Negative gearing and its impact on the housing market

In its most simplistic form, negative gearing for investment housing allows investors to deduct their losses against their personal taxable income.  These losses may occur when the investor incurs costs such as interest on a home loan as well as maintenance and other small expenses on an investment property. However, it is important to note that negative gearing is not unique to the property asset class; it also applies to businesses and shares in Australia.

The most important thing to realise about asset negative gearing is that it is fundamentally off-setting a loss.  Although you can claim that loss on your tax return, the investor must carry the cost of that loss throughout the year.  Ultimately, when investing, most purchasers would be hoping that rental rates increase over time and result in the asset moving from a loss-making one to an income producing one.

It is also important to note that between September 1985 and September 1987, negative gearing laws were changed.  The government quarantined negative gearing interest expenses on new transactions.  As a result, investors could only claim interest expenses against rental income, not other income.

Given that negative gearing provides a benefit to investors, we look at the impact these changes had on the investment market over the two-year period.  The first component is the impact the changes had on the rental market.

According to the rental component of CPI data, rents across the capital cities rose by 21.8% over the two years to September 1987 (the period during which negative gearing laws were changed).  The increase in rents was most pronounced over the period in Sydney (26.1%) and Perth (31.1%).  As a comparison, over the two years to September 1985, rental costs rose by a lower 17.0%.

The data clearly shows that rental growth was present over this period and it was greater than it was over the two year period directly preceding it (The above chart shows the period for which the negative gearing rules were changed and are bolded black).  Here you can see that rental growth was well above average, particularly recent averages, but it was not unprecedented with rents growing by a greater amount on an annual basis in late 1982 and early 1983.

Another important determining factor is the demand from investors over this period.  Unfortunately the Australian Bureau of Statistics does not provide information on the number of loans to investors; rather it provides the total value.  The total value of investment finance commitments in September 1987 was 41.5% higher than in September 1985.  These figures seem to suggest that at that time there was no weakness in demand for investment housing however, a clearer outcome would be apparent based on the number of loans rather than the value.

The reason why negative gearing was reinstated in September 1987 was that it was proclaimed that rents rose sharply on the back of a fall in housing market investment.  However, it doesn’t look as if investment in the housing market dried up throughout this period. Rents clearly did rise quite sharply throughout as demonstrated.

Many in favour of removing negative gearing from property say that it should occur due to the fact that housing is an unproductive asset class.

My argument is that given that housing provides shelter, if investors don’t purchase these assets, it would then be the responsibility of the Government to provide this shelter.  Ultimately, that would mean that anyone that pays taxes would be funding housing for those who can’t afford it themselves.

One of the arguments against negative gearing is that the tax deductions afforded to investors in the housing market reduces government revenue.  However, if investors did not provide shelter to those that can’t provide it to themselves, government revenue would already be reduced due to the fact that this responsibility would fall on the Government.

If we look at the recent Australian Bureau of Statistics (ABS) dwelling approvals data, it is interesting to see just how much of the new housing supply is created by the private sector as opposed to the public (government) sector.  According to the ABS dwelling approvals series which began in July 1983, between July 1983 and October 2012, 4,355,266 dwelling approvals have been given to the private sector compared to just 228,843 to the public sector.  Over the last 29 years (give or take a few months), public housing approvals have accounted for just 5.0% of all dwelling approvals.  This is less than 8,000 approvals by the public sector each year!

Over the 12 months to October 2012, 145,515 dwellings approvals were granted to the private sector (98.6%) compared to just 2,065 to the public sector (1.4%).

The most recent Census data shows us that of those homes occupied, 29.6% are rented (investment properties).  Based on this data, if we assume that without the private sector building homes for investment purposes, the public sector would have to account for 29.6% of all dwelling approvals to cover those in rental accommodation.  Over the past 12 months this would have equated to 43,684 dwelling approvals.  If we also consider that the median home price across Australia as at October 2012 was $386,000, and if the Government had to buy the land and build 43,684 homes, this would cost the Government of the day $16,861,900,480 based on the number of approvals and the median home price.

Of course this is a rather simplistic calculation and if the Government were to build homes on their own land it would cost them less as that figure includes land and building.  Also, it is unlikely that private investment in residential housing would cease without negative gearing but I would expect that it would fall.

The most recent taxation statistics data shows that over the 2009-10 financial year, $4.81 billion in net rental deductions were claimed by taxpayers.

In order for the Government to break even to allowable deductibles from tax returns they would have to be building those 43,684 homes at a cost of $110,100.  Based on the current median home price across the country at $386,000, they would have only been able to build 12,461 homes over the past 12 months or 8.4% of the total building approvals over the past year.  It should be noted that not all new builds are for investment purposes but if we assume that 29.6% are there is a significant short-fall.

When you look at these figures it is obvious why negative gearing is unlikely to be removed.  Whether the removal of negative gearing impacted investment or not, and whether it lead to an increase in rents is a secondary concern relative to how much it would cost the Government to supply public housing for the almost 30% of Australians that don’t own their own home.

