What's wrong with negative gearing?

By Rich Harvey, CEO, propertybuyer.com.au

These days, Australian property investment is practically our new national pastime. The Australian Prudential Regulatory authority's property exposures for deposit-taking institutions showed that 37.3 per cent of all residential lending in the December quarter last year was to investors. 

That's $34.8 billion going into investment, and for a lot of people that's going to mean negative gearing. While positively geared property gives people the option of steady cashflow, I think the tax benefits of negative gearing are just too enticing for investors, and they're a vital part of current market strength.

But not everyone thinks so. Federal Shadow Treasurer Chris Bowen was quoted by The Guardian on April 22 as saying that "it would be irresponsible to rule out going to the next election with changes to, for example, negative gearing," indicating that there could be tweaks to this scheme. 

But is this really the best way forward, at a time when certain parts of the market are thriving? I think there's a misconception that negative gearing is something used by the rich to get richer - in reality, it's helping a lot of middle-class investors create wealth in a stable manner.

Negative gearing an open proposition for many

The Property Council of Australia compiled numbers from the Australian Taxation Office which show the reach that negative gearing has across Australian households. In the April 28 Property Week report, it noted that in 2013 there were 83,000 clerical workers, 62,000 teachers and 12,300 emergency services workers who claimed tax benefits from negative gearing. 

These people all earned under $80,000 a year - showing how buying investment property can be beneficial for a wide range of Australians. It doesn't just boost your capital gains prospects either - it helps out the rental market.

Calls for a stay of execution

In an April 16 media release from the Real Estate Institute of Queensland (REIQ), CEO Antonia Mercorella said that removing the benefits of negative gearing would hamper the residential real estate economy. 

"Investors help maintain supply to the rental market and a strong supply also ensures rental affordability is maintained," she stated. Ms Mercorella added that in 1985, negative gearing was restricted and rents subsequently went up by 25 per cent. 

I don't think negative gearing is the only way to generate wealth - buying investment property is a long term plan, and a home always going to be there for you. But the idea of putting restrictions on something that is helping to foster supply is absurd. Governments should be tackling red tape and supply issues, instead of looking at methods that might constrict investor activity.