The debate surrounding negative gearing continues to rage in Australia, with Labor maintaining its calls for the rules governing the tax advantage to be changed.
With house prices continuing to rise and housing affordability seemingly becoming further out of reach every day for many Australians, it’s not hard to see why it remains a hot topic, and why many want the controversial benefit banned.
But what would happen if it actually happened? What would happen if negative gearing – the practise of buying an investment property and claiming the shortfall between the rent it earns and the mortgage repayments as a tax deduction – was abolished?
House price growth might cool (slightly)
AllianceCorp Property Experts managing director Jason Paetow predicts that if negative gearing was scaled back or scrapped, it could result in the brakes being softly applied to growth in house prices.
But he warns that the underlying demand for real estate is still there, meaning prices would almost certainly continue to rise.
“I would say that we would see cooling in the growth of inner-city suburbs as less investors would be looking at purchasing established properties,” Paetow says.
“However, there are many other factors despite the tax benefits associated with negative gearing that make these locations so desirable. You only need to look at other major cities around the world that are considered some of the world’s best, such as in the UK where there haven’t been tax advantages for investors like negative gearing, and yet they continue to experience even higher prices than we have here in Melbourne and Sydney.”
Rents would go up
Financial advisor Bruce Brammall says the cost of renting in Australia would almost certainly rise as investors would look to make up the shortfall in their tax savings.
“If you take away negative gearing, it would increase the cost for investors of holding the property, and as a result of that they would quite possibly feel that they’re not prepared to wear losing $200 or $400 a week on this property, so they’re going to have to do something about putting these rents up,” Brammall says.
It’s happened before
Many people don’t realise that negative gearing was scaled back once before– by Bob Hawke’s Labor Government in 1985.
But just two years later those changes were repealed, in part due to political pressure generated by the increasingly tight rental market in Sydney.
While some reports have suggested the impact on rental prices in other cities was negligible, the impact in Sydney and Perth was significant. Most of Australia’s other capital cities now have much tighter rental markets, meaning the same might happen to them.
“Rental prices soared and all of a sudden people who were renting were in extreme pain, and investors were obviously hurting as well and selling property, putting downward pressure on property prices, and negative gearing was reintroduced within about a two-year period,” Brammall says.
Boost for off-the-plan properties
Paetow says that because changes to negative gearing would mostly affect established properties, investors would instead look towards new and off-the-plan properties in order to maximise their returns.
“Established properties would become less attractive to investors as the holding costs on these properties could increase by several hundred dollars each week, which most investors won’t stomach,” Paetow says.
“On the flipside, this change could see a boost with investment in new and off-the-plan properties, which won’t be affected by the negative gearing changes.”