These figures are not to suggest that if in the case negative gearing was removed, there would be no investors in the market however, the appeal of negative gearing is part of what attracts many investors to the market.  Without negative gearing it is likely that there would be fewer investors and therefore less private developers delivering new homes coupled with a greater need for the public sector to provide housing.  The flow on effect may also be that there would likely be lower demand for housing credit.  Although some proclaim removing negative gearing would cause house prices to fall, I would expect that new housing supply would be even tighter as developer’s struggle to achieve pre-sales for new development, this may in-turn force prices higher than they otherwise would be.

By looking into the figures in more detail, it makes good economic sense for the government to allow housing investors to negatively gear their properties so that the significantly greater cost of providing social housing is not borne by the Government and ultimately the Australian taxpayer.

About Cameron Kusher

Cameron Kusher is Head of Research at CoreLogic, specialising in primary and secondary data analysis, property market commentary and consultancy. Cameron has a thorough understanding of the fundamentals such as demographics, trends, economics and spacial analysis and is a regular keynote speaker for property-related groups, regulated industry bodies, corporations and the government sectors. Follow Cameron on Twitter @cmkusher

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41 Responses to Negative gearing and its impact on the housing market

  1. Nice spruik December 14, 2012 at 12:54 pm #

    This is one of the more spurious defences of negative gearing that I have read. Over 90% of property investors buy pre-existing dwellings. If negative gearing was removed and all of these investment properties were sold (a crazy assumption in itself), who do you think they would sell to? That’s right, renters. In turn, those renters would be turned into owner-occupiers, thereby reducing the demand for rental properties.

    Because investors primarily purchase pre-existing dwellings, negative gearing in its current form simply substitutes homes for sale into homes for let. It, therefore, does nothing to improve the overall stock of housing nor improve rental supply or rental affordability. Yet, the added demand from tax subsidised investors places upward pressure on home prices. Perhaps this is why most other nations – many with more affordable rental accomodation than Australia – no not allow negative gearing.

    You also conveniently failed to mention that when negative gearing was quarantined between 1985 and 1987, rents only increased in real terms in Sydney and Perth. In all other capitals, real rents were either flat or fell. As such, you cannot conclude that the removal of negative gearing had any material impact on rental costs.

    A more sensible approach would be to allow negative gearing on newly built homes only. This way, housing supply would increase, placing downward pressure on both prices and rents, while also creating non-mining jobs and saving the government money.

    • Cameron Kusher December 14, 2012 at 1:05 pm #

      Hi Nice Spruik

      I am not sure where you have got the figure that 90% of investors buy pre-existing dwellings, could you please provide a link as I have not seen that data previously? I don’t disagree that most buy existing dwellings however, I feel that the 90% quoted is somewhat inflated.

      I am also not sure about where I stated that if negative gearing was removed that all these investors would sell, I made no such statement. What I did say is that investment activity would likely be reduced and therefore the responsibility of providing accommodation to the rental market would be borne by the Government and ultimately tax payers.

      Your statement about when negative gearing was quarantined is also incorrect. According to the rental component of CPI data, rents across the capital cities rose by 21.8% over the two years to September 1987 (the period during which negative gearing laws were changed). The increase in rents was most pronounced over the period in Sydney (26.1%) and Perth (31.1%). Over the same period, CPI rose by 17.9%, the other cities which recorded greater increases over the two years include: Melbourne (19.6%), Hobart (19.7%) and Canberra (19.8%). On the other hand, rental increases were below CPI in Brisbane (9.8%), Adelaide (16.5%) and Darwin (6.2%)

      Regards
      Cameron

      • Nice spruik December 14, 2012 at 1:40 pm #

        Cameron. The RBA statistics (table D6) shows that the overwhelming majority of investors purchase pre-existing dwellings over newly constructed dwellings. In fact, in the decade to October 2012, 93% of investors purchased pre-existing dwellings versus only 7% purchasing new builds.

        As for your statement that: “investment activity would likely be reduced and therefore the responsibility of providing accommodation to the rental market would be borne by the Government and ultimately tax payers”. How is this a problem given that the overwhelming majority of properties purchased by investors are pre-existing dwellings? Negative gearing, in its current form, is simply transfering homes for sale into homes for let and, by pushing-up house prices, is turning would-be owner-occupiers into renters. If the removal of negative gearing caused this situation to reverse, it would be beneficial for society.

        If you truly cared about protecting taxpayers, a better option would be to allow negative gearing only on newly constructed dwellings. This way housing supply would be increased at lower cost to government.

        Finally, your comment about rental increases proves my point. Putting aside semantics, if the commonly held view that removing negative gearing would increase rents was true, surely rents would have risen strongly in real terms across Australia when it was removed, not just in two capital cities?

        Based on an examination of the data, your blog has failed to make the case for negative gearing.

      • Cameron Kusher December 14, 2012 at 2:03 pm #

        Hi Nice Spruik

        The data which you have referenced is the total value of investor finance commitments rather than the number. As mentioned in my blog post this is not necessarilly a good proxy for actual volume. It should also be noted that this is just housing finance commitment data, some investors may not be using finance, whilst overseas investors may not be securing their finance in Australia.

