Negative Gearing in the Property Market

Posted on November 2, 2015 by ATB Chartered Accountants

Negative gearing is commonly used throughout Australia as it provides individuals with an opportunity to make an investment that wouldn’t necessarily be afforded otherwise. Put simply, negative gearing is when an individual funds an investment using debt financing, and this is offset in individual tax returns.

The main reason for the growing popularity of negative gearing is that it provides individuals with the ability to earn from other people’s money. There is a high risk associated with negative gearing, but this money does need to be repaid straight away. It provides an important opportunity that otherwise would be unattainable for many people. A ‘good’ investment is one that will earn you income and capital growth over time, and these need to be strongly considered before you decide to use negative gearing in order to fund an investment.

As a result of this, negative gearing is often blamed for the unaffordability of housing in Australia, particularly in Sydney. People who hold this view often fail to recognise that this ability to offset losses against other income is actually providing the opportunity for countless Australians to become property owners. With an increasing supply of properties available for rent, it is becoming more difficult for property owners to charge higher rents, and so, rental income within Sydney is falling, creating a loss for property owners. Negative gearing prevents property owners from losing all of this money as they can claim the tax back on this.

Since the prices of property in Sydney are still high, the overall value of individual properties are still increasing, and so the loss is in the rent being collected. If for example, the property value was increasing by $5,000 per year, however the property owner was losing $2500 a year in rent, the lost rent can be offset against other income, and they are not losing money in the long term. Without negative gearing, these losses would be passed onto those individuals renting properties which would subtract from consumers’ disposable income and harm the economy.

As well as this, negative gearing increases the demand for new housing construction. This boosts the building and construction sector through creating employment opportunities. As well as this, increasing the supply of properties will also lead to a deflation in the overall prices of housing in Sydney, a much needed benefit to the overall economy. Mortgage and lending sectors have also greatly benefited from this taxation practice which has led to an increase in earnings for financial institutions.

On the other hand, there is wide spread criticism in both the media and politics surrounding negative gearing. Primarily, the concern of negative gearing is that it pushes up the price of housing for first home buyers, regardless of the government grants and assist packages. Grants become a necessary factor in individuals buying into the property market. With people being allowed to use negative gearing, there is an increase in demand for individuals to purchase properties and grow their wealth, causing a further surge in housing prices. It cannot be ignored however that a factor of increased demand for houses within the major cities in Australia is from foreign investors which contributes to the rising prices of properties.

The RBA agree that negative gearing is a beneficial tax tool for Australians, however they believe that the system needs to be reviewed as it may account for increasing costs in the housing market.