Peter Gordon Dip.FP. & Dip.FMB.
e peter@investoproperty.com.au
Ph: 0401 214 134

Changes to Negative Gearing Won't Solve Housing Supply Issues by Mark Bouris

Monday, 27th July 2015

And the most consistent call is to get rid of negative gearing.

There are two really important things to understand about this issue.

Firstly, a housing affordability crisis is only evident in some parts of Sydney and in even fewer parts of Melbourne.

Secondly, the other capital cities have flat property markets and only a few places are taking off in regional Australia.

The overall picture of housing affordability is actually very positive. The Reserve Bank recently calculated that because of very low interest rates, property – across the board – is undervalued by 30 per cent.

That is, the differential between what you pay in rent and what the same house would cost in mortgage repayments and makes property cheap.

The fact that property is booming in Sydney is as much to do with supply of new dwellings as it is to do with interest rates. Compliance costs, building restrictions and tight credit for developers means not enough new housing is being built.

Supply falls short of demand and prices rise.

So where does negative gearing fit in?

Negative gearing is a part of the tax system: if the annual rental income from your investment property is less than the costs of owning that rental property, then the loss has to be met by your personal income. Therefore, you can reduce your taxable income by the amount of personal income that is being used to prop-up your rental property.

If your property earns $25,000 per year in rent, and it costs $30,000 to hold that investment property, you can reduce your taxable income by $5000 and pay less income tax.

Around two million Australians use negative gearing to make a property investment. It helps medium income earners to become landlords.

Property is a good way of turning current earnings into a long-term asset that earns income. It helps Australians provide income for their retirement and security for the future.

It also ensures there are stable stocks of private rental housing by allowing people on medium incomes – such as teachers, nurses, police offers etc. – to invest in property. These people are not speculators. They are mostly long-term investors who bring stability to the rental market.

Why would we punish them?

And how would terminating negative gearing fix the supply problems in Sydney? The New South Wales government and the local councils have to fix the Sydney property situation – not the tax system.

If negative gearing was suddenly dropped, the immediate effect would be to limit property investment to wealthy Australians. Many medium-income earners would have to sell.

Thousands of properties would be released onto the market as investors switched to the stock market. House prices would fall and the property investors who remained in the market would have to raise rents to cover their overheads.

So negative gearing gives a lot more than it takes away. Its detractors should be careful what they wish for.