        Investment activity would be reduced is a hypothesis as to what would happen, of course no one truly knows. Yes more people buy existing homes but the point is a proportion of investors buy new homes and many of those new high rise complexes going up around inner city areas are now targeted towards the rental market (investors). What I do know is that property developers require a significantly greater number of properties to be pre-sold now than they did before the financial crisis. These developer’s are also businesses, if they can’t achieve these pre-sales the projects wouldn’t go ahead and new housing supply would likely be reduced which is likely to create even greater pressure on house prices.

        I don’t understand how anyone can suggest that people that choose to buy brand new homes which are often more expensive than pre-existing homes within the same area should receive the benefit of negative gearing whereas other purchasers don’t. Investors are providing shelter for those which can’t afford or aren’t in a position to provide shelter for themselves, why discriminate? Keep in mind that those that invest in new housing also can claim depreciation which investors of pre-existing homes can’t unless they do some type of renovation.

        With regards to your final comment, the statement that they only rose in two cities is not correct as shown and as my graph shows, rental growth back then was significantly greater than it was over the preceding two year period, you would assume that is at least partially a result of the change to negative gearing rules.

        I would also argue that two years is not necessarilly long enough to see what the full impact of removing negative gearing would have on rents however, you will note that rents continued to climb once it was re-instated and then fell quite sharply.

        The ultimate question is that do you want your taxpayer money going towards the Government providing rental accommodation or would you prefer that service is provided by the private sector and the funds are used elsewhere? There are plenty of other ways to bring down the cost of housing such as increasing land supply, removing stamp duty, providing a more rapid development approval process and reducing Government development fees and charges, it is my belief that these would all be a much better way to tackle housing affordability than removing negative gearing which may actually cause prices to rise further.

        Regards
        Cameron

      • Nice spruik December 14, 2012 at 2:27 pm #

        “As mentioned in my blog post this is not necessarilly a good proxy for actual volume. It should also be noted that this is just housing finance commitment data, some investors may not be using finance, whilst overseas investors may not be securing their finance in Australia”.

        That’s a cop-out Cameron. Whether it is volumes or values data is irrelevant. The huge imbalance of investors buying pre-existing dwellings (and not adding to supply) is there for all to see. Also, what relevance are investors that buy without finance or overseas investors? Neither of these are negatively geared and would not be affected by changes to negative gearing rules.

        “These developer’s are also businesses, if they can’t achieve these pre-sales the projects wouldn’t go ahead and new housing supply would likely be reduced which is likely to create even greater pressure on house prices.”

        You can’t be serious? Demand would tank and prices would fall, irrespective of whether supply fell. Anyway, if you are worried about supply, limit negative gearing to newly constructed dwellings only. Problem solved (at lower cost to taxpayers as well).

        “With regards to your final comment, the statement that they only rose in two cities is not correct as shown and as my graph shows, rental growth back then was significantly greater than it was over the preceding two year period, you would assume that is at least partially a result of the change to negative gearing rules.”

        No, real rents only rose significantly in two cities – Sydney and Perth – when negative gearing was removed between 1985 and 1987. Also, population growth surged over this time period, which is likely the main reason why rents grew more strongly over the two years when negative gearing was quarantined than the two years prior.

      • Cameron Kusher December 14, 2012 at 3:12 pm #

        Hi Nice Spruik

        It is a fact that the value of finance commitments is not a good proxy for the volume, especially if you consider that a first home buyer is more likely to be getting a 90% to 95% LVR loan than an investor that is using equity and would most likely want to avoid mortgage insurance. The point about overseas investors is taken but your previous point was specifically about the number of investors as opposed to owner occupiers.

        I still don’t know why demand would tank. People still need somewhere to live, the population is still growing and jobs are mainly located within capital cities. If the supply of new housing fell, the population increase would mean that demand would continue to grow, people still get older and leaver the parental home as well. Who is going to provide shelter for the population, the Government (taxpayer). As the dwelling approval data shows, the Government is doing very little to provide this shelter and is leaning on the private sector to do so.

        Real rents only rose significantly in two cities yes but they still rose above inflation in three other cities. Nowhere do I make the statement that rents rose ‘significantly’. Please see what was written in the article ‘According to the rental component of CPI data, rents across the capital cities rose by 21.8% over the two years to September 1987 (the period during which negative gearing laws were changed). The increase in rents was most pronounced over the period in Sydney (26.1%) and Perth (31.1%). As a comparison, over the two years to September 1985, rental costs rose by a lower 17.0%. The data clearly shows that rental growth was present over this period and it was greater than it was over the two year period directly preceding it (The above chart shows the period for which the negative gearing rules were changed and are bolded black). Here you can see that rental growth was well above average, particularly recent averages, but it was not unprecedented with rents growing by a greater amount on an annual basis in late 1982 and early 1983.’

