We’ve got 101 housing issues, but negative gearing ain’t one!
As the debate over surging house prices continues to rage in the media and in parliament, one of the key points of contention that arises continually is whether removing negative gearing is a viable solution to housing affordability. In September it emerged that Treasury was undertaking modelling on removing negative gearing tax benefits, sending the media, government and prospective investors into a tailspin. But will removing negative gearing actually help with housing affordability? Or could it in fact do the opposite?
What is negative gearing?
Negative gearing refers to a tax incentive which enables investors to deduct their losses on an investment against their income. It applies to all asset classes, not just property.
Every investment property will involve costs. Expenses an investor can incur include interest, property management fees, body corporate fees, building insurance, maintenance, rates, etc.
When the total expenses for running an investment property are greater than the rental income received, we refer to this difference as negative gearing. When a property is negatively geared, investors can deduct their losses against other income, such as salary and wages. This can be advantageous as it will minimise the income tax you pay. The higher your marginal tax rate, the higher the tax refund when it comes to negative gearing.
However, many investors also proactively pursue this strategy if they’re choosing to invest in property markets with lower rental yields, but higher capital growth prospects. In this case they’re relying on the fact that the long term capital gain will offset any cash flow losses they may have experienced in the early years of owning the property – remembering that rents for the majority of properties will increase over time and the property cash flow should eventually turn positive.
What’s the history of negative gearing policy?
Negative gearing was introduced in 1936 to encourage investment in housing in order to increase housing supply. This lessens the burden on government to build housing by handing over the responsibility to private investors.
By 1985, following intense debate about whether negative gearing rules were threatening housing affordability, negative gearing was scaled back by the then Labor government, with rental property losses no longer permitted to be deducted from income.
As a result of that change, the government had successfully reduced demand from investors but consequently reduced rental supply. Within just two years, continued housing shortages and rising rents believed to be caused by the removal of negative gearing led the Labor government to reinstate negative gearing on housing in 1987.
Several governments since then have either considered or actively pursued changing negative gearing rules, without success. Removing negative gearing has become so politically unpopular that it’s even considered to have contributed to Bill Shorten losing the 2019 election when he took it to the polls as one of Labor’s key housing reforms.
Will the Albanese government remove negative gearing?
The Albanese government has denied that removing negative gearing will be a part of the agenda they take to the election, despite Treasury analysis on the subject. However, several Labor MPs in key electorates did discuss the issue in the media, perhaps testing the waters on how it would be received.
Much of the language used by the Treasurer and Prime Minister on the issue was also evasive and unclear. Negative gearing reform may well become policy, but we’re unlikely to know for sure until closer to the election.
Based on previous reform proposals, it’s likely that should negative gearing changes be introduced they won’t apply to new properties, so as to not negatively impact future supply which is already a huge issue. Changes would also likely be grandfathered, which would mean the reforms wouldn’t apply for those assets already negatively geared before the new rules take effect.
What are the advantages of negative gearing?
It’s important that Australia has a steady stream of rental supply for people who are not ready or able to buy a home. Currently in Australia, nearly a third of the population rents their home. Incentives like negative gearing encourage property investors to invest in property, ensuring there is a sufficient pool of rentals available. With significant boosts to overseas migration in recent years, the demand for rentals has only increased.
Regardless of any improvements to housing affordability, Australia will always require a healthy percentage of rental supply to ensure everyone has the ability to access housing.
One of the potential risks of negative gearing reform is that property investors will reduce, negatively impacting future rental supply and hiking up rents – and ultimately property prices. In an environment where rental supply is already under serious strain – rental vacancy rates are already below 1.5%, with 3% considered a normal range – although some locations around the country are at historically low vacancy rates of 1% or below.
Activity from property investors, particularly in new properties, creates much needed housing supply. In July 2024, the value of new investor loans rose 5.4 per cent to $11.7 billion, demonstrating how investment is underpinning housing supply. If negative gearing reform forces investors from the property market, it could also cause developers to put the brakes on new development, further negatively impacting new property supply, further driving up rents and property values.
What would really help drive housing affordability?
The biggest issue when it comes to housing affordability in Australia is that demand significantly outstrips supply, which puts upward pressure on prices. It’s estimated that by 2027, there will be a supply gap of nearly 200,000 homes.
Negative gearing reform is considered by some to be a lever to help create supply, however, with several other factors contributing to demand such as record overseas migration, it’s not likely to make much difference. Creating new supply is the single most important vehicle to help property prices stabilise and with outdated planning restrictions and difficulties with rising construction prices, this part of the property jigsaw is unlikely to be solved in the next few years.
The property markets with the least growth around the country are always those with the most supply. For example, according to rea.com.au, Docklands in Melbourne has seen median apartment prices fall from $640,000 in November 2019, to $612,000 currently, largely due to an oversupply of apartments. If we can get the balance right by increasing supply in key areas without creating an oversupply, house prices will stabilise.
There are several barriers in the current market impacting new supply including bottlenecks in our planning system and councils, high construction costs across both labour and materials, and an uptick in construction companies going under. Unless we can find new ways to streamline housing development such as new methods or innovations to make building homes more efficient and cost effective, housing development will struggle.
Key takeaways
To truly address the housing affordability crisis in Australia, addressing major housing supply shortages is the only solution. While negative gearing reform would impact demand by disincentivising investors, it would also narrow the supply of new properties, simply further reducing the affordability for prospective renters and homeowners.
Housing is a basic human need, as we all need a roof over our heads. As such, there are limits on how much we can reduce the demand for housing in an undersupplied market. It’s only by creating new supply in areas that are well catered for with amenities, transport, etc that we can address the imbalance and make some inroads into housing affordability.
Want more insights into negative gearing and property investment? Chat to the team at Binnari Property today.
N.B: This article was drafted in early October 2024. Since then the government has ruled out any changes to negative gearing in a recent AFR article, as they’ve recognised lack of new supply is the number one issue when it comes to housing affordability. But don’t rule out negative gearing becoming a future topic to be debated for many years to come – like cricket and bbq’s, it’s an Australian institution!
