While many investors are tempted into the property market purely for the benefits provided by negative gearing, not everyone is a fan of the strategy. In fact, recently, a number of economists have jumped on the bandwagon to give their two-cents worth about how it’s detrimental to the economy.
Negative gearing is a relatively simple concept. It’s when the costs associated with buying a property exceed the income earned from it – that is, the rent. This difference between the expenses and income generates tax benefits and it’s these that attract investors into the market.
Economists believe the tax breaks should be abolished
There’s no doubt that property investors love negative gearing – it’s reflected in the ever-increasing number of investor loans. Statistics from the Reserve Bank of Australia put investor home loans at about 34 per cent of all home loans.
But not everyone is a fan. Recent comments from experts, especially economists, have called for negative gearing tax breaks to be amended or abolished. One of the arguments is the high cost to Australia the strategy causes – around $5 billion a year. Another argument is that it prevents first-home buyers from getting a foot on the property ladder because it leads to higher property prices.
One of the strategy’s most strident critics is Saul Eslake, the chief economist for Bank of America Merrill Lynch. But while he seems to condemn negative gearing, he doesn’t propose it be abolished across the board. Rather, he has suggested it should not be available to new investors, plus he claims it is possible for the government to impose a deadline after which the strategy would no longer be available to new investors.
The effect of this amendment, according to Eslake, is that demand for established properties by investors would be reduced and this housing type would become cheaper. This would also help first-home buyers to enter the market thus reducing the demand for rental accommodation.
Arguments against abolishing
One of the main arguments against amending or abolishing negative gearing is that it has already been tried. And it failed. Back in 1985, the then treasurer Paul Keating abolished it. After investors fled the market and rents dramatically rose, it was reinstated two years later.
One industry body, the Housing Industry Association, is also arguing against its abolition. In one of its recent reports, it found if negative gearing tax breaks were reduced, investing would become less attractive and this would erode housing affordability. This in turn would lead to an increase rents.
It also says negative gearing promotes private investment in the rental market, which stimulates economic activity and takes the pressure off social housing and the public purse.
Instead, it says that stamp duty
should be the main focus. It wants to abolish stamp duty on conveyances, as this would make housing more affordable for both renters and owner-occupiers.
What does the future hold?
Arguments for and against negative gearing have been going on for years. And it would be a brave government that made any move to alter it. Any changes would have a significant effect on the housing and mortgage markets.
However, many experts would suggest entering into an investment purely for the tax benefits is something that should be avoided. Any investment needs to be viewed in the context of your specific needs and goals.
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Will Keall, iMortgage’s general manager, has a wealth of marketing and business development experience gained in Australia and the United Kingdom. These include high level roles in a range of sectors such as financial services, insurance, travel and tourism, motoring and professional services.
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A self confessed “numbers and brand geek”, Will calls himself a conservative investor with a long-term philosophy. He also believes it’s important to “love where you live.”
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