        Also, population growth increased over the period as you have stated however, it was recorded at 1.5%pa, I would hardly suggest that is a surge and population, especially when you consider that the population has growth at an average annual rate of 1.3% over the 30 years to March 2012. Population grew by a furth 1.7% over the year to Sept-88, 1.6% to Sept-89 and 1.5% to Sept-90. Over the same periods, rents grew by an annual rate of 11.4%, 8.9% and 5.5%. Population growth does have an impact on rental growth however, there are a number of other considerations such as rental vacancy rates and supply.

        It is clear you don’t agree with my analysis and that is fine, I didn’t expect people to agree however, I still don’t see how and why investors spending more to buy a brand new home should get preferential treatment over others. I also fail to see why investors in shares and businesses should receive beneficial treatment to those providing shelter that the Government is unable or unwilling to provide for renters.

        Regards
        Cameron

  2. John Strindberg December 14, 2012 at 1:20 pm #

    Good article Cameron, and it certainly backs up all the points made last month in this detailed Australia Property Forum discussion…

    http://goo.gl/6xT4p

    Of course, the comments above by ‘Nice Spruik’ are to be expected. The bears have been listening to gloomer sites telling them the opposite for years – i.e. that rents didn’t rise when NG was removed. In fact the truth is that rents went through the roof last time NG was removed, which is why it will never happen again!

    • Wayne December 14, 2012 at 4:18 pm #

      I wonder if by allowing any amount of losses on properties to be deducted against other income in Australia are we reducing competition from the private sector?

      If you look at countries like the USA you’ll find a large number of Real Estate Investment Trusts (REIT’s) formed to provide rental accommodation across the country. They develop, buy and sell apartment buildings and the like (with facilities, maintenance staff, front desk staff etc so generally the properties are in better condition that our rental accommodation in Australia). The various state and local governments regulate and enforce various housing goals on these companies too (to provide some low income housing). I don’t see governments in Australia being able to enforce any housing goals on private investors in Australia (although with the National rental affordability scheme I guess we are trying, but once again the taxpayer is funding this not private investment).

      Where are the huge listed and private REIT’s like Post Properties http://www.postproperties.com and Archstone http://www.archstoneapartments.com/ to name a couple? I guess in Australia they don’t have the benefit of off-seting their “losses” against other income like the private investors.

      I think many commentators have commented about the fairness of allowing rental deductions to be offset against other income i.e. who claims the majority of those deductions? (you will of course find the top taxpayers claim the lions share). Hence why Treasury via the Ken Henry review would have liked to see these generous deductions reformed too.

      Is it really a good idea to encourage people to lose money in the hope of future gains?

      Hmmm so many questions, but as with the Ken Henry review, nothing will change and Australian housing markets will continue to appear in the top 10 most expensive lists. I don’t think you could find a professionally managed and maintained 2 bedroom apartment in Australia for $1000 a month like you could overseas. Perhaps we should be using those tax breaks on high speed rail to open up vast corridors of additional affordable land to develop? A lot of small/medium sized cities is more efficient than a few overcrowded ones with infrastructure gridlock.

      Disclosure: I do own a 2 bedroom apartment in Sydney and I rent a house elsewhere from a real estate agent, I have also lived in the US quite a few years in Post, Archstone and private rental properties so I can compare the quality of the markets (and our rental accommodation is by far more expensive and of poorer quality). Yes we have a stronger economy and lower unemployment, but even when the US is riding high, it is still far cheaper to live there.

      • Cameron Kusher December 14, 2012 at 4:28 pm #

        Hi Wayne

        I would suggest that we are reducing competition however, some developers do use this type of model in some areas of the country although it is quite rare.

        There is no incentives for REITs such as these to be set-up in Australia as you say. I also believe that the high cost of land and the significant cost of construction would also act as a deterrent in Australia. Perhaps the Government could do a public private partnership on their own land for rental accommodation such as this, I think it would be a progressive idea.

        Regards Cameron

      • Wayne December 19, 2012 at 2:15 pm #

        Definitely public / private partnerships are a popular model in the US giving away some future tax revenue on a development or new Costco outlet etc in return for a company committing to develop in your county/state.

        Also we could place a limit on the amount of deductions allowed to be offset against other income (and tinker with the number over the years). i.e. in the US “the IRS limits your losses from your rental business to a maximum of $25,000 per year. The rules and criteria for Passive Activity Losses are found in IRS Instructions for Schedule E. Note: this is $25,000 in total losses from all your rental properties.” http://taxes.about.com/od/taxhelp/a/Schedule_E.htm

    • Alex Barton December 14, 2012 at 4:20 pm #

      “Went through the roof” is a very deceiving way of putting it given the CPI increase over the same period!

      I bet there are many investors praying it won’t be changed, but we have state and federal government desperate to reach surplus. I wouldn’t be surprised to see changes to negative gearing in the future.

  3. dam December 14, 2012 at 4:10 pm #

    ” I also fail to see why investors in shares and businesses should receive beneficial treatment to those providing shelter that the Government is unable or unwilling to provide for renters.”

    investors buying existing dwellings do not provide shelters, the shelters was there before the investment, they did not add to the supply, they just pushed the price up and forced a would be OO to be renter.Quite nasty.

