Negative gearing is a hot topic of discussion in the lead-up to the Federal Election on May 18, but what would changes to the current policy really mean for Australians?
For those confused about what negative gearing means, it’s essentially when the income from an investment property (i.e. the rent) is exceeded by the costs to hold into it.
While making a loss on a property is never the ultimate goal of an investor, Australia’s negative gearing policy currently allows property investors to deduct their property losses from their taxable income, thus softening their overall losses.
This makes it much easier to hold onto the property long term, so that ideally the property can get enough capital growth behind it for the investor to profit from.
Why does Labor want to limit the use of negative gearing?
Negative gearing is a great incentive for investors, however proponents for changes to the current policy believe that it unduly increases property demand and therefore pushes up prices.
With housing affordability being an issue in some parts of Australia, namely inner Sydney and Melbourne, many believe that scaling back negative gearing will make it easier for home buyers to break into the market.
Labor has proposed limiting negative gearing to new properties, so this may also help encourage investment in new housing, which is needed in many parts of the country.
What are the drawbacks of Labor’s plan?
Negative gearing is a popular tax incentive and removing the policy as it is now could cause a lot of unintended flow on effects.
While it’s obvious that it could discourage new investors (it will remain available on existing investment properties), removing negative gearing may also hurt regular homeowners and renters, as well as the construction industry and the national economy.
That’s partly because it’s questionable whether or not the policy would help encourage the development of new housing, as some research suggests that the policy changes could turn buyers away from new properties, rather than towards them.
According to an article on Smart Property Investment, statistics from SQM Research reveal that rents could go up anywhere between 7 per cent and 15 per cent on average, under the new policy.
Further to this it is predicted that dwelling prices could decline anywhere from 4 per cent to 12 per cent by 2022.
The same data predicts that price growth could be relatively strong if there are no policy changes, while rental growth could be more subdued.
Is a change needed?
While Sydney and Melbourne have seen unprecedented property growth in the last few years, prices have already started settling back to more manageable levels.
One could argue that further interventions to improving affordability in these cities aren’t warranted at this time, and could provide an unwelcome hit to these markets.
Some however think that changes to negative gearing won’t have that big of an impact, and property investors will simply work around any tax changes.
There are a lot of differing opinions around and we will have to wait and see… however it’s just one policy for people to weigh up when they hit the polls for the Federal election next month.