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Negative Gearing – Why It Works

If you are an investor, developer or average income earner negative gearing is a key element in the finance structure that makes your property portfolio viable and sustainable.

Over recent months it’s featured heavily before and after the election with both political parties weighing into the debate about its merits.

The Turnbull government intends to retain the current negative gearing model citing that it promotes private investment in the residential market, stimulates economic activity, relieves pressure off social housing and ultimately the public purse. Any changes would further hurt confidence in the economy.

Those positive effects combine to help slow the price increase growth of housing in our capital cities and help people with affordability. Melbourne and Sydney are the only ones with double digit growth over the last 2 years while other states have had moderate growth only. Perth and Darwin have had negative growth after coming off the mining boom. So why use a one size fits all approach to deal with housing affordability?

Labor’s position was an intention to change negative gearing tax benefits so they would apply to new properties only, while existing negatively geared properties would not be affected by the change, “grandfathering” those investors already claiming deductions under the current model. Effectively this change would move investors from established properties to new dwellings. This would certainly impact already struggling first homebuyers including second and third time home buyers who would now be competing with investors for new housing stock.

Middle-income earners rely on negative gearing the most

In reality it’s middle-income earners who are the biggest participating group, with two-thirds of all Australians using negative gearing having incomes of $80,000.00 or less. Where its’s not just a mechanism for the wealthy to boost their investment portfolios, but a legitimate financial tool used by the middle-class as part of their overall retirement strategy – at SAW we see it all the time.

Stamp Duty reform is the top priority

Housing Industry Australia says independent research clearly shows that abolishing stamp duty on conveyances is the key priority for any housing tax reform. This would produce a substantial gain in household living standards by reducing artificial barriers to both investing in housing and to the ability to move when households’ housing needs change. It would make housing more affordable for renters as well as owner-occupiers.

HIA also makes some of the following points:

  • Ending stamp duty would bring residential rents down by 5 to 6%.
  • There are a range of other areas of housing reform which need review and action, but these tend to be crowded out by the disproportionate and misleading focus put on negative gearing of residential property, which is only one of the many asset classes this tax treatment applies to.
  • Another opportunity for housing policy reform is easing of the artificial restrictions put on the supply of residential land, which would boost living standards and housing affordability.
  • Government pressure should be applied to urge councils to provide an easier and quicker process for development approvals for subdivision town planning permits. Faster approval processes are needed to help enable housing industry projects and opportunities.
  • Independent research shows a substantial increase in residential land supply would reduce rents by 1 to 2%.

At SAW we welcome the Government’s decision to keep negative gearing in place, it’s obvious the positive effects combine to produce an important stimulus. It’s a good thing for the Australian economy and our housing industry.