So what exactly is negative gearing, why was it introduced in the first place and why is it such a political hot potato right now?
Well let’s start from the beginning. Negative gearing was introduced in the early 1980’s as an incentive to encourage Australian’s to invest in property. The incentive lay in the benefit of off-setting your tax payable on your income by the expenses incurred from owning an investment property. Put simply, borrowing money to make a tax loss.
The central theme of the current debate surrounding negative gearing is housing affordability. Labour believes abolishing negative gearing will drive down house prices because less investors will compete with purchasers on auction day, therefore making the great Australian dream of owning your own home more attainable. Liberal on the other hand believes if you abolish the scheme it will drive rents up because there will be fewer available rental properties as investors will leave the market in favour of other investment strategies.
So who is right? Well it seems the confusion/debate stems from the mid 1980’s when our PM at the time Bob Hawke and his labour cabinet made the decision to abolish negative gearing. The net result was a surge in rental yields. However, upon deeper research it was ultimately realised this was only the case in Sydney and Perth. In fact, the balance of the countries property market stayed unaffected by the change. What actually attributed to the rise was economic growth, population growth and a shortage in new housing. The scheme was reintroduced 2 years later.
In 1960 a house cost 1.6 times the household income. In 1985 (the year negative gearing was introduced) it increased to 2.25 times the household income but in 1999 when John Howard introduced a capital gains tax discount it significantly increased investor activity in housing. Fast forward to 2016, and bearing in mind most homes today are double income, a house will cost 4.3 times the household income.
So what does this mean? Well clearly the more incentivised investors are the more likely they are to sit at the table and play their hand.
Leaving the debate at the political door for a moment lets now consider why you would negative gear in the first place. To offset tax. Can’t be more simply explained than that. Who can do it? Anyone. There is a misperception that it is a strategy only for the wealthy. Utterly incorrect. If you want to reduce your tax payable on your income, have the ability to save a deposit, service a loan and cover the gap between the cost of your asset and the income generated from the property then you can negative gear.
Like all investment decisions, it’s a personal choice dependant on one’s personal set of circumstances.
However, in all of this discussion it’s wise to remember that whilst the government introduced the scheme for Australian investors, the underlying purpose was to generate more income for the government. Significant revenue is generated from negative gearing. Since it’s introduction it has attributed billions of dollars for the government which would create a gaping hole in the governments purse if they were in fact to abolish negative gearing. It’s interesting that the opposition wants cut negative gearing to focus spending on health and education. Not sure standing at the traffic lights rattling a tin can will be quite as substantial.
So what have we learnt? Nothing really other than the government is doing what they usually do and creating hype for their own agenda. Either way, investing in property is a wise long term strategy and as long as there’s money in it for the government I don’t think we’ll be seeing any drastic changes to negative gearing.