Negative gearing has been getting a lot of press recently. Here at Regfin, we’re seeing both major political parties giving consideration to changes in property tax concessions.
Negative gearing allows a property investor to offset their costs of owning investment property against rental income. Should these costs exceed the rental income, the loss can then be deducted against their taxable income.
Without wanting to get into a political debate, it’s hard to see that the possible changes will have positive effects in the long-term.
Should the Government decide to ‘grandfather’ negative gearing (that is, let existing customers continue to claim negative gearing deductions) for existing property owners, there is a disincentive for existing investors to sell property. This potentially reduces the supply of housing stock. This limited housing supply would increase house prices and serve to counteract diminished demand for existing homes created by reduced investor demand.
Forcing investors to buy new stock only, in a situation where land and development costs are already high, is likely to see increased prices for new property. These increased prices can also arguably flow through to higher prices for existing stock as new home buyers are forced out of that particular market. This means that there’s the potential for home prices to increase.
In politician-speak, the changes to negative gearing are not about increasing tax revenue – they’re about helping young Australians to buy property. One of the biggest inhibitors to owning property is the ability to save enough deposit to buy. One impediment to generating a deposit is the cost of rent. In taking away negative gearing tax concessions, this would logically reduce the supply of rental properties, forcing rents up and reducing the ability of renters to save a deposit.
While I don’t envy the policy makers in trying to work through prospective changes, I can’t help but be negative on any proposal to eliminate negative gearing.