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Negative gearing is here to stay

There’s been a lot of talk lately in the media about negative gearing, and the possibility of its removal as a tax deduction for investment properties. It seems quite logical to the layperson – negative gearing provides benefits to people who can already afford to buy investment properties, encourages those people to invest in residential property, and this must, therefore, increase housing prices, making it more difficult for low-income first home buyers to enter the market and increasing rental prices.

However, the reality is more complicated, with a greater number of factors influencing the residential property market. When you look into all of these factors, it becomes clear that removing negative gearing tax breaks could in fact decrease the supply of new housing coming onto the market, increasing demand for the remaining properties, and ultimately increasing, not decreasing, property prices around Australia.

Take, for example, the effective abolition of negative gearing as a tax deduction in July 1985. Under the new regulations, losses on rental properties could not be used as deductions against other assessable income – but they could still be offset against future rental profits on that property and other rental properties. That lasted all of two years before Paul Keating sought to restore negative gearing. The cabinet submission on the topic states:

“Throughout the latter half of 1985 and first half of 1986, construction in the housing sector declined generally, following strong investment over the previous 18 months… Reducing the impact of the negative gearing provisions could be expected to provide some stimulus to investment in residential rental property.”

The government of the day found that against expectations, rental prices increased substantially in some cities after the removal of full negative gearing deductions. While it had expected to net around $55 million/year in revenue from the change, it instead received only $11 million/year – most investors simply moved to other investment options. Negative gearing was reintroduced in 1987.

If we’ve learnt one thing from the issues faced in the mid-to-late 1980s, it’s that economic policy is more complicated than it often appears to the layperson. While negative gearing may seem an obvious target in a campaign to improve housing affordability across Australia, experience tells us that actually, removing negative gearing can exacerbate high rental prices, decrease housing supply and make the problem worse, not better.

With this knowledge in mind, we’re fairly sure that current investor concerns around the abolition of negative gearing in the next budget are groundless. As a country, we’ve been there, done that – and hopefully we’ve learnt our lesson. Negative gearing is an essential component of the residential property market, and we think that it will be around for many years to come.