Key takeaways
Negative gearing occurs when rental income does not cover property expenses, allowing the shortfall to be deducted from other taxable income. This tax relief helps investors manage cash flow until property values or rental income rise.
Negative gearing has been part of Australia’s tax system since 1936. A brief removal of the policy in 1985 by the Hawke government led to higher rents, particularly in Sydney and Perth, demonstrating its role in maintaining rental supply.
Many countries, including the U.S., have similar tax principles to encourage property investment. New Zealand’s removal of negative gearing led to an increase in rents, prompting a partial reintroduction to stabilize the rental market.
Negative gearing encourages investment in new housing projects, indirectly supporting the construction industry. Removing it could slow down new developments, exacerbating the housing shortage.
Property investment, supported by negative gearing, contributes significantly to Australia’s economy, particularly through job creation in construction and related sectors. Investors also contribute billions in taxes, further supporting public services.
The idea that abolishing negative gearing would make homes more affordable is challenged. The real drivers of housing unaffordability are factors like population growth, limited land supply, and bureaucratic barriers to development—not negative gearing.
There’s an easy way to save the government up to $20 billion annually.
Just slug greedy, rich property investors by reforming negative gearing and capital gains tax and it won’t increase rents for tenants or hurt mum and dad investors a bit.
Really??
Nothing new about this…negative gearing has been a hot topic in Australia for years, often pitched as a controversial tax benefit for greedy property investors that makes homeownership harder to attain.
Critics argue it inflates property prices and enriches investors at the expense of aspiring homeowners.
However, a closer look reveals a different story: negative gearing plays a significant role in providing affordable rental housing and boosting the supply in a market facing chronic shortages.
Removing or limiting this incentive would likely have unintended consequences, increasing rents for tenants and doing little to improve housing affordability.
So let’s explore the history and impact of negative gearing, and why it remains essential for a balanced property market.
What is negative gearing?
At its core, negative gearing is a tax deduction available to property investors when their rental income falls short of their loan interest and property expenses.
This difference between income and expenses (the “negative” part of gearing) can be deducted from the investor’s taxable income, which can provide financial relief, particularly in the early years of property ownership.
This practice incentivises investors to purchase and maintain rental properties, as it can soften the cash flow burden until the property appreciates or rental income grows to cover costs.
Negative gearing is not an exclusive benefit for property investors; it’s a foundational tax principle applied across many asset classes in Australia, including shares, bonds, and business investments.
Singling out property investors for using negative gearing ignores the widespread application of this principle across different types of investments.
Targeting property investment alone ignores the broader purpose of negative gearing as an investment incentive across the board.
A brief history of negative gearing in Australia
Negative gearing is not a recent phenomenon – it has been allowed under Australian tax laws since 1936.
But it wasn’t until the 1980s that it became a focal point of policy debates.
In 1985, the Hawke government briefly removed negative gearing, hoping to curb property speculation and make homes more accessible. However, this move backfired.
With fewer investors willing to take on the costs without tax relief, the rental supply shrank, and rents skyrocketed, especially in Sydney and Perth.
Recognising these impacts, the government reinstated negative gearing in 1987.
This experiment showed that curbing negative gearing didn’t increase housing affordability but rather strained the rental market, leaving lower-income households particularly vulnerable.
This historical precedent demonstrates that removing negative gearing could lead to similar challenges in today’s market, potentially exacerbating the very problem it seeks to solve.
Do other countries allow negative gearing?
Negative gearing isn’t unique to Australia; it’s a widely accepted tax principle applied in many countries to encourage investment across various sectors.
In the United States, for instance, investors can deduct interest expenses from income on rental properties, helping to offset the financial burden of maintaining and holding property assets.
This provision supports the housing supply, encourages investment in real estate, and makes rental properties more accessible to the market.
In recent years, negative gearing has been removed in New Zealand as part of a tax policy reform intended to curb property speculation and address housing affordability.
However, this change quickly highlighted the policy’s importance.
Without negative gearing, many investors found it unfeasible to hold rental properties, which led to an exodus of investors from the rental market and, ultimately, a sharp rise in rents due to dwindling supply.
Recognising these impacts, the New Zealand government has now begun reintroducing negative gearing, acknowledging that the removal did not make housing more affordable for buyers but instead strained the rental market, putting additional financial pressure on renters.
This reversal serves as a clear example of how negative gearing can be critical to rental market stability; a lesson relevant here in Australia.
In the United Kingdom, investors still benefit from similar tax offsets, albeit with certain caps on interest deduction limits.
These limits were introduced to balance tax revenue needs with the recognition that rental investors play an essential role in meeting housing demand.
Internationally, governments acknowledge that discouraging investment through restrictive tax changes often leads to unintended consequences on rental availability and affordability.
