There is an argument that in the long term banning or limiting negative gearing could make property cheaper by taking investors out of the market.
If you invest in property, or wish to do so, then negative gearing is likely to be crucial to your plans. The ability to set losses against your taxable income is the most important tax break for the everyday investor. It has been used by millions of investors, myself included, and no doubt will be used by many more taxpayers to get into the investment market.
Typically the gross return on a residential property at the time of purchase is about 4.8% of the purchase price. From that comes insurance, rates, maintenance and management fees. That leaves somewhere in the order of 2.5% to service the investment.
Assuming interest rates of 6% for investment borrowing our investor is going to have to make the difference up from household income or increased rent otherwise he looks to shares..
At the current tax rates, particularly after the decision to keep income is over $190,000 per annum at 45% plus Medicare the government is going 50/50 with the investor in the shortfall which is a sight cheaper than the government putting money into new housing.
Most of the rental housing stock in Australia is owned by small investors. Everyone in the first few years relied on negative gearing to get started. In time the debt reduces and the rents rise until the point where the property is no longer negatively geared, at which time the government begins to recoup its “investment” in increased taxes.
There is one example of what might happen. When the Labor Party last abolished negative gearing. That was in 1985 when negative gearing was scrapped from July 1985 and then restored two years later. In a panic over a rent increases crisis.
Mr Keating was so concerned that he not only brought it back he added a sweetener that if you bought a house, built after July 1985 for rental you could have an additional 4% write off of the cost of the house as a tax incentive. After September 1987 the incentive was reduced to 2.5% of the historic cost and there it sits today.
If we look at what happened during the two-year “experiment” the national experience suggests that removing negative gearing would reduce rental supply, lift rents and slow house price growth.
That is exactly what happened in Palm Beach and Burleigh, rents doubled in two years because the rental stock shrunk as owner occupiers came in and bought houses. There was no exodus by the investors. There are always investors moving in and out of the market and the trouble was that there were no investors moving into the market which is why it took two years to play out.
So, if you are ready to buy soon negative gearing is a great inducement to act. If you're not ready to buy and it is abolished or severely modified you may not like the result. Ironically investors who are already in the market will get an immediate benefit from the increased rents.
One final observation, nobody buys residential property for the rental return, they buy for the rental return plus an expected capital gain usually giving themselves an overall return of 10 or 12%. Only bargain hunters buy in a bear market.
In today’s share market you could achieve exactly the same yield by buying Bank shares. Right now you can negatively gear them too. Alternatively you could put your spare cash into your super balance which is not geared.
Governments that want to play with one part of our economy need to look at the pluses and minuses everywhere before they start making changes.
There is an interesting article on the subject “In praise of Negative Gearing” by Michael Blythe, a former chief economist of the Commonwealth Bank.
If you want to find out more about plant and building depreciation here are a couple of sites.
https://duotax.com.au/property-tax-depreciation/#capital-works https://www.bmtqs.com.au/residential-property-depreciation