advice remains to do your homework on everything from property prices to comparing home loan interest rates and everything in between.

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