The global re-evaluation and, in New Zealand’s case, reintroduction of negative gearing highlight its function as a vital tool for supporting housing supply and rental market stability.
Why negative gearing is crucial for property investors – and renters
Negative gearing has often been vilified, with critics suggesting that it inflates home prices, reducing affordability for first-home buyers.
However, negative gearing’s role in the housing market is more nuanced.
By providing tax relief, it encourages investors to stay in the market, supplying properties that millions of Australians rely on for housing.
Here are several reasons why, in my mind, maintaining negative gearing is essential:
1. Boosting Rental Supply: around one-third of Australians rent their accommodation, and that’s not necessarily because they’re poor, but often because of the stage of their life cycle and they don’t want to put down roots and buy a property.
The government has left the provision of accommodation for these 8.5 million people to private investors- often called mum and dad investors.
More recently the government has been encouraging large corporations to become involved in Build to Rent accommodation, but according to the latest tax office statistics, 67% of property investors had a taxable income of less than $100,000 and 24% of these every day Australians are aged 40 or less.
Anyone who owns an investment property and provides rental property accommodation knows how the operating costs of running their small business have risen significantly. It is estimated that 70% of rental properties are producing annual operating losses.
When rental suppliers receive tax benefits for providing accommodation, they’re more likely to enter or stay in the market, ensuring a steady supply of rental housing.
In today’s climate of housing shortages, investor participation is critical to maintaining balance.
2. Stabilizing Rent Prices: Without negative gearing, many investors would be forced out of the market due to these increased holding costs.
This exodus would drastically reduce the rental property supply, pushing rents up as competition for limited rentals intensifies.
The lesson from the 1985 experiment is clear: fewer rental properties lead to higher rents.
3. Incentivizing New Development: Negative gearing doesn’t just support investors in established properties; it also plays a role in new housing construction.
Many investors purchase off-the-plan properties increasing housing supply and indirectly supporting the construction industry.
Reducing negative gearing would discourage investors from investing in these projects, slowing down new housing development.
4. Supporting Retirement Planning and Long-Term Investment: Many Australians see property investment as a cornerstone of their retirement strategy, aiming to build wealth and security for later life.
Negative gearing eases the financial burden, particularly for small investors who rely on this tax relief to keep them viable amid rising holding costs and interest rates.
Removing this support would put a strain on these individuals, diminishing their financial resilience.
The misguided argument: removing negative gearing will improve affordability
A common argument for abolishing negative gearing is that it would improve housing affordability by making property investment less attractive, theoretically freeing up homes for owner-occupiers.
However, this assumption overlooks key realities.
For one, the housing affordability crisis is driven by fundamental issues, such as population growth, limited land supply, and bureaucratic barriers to development, rather than by tax policies alone.
Negative gearing makes it easier for investors to hold property long-term, contributing to stability in the rental market.
Moreover, most investors own only one or two properties and aren’t the “greedy landlords” that some critics suggest.
These investors are average Australians looking to secure their financial future through property.
Punishing them with tax penalties would not only affect individual retirement plans but would have a ripple effect on the broader economy and rental market.
Negative gearing’s economic impact
Beyond the property market, negative gearing supports the broader economy.
Property investment is closely linked to construction, property management, and real estate services, which generate thousands of jobs.
Curtailing negative gearing could reduce investment in housing and lead to job losses in these sectors, undermining economic stability.
It’s estimated that the construction industry directly contributes over $360 billion to Australia’s GDP, and a decline in investor participation would inevitably affect this sector.
Further, I have seen estimates that private rental property providers (property investors) save the government in the order of $2 trillion by providing accommodation that would otherwise be required to be funded by taxpayers.
And each year, property investors pay around $45 billion in various taxes, including stamp duty, land tax, capital gains tax and council rates.
As I have explained, negative gearing doesn’t only apply to property; it’s available across various asset classes, including shares and business investments.
The bigger picture: addressing the real causes of affordability issues
While abolishing negative gearing might seem like a quick fix, it overlooks deeper issues impacting housing affordability, such as limited land supply, restrictive zoning laws, and cumbersome approval processes that hinder housing development.
Addressing these challenges would have a more meaningful impact on housing accessibility than removing a tax benefit that keeps the rental market viable.
What’s needed is a comprehensive approach to affordability, one that involves expanding housing supply, simplifying planning processes, and incentivizing new development.
Penalising investors by removing negative gearing would lead to increased rents, greater market volatility, and fewer affordable housing options for Australians.
By recognising the critical role that property investors play, we can work toward genuine, long-term solutions to affordability rather than short-sighted policies with unintended consequences.
In the end, negative gearing serves as a stabilising force in an otherwise volatile market, making it a critical component of Australia’s housing ecosystem.
The answer to housing affordability lies not in dismantling this policy but in addressing the root causes that genuinely affect home prices and rental availability.