  4. Return2mean December 14, 2012 at 4:36 pm #

    The removal of negative gearing, (ie the disallowing of expenses against income for tax purposes), would constitute an increase in taxation for suppliers of accommodation. It is quite obvious that if a further cost is imposed on a significant proportion of service providers that the end cost of the service can be expected to rise. This applies to any service or goods provision.
    Imposing further costs of rentals on the already stretched less fortunate members of society would be a very cruel act. Somebody needs to stand up for the interests of the less fortunate poor renters. If anything, property investment needs to be further encouraged through the tax system.

    • Mal August 22, 2014 at 11:23 am #

      Rents are not elastic – nor are mortgage payments. Generally 30% of income maximum is the stress level.

      Rents won’t rise – if you try, the renters move. Price would drop, without a 40% tax loss for the owners.

      Negative gearing only for new builds – currently it does next to nothing for new supply – whether its 80 or 90% existing housing is totally wasted tax money .
      As for existing houses, well yes the price would drop – other studies show $ 50k, and guess whod buy? The existing renter.
      $ 10 billion a year tax deductions from the highest earners currently.

      Your own graph shows what a furphy this rent argument is – plenty of periods of higher rent, and many other reasons.

  5. Return2mean December 14, 2012 at 5:18 pm #

    “Is it really a good idea to encourage people to lose money in the hope of future gains?”

    Almost every business endeavour loses money in the early years. Capital has to be invested. Fortunately those losses are allowed to be deducted for tax purposes.

  6. Richard Livingston December 17, 2012 at 12:44 pm #

    Cameron

    If the rent increases were simply a repeat of the events of 1982/1983 then, without identifying fundamental differences in other relevant factors (CPI, interest rates, wage increases, population growth) then isn’t it more likely that the 1985 to 1987 rent increases were caused by the same factors that caused them in 1982/83?

    I haven’t studied this is any detail but a quick glance at CPI and interest rates would suggest that they were the cause of the rapid rent increases and that negative gearing’s removal had nothing to do with it?

    • Cameron Kusher December 17, 2012 at 2:43 pm #

      Hi Richard

      Given I am only in my early 30’s I can’t accurately comment as to what happened in 1982/83 however, mortgage rates were slightly higher between 1985 and 1987 than they were between 1985/87. I can’t determine why rental growth was so strong back in 1982/83 however, I can state that over that period and the period over which negative gearing rules were changed, rental growth has been much higher (in actual not inflation ajusted terms) than we have seen since.

      As I said in the blog post rental growth was well above average, particularly recent averages, but it was not unprecedented with rents growing by a greater amount on an annual basis in late 1982 and early 1983. As I have also said in previous comments I don’t believe that two years is really long enough to determine the full impact. What I do believe though is that private investment in rental accommodation would ease were there no negative gearing avaialable and I believe that the result would be either Government would have to pick up this slack or rental growth would be strong once again as supply is constrained and competition for rental accommodation heats up.

      Regards
      Cameron

      • Nice Spruik December 17, 2012 at 6:44 pm #

        Cameron also forgets to mention that Australia experienced a harsh recession in 1983, which would have suppressed rental growth. By contrast, the economy was much stronger between 1985 and 1987, not to mention the higher population growth over this period.

        As I said above, this blog is a poor attempt at showing the merits of negative gearing. As the data clearly shows, it has done absolutely nothing to boost housing supply but has artificially acted to boost housing demand and therefore prices. Perhaps that’s why the over whelming majority of developed countries do not allow negative gearing.

      • Richard Livingston December 17, 2012 at 9:40 pm #

        Hi Cameron

        It sounds like we agree that no conclusion can be drawn on the relationship between negative gearing and rents. As you say, the time frame is too short and history suggests inflation might be the key factor.

        On your last point, are you talking short term or long term?

        If negative gearing benefits are factored into investors’ returns then I think we both agree that something needs to give if NG was removed. I would argue that price is more likely to adjust (since we no longer live in a high inflation, rising wages environment) but you might argue rents will increase.

        Either way, one of these needs to move to restore the returns of investors to their required level. Once this has occurred (whichever it is) investors will be earning the same rate of return they did previously, but negative gearing tax benefits won’t be part of it.

        As a result, the quality of investor earnings (now all cash) will increase and the universe of potential buyers will expand (since those who can’t value negative gearing deductions are no longer at a disadvantage). In this environment (of higher quality earnings and greater number of potential investors) it is hard to see why investment in housing would fall long term (even though it may go through a difficult ‘adjustment period’)?

        This is consistent with my observations on Govt tax benefits and subsidies generally. Whilst they may nominally accrue to buyers or users, economically they end up in the hands of sellers (or those who held the assets prior to the subsidy/tax benefit coming into place).

        Or, to put it another way, all they do is push up the price of the relevant asset – be it property, agricultural land (in the case of MIS schemes) or solar panels.

