Negative gearing has been receiving a lot of bad press of late. Many commentators see it as a tax advantage that is enjoyed by the rich. Worse, they also believe that negative gearing is a major reason why residential real estate prices in Sydney and Melbourne, especially, have soared in recent years. These views ignore a number of hard facts.
As the peak body for the property investment association, the Property Investment Professionals of Australia (PIPA) has identified 6 key reasons negative gearing has helped ordinary Australians, the housing market and the broader economy – and why it should continue to do so.
1. Surging house prices (in some places) is due to a shortage of supply, not negative gearing
Property price growth has come under the microscope of late but it’s important to note that dramatic price rises have been neither long-lasting nor widespread. According to global real estate firm Jones Lang LaSalle, in terms of measures such as the price-to-income and the price-to-rent ratios, housing in Australia is broadly as affordable as it is in Canada or the UK. Moreover, median prices for houses and apartments in Sydney grew by 5.7% and 4.5% annually over the five years to Q42014, thanks mainly to population changes.
It is Australia’s long standing housing shortage that has underpinned price growth, not negative gearing. There has been a net shortage in the stock of housing, a resultant low vacancy rate and strong growth in the number of people in Australia’s metropolitan areas. According to the National Housing Supply Council, the nation’s housing gap was as much as 284,000 dwellings in 2011. In 2014, Moody’s Analytics published a report, which found that negative gearing only adds around 9 per cent, or around $44,000, on average to home prices.
Low and/or declining mortgage rates have also been a factor in recent house price rises.
2. Negative gearing is widely used by ordinary Australians – not just the rich
It is wrong to see negative gearing as the preserve of the well-to-do. According to the Australian Taxation Office (ATO), two thirds of rental property owners who made a loss on their investment property in 2012-13 earned a taxable income of $80,001 or less. Some 78% earned $100,000 or less. Individuals earning $80,000 or less accounted for 58% of the rental losses claimed.
It’s also untrue that negative gearing is used by wealthy people to build large portfolios of rental property. Almost three quarters of all rental property investors in Australia own only one property.
3. Negative gearing supports ordinary Australians to provide for their retirement and support the provision of housing
It is reasonable to see negative gearing as a tool that many ordinary Australians use in their pursuit to be financially independent retirees – reducing the burden on the Australian government to provide pension support. In light of our aging population, this is an invaluable factor.
Negative gearing helps the State governments in another important way, too. It supports the provision of housing via the private sector, which means that the pressure to deliver social housing is reduced.
4. Removing negative gearing would hurt the economy
A report prepared in mid-2015 for the Property Council of Australia (PCA) and the Real Estate Institute of Australia (REIA) notes that property investors tend to invest in existing housing. However, just over one quarter of all loans for the construction of new housing in 2014 was to investors: this percentage has remained broadly constant over the last 30 years.
Two thirds of property investors are negatively geared. If negative gearing was not available, it is almost certain that investment in new property would be lower and the invaluable contribution of the new housing sector much smaller. More generally, a removal of negative gearing would deal a blow to the economy because property investors are significant contributors to overall activity. Researchers Independent Economics found that a 40% cut in net residential income would reduce GDP, thanks to a lowering of activity in the residential construction and housing services sectors.
5. Removing negative gearing would hit young first time buyers very hard
Advocates of a removal of negative gearing overlook the fact that this change would actually hit first time buyers particularly hard, rather than helping them. In 2014, Mortgage Choice’s Investor Survey found that over one fifth of property investors purchased an investment property before an owner-occupied property. Martin North, the principal of Digital Finance Analytics, observes that there were 4,000 first-time buyers who purchased investment properties in Australia in just the month of April this year. According to the Australian Bureau of Statistics, 7,600 first home buyers were owner-occupiers. In other words, young first time investors typically account for a sizeable percentage of the activity in the housing market.
6. Negatively geared property usually becomes positively geared
Finally, the discussion of negative gearing ignores a very important fact. For most investors, negatively geared property becomes positively geared over time, thanks to growth in the rental income from it. According to the ATO, over 80% of people in 2012-13 who had an interest in rental property made net losses. However, half of rental property owners who were 60 or older were positively geared. Positive gearing is consistent with easier repayment of sums borrowed and higher tax revenues for the Australian government.