In Australia, negative gearing is a hot topic, often sparking debates about its role in property investment and its influence on the market.
What Is Negative Gearing?
Negative gearing occurs when the costs of owning an investment property, such as mortgage repayments, insurance, and maintenance, exceed the income from rent. This creates a negative cash flow, where the Australian government allows investors to offset these losses against their taxable income.
For example, if an investor earns $100,000 annually and incurs a $10,000 property loss, their taxable income would be reduced to $90,000.
From a tax perspective, negative gearing can be a valuable benefit for property investors, however, should never be the sole reason for choosing to invest in property. At OpenCorp we don’t select investment properties for our clients solely around tax savings. We focus on selecting properties designed for long-term capital growth, using our MAP Process (Market, Area, Property). This ensures that we target investments primed for appreciation over time.
Common Misconception
Myth: Negative Gearing Only Benefits the Wealthy
Middle-income earners more often use it as a strategy to hold their investment property. It’s not reserved for high-net-worth individuals – whose properties are generally positively geared anyway!
What Might Happen if Negative Gearing is Abolished?
The consequences could be far-reaching, affecting investors, renters, and the broader property market.
Impact on Investors:
Investors who haven’t selected their investments with a long-term strategy in mind or have looked to property investment for the tax benefit it can provide, may find it difficult to hold their properties. This could lead to a wave of sell-offs, particularly in low-growth areas where holding costs outweigh returns. For investors, this would mean additional selling costs and possibly offloading properties at a loss.
Impact on the Market:
With fewer rental properties available, competition for remaining rentals would intensify, driving rents higher. This would disproportionately hurt first-home buyers (FHBs) and renters trying to save for a deposit, pushing them further away from their dream of homeownership.
Historical Context:
We’ve seen this play out before. In the 1980s, similar changes to negative gearing led to skyrocketing rents and housing scarcity. It’s a cycle that punishes renters and buyers alike, making housing less affordable for everyone worsening the housing crisis we are currently experiencing across Australia.
In short, negative gearing, when used correctly, helps both investors and renters in the long run. Eliminating it would cause more harm to the housing affordability crisis than good, particularly in an already tight rental market – where there already aren’t enough homes for people to rent!