        Regards
        Richard

      • Cameron Kusher December 18, 2012 at 8:47 am #

        Hi Richard

        We do agree, in the short-term I believe that either prices would fall or rents would rise if negative gearing was removed however, I believe that rental increases are more likely as those investors that were negatively gearted look to move their investment to positive gearing.

        I guess the big questions are how much would rents move and would they move far enough to negate the fact that the fact that there is no negative gearing and therefore housing investment is less appealling? The question is then what happens when renters can no longer afford to pay rent, nor can they afford to take out a mortgage? This would create more social issues and a requirement for the Government to intervene and provide a greater amount of social housing. I think this is the reason why we are now seeing schemes such as NRAS which incentivise developers to provide rental accommodation to low income households. I believe it is easier and more cost effective for the Government to undertake these types of schemes rather than taking on the responsibility of delivering this product themselves.

      • Nice Spruik December 19, 2012 at 1:43 pm #

        The last time negative gearing was removed, here’s what happened to rents after adjusting for inflation:

        Sydney: +6.2%
        Melbourne: +1.1%
        Brisbane: -7.6%
        Adelaide: -2.0%
        Perth: +10.7%
        Hobart: -1.5%
        Darwin: -8.1%
        Canberra: +0.7%

        Gee Cameron, your hypothesis that rents would rise if negative gearing was removed is looking shaky based on actual historical experience. Only Sydney and Perth experienced significant rental increases following the removal of negative gearing and rents actually fell in four capital cities.

  7. Phil December 17, 2012 at 2:32 pm #

    I had a little play around with this helpful calculator: http://www.rba.gov.au/calculator/quarterDecimal.html

    Overall CPI increase:

    Sep 83 – Sep 85: 11.5%
    Sep 85 – Sep 87: 17.9%

    So real rental changes:

    Sep 83 – Sep 85: 5.5%
    Sep 85 – Sep 87: 3.9%

    It looks like removing negative gearing actually slowed the real rate of rental increases!

  8. Richard Livingston December 18, 2012 at 12:10 pm #

    Hi Cameron

    We seem to have quickly gone from either prices falling, or rents rising, to an assumption that rents will rise?

    It is quite conceivable that prices will fall (in fact that would be more logical given that it seems to be prices that are out of whack vs long term equilibrium). In this environment rents may not rise at all and, in fact, they may also fall.

    Such an outcome would be nirvana for renters and future purchasers (albeit at the expense of current owners).

    So, on the assumption (and it is very definitely an assumption since we don’t know how the future would play out) that the element of the equation which is furthest from its long term equilibrium (ie prices) will be the one to adapt to a ‘negative gearing free’ environment:

    1. Rents may remain unaffected, or even fall (long term that is)
    2. Affordability may increase
    3. The need for the Govt to provide social housing may lessen

    Negative gearing in it’s present state may well be exacerbating demands on other govt resources (although, to be honest, I don’t think it’s the major factor in high property prices) and so removing it may ease these other burdens.

    But, it all comes down to what assumptions (or guesses) you make about the future.

    Regards
    Richard

  9. Parry December 27, 2012 at 9:52 am #

    Great article Cameron!

    You’ve provided a fantastic argument demonstrating the positive effect of negative gearing on the housing market. You’ve also correctly identified dwelling approvals as the metric for measuring policy outcomes. These investors are providing much needed new housing that would otherwise have to be provided by the public sector.

    It’s a fantastic argument for restricting negative gearing to newly built homes only, and we should focus investor incentives on this task. After all, money invested in existing housing stock isn’t improving the key statistic of increased dwelling approvals. And as you’ve identified, this still costs the government money in lost taxes which it could instead devote to public housing projects. Cameron, you seem like such a civic minded individual, genuinely interested in increasing the supply of affordable housing for all. You surely agree that this is the logical conclusion to your well reasoned argument.

    • Cameron Kusher December 27, 2012 at 10:06 am #

      Hi Parry

      Thanks for your comments. My issue with saying that someone can only negatively gear new investment properties is that it discriminates. This would be the equivalent of saying that you can only negatively gear shares in start-up listed companies which is not really equitable. I think the Government along with developers can look at ways to make investing in new properties more attractive than investing in existing properties rather than biasing them by saying they are the only one’s which receive the benefit of negative gearing. These benefits should be obvious via price, rental return (and yield), location and design. At the moment, I believe the biggest deterrents for investors when looking to purchase brand new stock is the price comparative to existing stock and the fact that there has been no significant design improvements over recent years. Finally, the fact that strata levies across new stock are often exorbinant, althought they are often discounted during the first few years of the scheme, is also a further disincentive to invest in new unit stock in particular.

      Regards
      Cameron

      • Phil December 27, 2012 at 2:00 pm #

        So you’re saying that changing negative gearing rules would be “not really equitable”? As opposed to the current system, where renters earning salaries have to pay extra tax to make up for deductions claimed by speculators who push up prices of existing houses? It seems that those renters are being doubly screwed over, but at least the speculators are being treated equitably… To paraphrase your article, “ultimately, this mean that anyone that pays taxes is funding the property portfolio of those who can afford it”.

