The Negative Impact of Negative Gearing

By Alicia Robson-Garth

The growing unaffordability of houses in capital cities is causing most young Australians to think of entering the property market as a distant reality. The unrestricted practice of negative gearing contributes to this situation as highlighted by the robust discussions emerging from politicians, economists, academics and the media. Real estate lobbyists advocate for its existence, while a large number of politicians continue to avoid any invidious opinions.

Negative gearing can be invoked where the outgoings (including rates and principal and interest repayments) exceed the rental income resulting in a net loss. These losses can then be claimed against other taxable incomes such as a salary or a business income.

Arguably negative gearing does increase the value of property due to investors being more willing to spend if there are tax incentives. This increasing value is a benefit for existing home owners but increases the difficulty for prospective home buyers. Furthermore, if investors are able to hold on to their properties for longer periods then negative gearing contributes to the billions of dollars in revenue received from capital gains.

Another justification for negative gearing is that it offers an incentive for landlords to offer affordable rent to tenants. The rationale is that if a net loss is produced then landlords pass on these losses to their tenants by increasing rent. However, the abolition of negative gearing in 1985 by the Keating government indicated otherwise. There was no uniform rental escalation in major cities. Only Sydney and Perth experienced an increase and evidence suggests this coincided with other local influences independent of the abolition. This begs the question whose interest does negative gearing serve?

Critical legal studies would suggest law, including tax benefits is not neutral and does tend to favour some classes more than others. This is evident by the fact that negatively geared investors are positioned in the top 40 per cent of income earners and by federal budgets that expose a favouritism towards investors over receivers of government spending. Accordingly, politicians tend to have a strong aversion to remove tax benefits for fear of displeasing the wealthy classes of Australia and seemingly disrupting the rising value of houses.

Stebbing and Butcher contend policy relating to housing has produced generous tax subsidies to encourage growth in the private sector. This policy was designed to alleviate the government’s responsibility to provide residential accommodation to low socio-economic individuals and families. Therefore, those who are in need of rent assistance, find very little aide is provided to them by the government. In failing to do so, these tax concessions primarily benefit those already well off.

Yates expresses her concern over the possibility of existing homeowners using their enhanced purchasing power to increase their housing consumption and housing investment. This means the ability to enter the property market will continue to favour high income households and so act against the interests of young Australians. Moreover, a study comparing the long term value of the tax benefits available to property investors and first home buyers show that the former is significantly advantaged in the long run.

Tax benefits like negative gearing contribute to a growing intergenerational inequity in Australia. Lower numbers of younger people are entering the property and homeownership rates have declined. This could be a result of individuals increasingly forming families at a later stage in their lives and/or the longer periods of saving that are required to gather a deposit to enter the property market. However these explanations are not conclusive. Instead, what is posited is that these trends represent an increase in a process of social stratification.

Complete elimination of negative gearing would not be favourable due to the impact it has on the increasing value of property. However it is appropriate to restrict its usage to be congruous to maintain property value and stimulate the market. Some fairer amendments could include introducing a means test cap and/or restricting negative gearing to new homes. The latter option has been adopted by Labor in the lead up to the upcoming Federal election.

Without revision of generous tax concessions society risks eviscerating opportunities for young Australians – and especially current university students – to compete in the property market. It is incumbent upon our politicians to eliminate the downtrodden sentiment which will continue to represent the experiences of young Australians if negative gearing is to continue unabated.

Alicia Robson-Garth is currently studying a Bachelor of Laws/Arts (Undergraduate Entry) at La Trobe University

La Trobe