        The usual argument is that the renters benefit because negative gearing keeps rents down, but that’s been refuted above. Or that somehow, a great shortage of rental stock would suddenly appear…and yet, just about every country in the world gets by without negative gearing…

        In fact, I’d say the “equitability” argument is the silliest since Julia Gillard’s comment that “an abolition of negative gearing would cause distortions to the property market”, when it is a major distortion to the setting of fair prices for property, and fair rents. What she meant was she’s scared house prices might fall and she’d lose votes from people who felt entitled to their tax deduction…

  10. wilson October 7, 2013 at 5:44 pm #

    negative gear is what made the housing market imbalanced and it just made the rich people get richer and poor people (or people who just entered to the workforce) have no chance to buy a house. i strongly think the govenment should cancel the negative gearing on housing ASAP. government should not encourage rich people to keep buying houses and the not so rish people cannot afford to buy and just have to keep renting. this doesnt make sense at all. the government needs to wake up and see the bigger picture.

  11. Michael March 6, 2014 at 10:39 am #

    People on this topic jump to the extremes far too easily.

    The main problem with negative gearing is that it is all too often used as a cover for overly advantageous personal gains and reduction of taxable income. I have no issue with the premise that you can deduct your losses from an investment, but critically the current rules do not take into account the nature of property investment and the equity building in the property as it appreciates in value.

    Tax specialists flirt inside the rules to enable investment properties as a vehicle to reduce taxable income by offsetting the loss, and directly channel the equity to finance there own property far too easily. There needs to be a clear separation between personal and investor finance arrangements, it is all too easy to pool the assets together and set the LVRs in your favour.

    Personally I believe the rules on negative gearing should be tightened (not removed) and have in place much higher scrutiny on the tax deductions and financing of these investments. This should discourage some investors and release some property on to the market increasing supply and also calming the demand steadying the pace of growth in house prices.

    Right now its a feeding frenzy of foreign investment, baby boomer super money and high wage earners all battling with first home owners with these low interest rates.

    Should we be placing similar regulation and restrictions that are in place for self managed super funds for investing in property?..

    But If you cant beat them join them, this government or opposition will not move on this in the next ten years, so i’m off to go and buy two investment properties before these house prices get out of control!…

  12. Manfred April 17, 2014 at 11:34 am #

    The Whitlam Government abolished negative gearing for a while, but found it was totally counterproductive. As you state ,the government can never provide enough public housing, and investors fill the gap.
    It provides incentive for people to work harder and get some tax benefits. A win win for all

  13. Alex October 5, 2014 at 12:00 am #

    If property prices fell by $50K.. does that mean that those who couldn’t afford before (blaming negative gearing) can now afford to buy? I somehow doubt that. What would price need to fall by before those potential buyers can comfortably afford to buy? $100K $200K which would put prices of homes at $150K – $250K?? Would a developer be able to build the same home for these kind of prices.. I don’t think so.
    Same argument can be made about food prices.. those who cannot afford to put food on the table for their family. Does it then mean that food prices need to come down? What about petrol for those who cannot afford to fill up?

  14. Alex October 5, 2014 at 12:21 am #

    The assumption in some of the replies that by abolishing negative gearing the investors would sell out and the renters would convert to home owners is ludicrous. If the majority of renters could not afford to buy when negative gearing was in place how would they suddenly be able to afford to buy after?? I presume the assumption was that the investors would all go on a fire-sale. Well think again.
    For those who cannot afford to buy their first ideal home, they should consider purchasing an investment home and building their equity that way so they can purchase their owner occupied home some years down the track. That’s the way to go instead of trying to get instance gratification. Take some risk and be rewarded. Stop whinging.

    • Endless pumping of the bubble October 16, 2014 at 2:07 pm #

      Several bank studies have shown the effect of negative gearing as 50 to 100 k on the price.
      Indeed do the sums on an investment unit – with 10K losses (the average reported) or 20K – the median loss by high income earners on 49% tax, who are 400 000 of the 1.2 million NGers, and receive the bulk of the tax refunds – obviously it makes more sense on 49% tax than 30% tax.

      Another 5-10 k of refund funds another 100k to 200k of mortgage.
      Remove this, and the feasible loan drops 100k -eg from 500k to 400k.

      FHBs don’t get this 5-10 k , so cant bid 500k.
      As you note above, the ridiculous circular solution suggested at the moment is for the FHB who can’t afford a 500k house, to buy a 300 k investment (- but a dumb ideas, as presumably they are not a higher income earner in the first case, then its not worth much to them on at 30 % tax rate).
      beautiful – Suck those punters in to the ponzi scheme – get the indebted lower incomes to support the policy for the high income tax rort beneficieries

  15. More Supply December 7, 2014 at 3:43 pm #

    On a daily basis we all demand housing, wether by owning or renting. No changes to the tax system will change the total demand for housing. there will be the same number of people demanding housing on a daily basis. An owner occupier expresses that demand by continuing to own and a renter by continuing to rent.

    Changes in overall demand are a function of the size of the population and the demographic trends within the population, ie the average number of occupants per housing unit As our population expands we are also trending towards lower occupants per housing unit. These changes represent our growing demand for housing.

    This growing demand can only be met by increasing the supply of new housing.

    Currently there are broadly three sources supplying new housing, Government, owner occupiers and investors.

    Proposals to change negative gearing will have the desired effect, they will reduce ivestor supplied housing. The result accross the housing market (to purchase or to rent) will be an increase in price.

    The only way to reduce housing prices (to own or to rent) is to increase supply. All measures to increase supply should be brought to bear, including tax policy that serves that purpose.

    • Ban NG now. December 10, 2014 at 2:03 pm #

      Nonsense, – the removal of negative gearing simply reduces by 50 to 100k the amount that investors can pay for a unit compared to the rent – removes their additional credit (ie removes the govt subsisy from their loan calculation). allowance, and hence prices for existing units can drop 50k. Any units sold – guess what – that renter can now buy them. No change to housing supply.

      Negative gearing only for new construction should be tghe law – currently 90% goes to existing housing, which does nothing for supply at all. Just prices out FHBs and increases the govt debt by $ 6 billion per year.
      Anyway investment losses would still be quarantined then against the asset is fine,
      not against other income like NG.
      Ban NG immediately Mr Hockey. However we can only wish !

      • More Supply December 15, 2014 at 11:47 am #

        That you advocate for NG on new construction underscores my point perfectly – thankyou.

  16. Chris February 12, 2015 at 9:15 am #

    Property prices are extremely distorted in Australia. We all know foreign investor visas have played a significant role in “artificially” inflating the property market. If you are told spend $1.5 million to gain a visa for your entire family, you spend big. And the Australia market in their minds is a low risk asset and they will never lose money. So they spend big! I know if I was in their shoes I would do the same!

    However, in turn this has turned baby boomers, that bought in the 70’s through to the 90’s, into millionaires. They didn’t need to earn much or buy smart investments! That just needed a property, with a small loan that they could pay off. And now these baby boomers, thinking they are property gurus, are buying back into the market with their masses of wealth and overspending. Again distorting the market.

    In my opinion negative gearing is a desperate attempt for the younger generations (gen x and gen y) to be apart of this distorted growth. Taking out loans from $500,000 to $1million to hopefully get capital gains. Loans this big are ridiculous!!! But when you can claim all the expenses back it seems reasonably and you hope for capital gains.

    My issue is this. When the foreign investor visa rules are changed and the amount goes up to $5million they must spend. It will slow the foreign investment in property. And when baby boomers are too old to be investing their millions. All that is left is younger generation with massive loans that will never be paid back!!! All the renters and younger generation aren’t gonna buy our properties off us for $1 million plus?? So who will?

    The government needs to act now and get rid of negative gearing. They need to get rid of foreign investor visas. And somehow control baby boomers spending in property. They need to do this while there is still money in the market to soften the impact. If they wait 20 years we will have a dangerous scenario where we only have a generation with massive loans and no one to buy the properties back at over inflated prices. And we will have a younger generations who will never be able to buy. It will cause a massive issue that will require huge amounts of government funding which may even result in a property crash and in turn a recession.

    Cameron, I would have thought, as a fellow early 30’s Australian, you would maybe not advocate negative gearing, but maybe advocate proceeding with caution in the current climate. Don’t look to the past to back your theories up!!! Look to the future. Negative gearing with huge loans only works if someone buys your asset off you in the future. Doesn’t matter what happened in 1985.

    I should disclose I am in my 30’s, buying my 3rd property. I’ve benefited greatly from foreign investors and baby boomers that spend big. And I negatively gear investment properties too. But I also have kids and worry about their futures.

    I guess my point is. Maybe don’t advocate negative gearing as a necessity for Australian tax payers and the rental market. It’s a rort that we are lucky to be benefitting from. That’s all it is

  17. Bruce February 28, 2017 at 9:39 pm #

    Hi Cameron.
    Having worked as an agent during the removal period, I would agree with your article on rent increases. We saw an immediate tightening of rents and rental price hikes followed. Within 12 months we were at zero vacancy with signs displayed outside the agency Sorry No Rentals to avoid the constant stream of counter enquiry. For the govt to backflip within 2 years is a pretty damming argument to the failure of the policy. The argument that prices only rose in Sydney and Perth is because the govt realised they had a national trend happening and to save an election, reversed their policy before tenant hardship spread nationally. The increase in finance in Sept 87 was the massive backlog of investors jumping back into the market, causing disruption and major boom resulting in climbing interest rates to 18 % home loans. Up until the recession we had to have. This my industry experience last time it was removed. Ultimately it was the tenants who paid the price of the Keating govt going after the so called rich. Class politics always backfire on the most needy. Remove gearing if you must but be prepared to spend way more taxpayers money on way less amount of social housing than the number of homes currently provided by the private sector investor.

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