The negative gearing debate has been a hot topic amongst investors and those with an interest in the property market. Many critics claim negative gearing has failed to work as it was intended as investors purchase existing dwellings and have little interest in construction of new supply. This can lead to distorting the property market and effectively barring first home buyers from purchasing in high demand areas.
As speculation mounts that negative gearing may be scrapped in order to improve housing affordability and reduce government expenses, both sides of the debate are being presented. Statements have also emerged that negative gearing in fact protects property prices and could be beneficial to both investors and the average taxpayers with the government saving more if they continue the current policy. Claims that if the scheme is scrapped the government would save up to $5 billion a year and ease the housing market conditions have been countered with fears that rental prices could grow astronomically high with severe supply shock.
Experts predict that rental prices could rise as far as 50 percent due to the removal of negative gearing with roughly 96 per cent of rental properties belonging to the private investment market with a majority being ordinary Australians owning no more than the one investment property (approximately 73% of investors) to secure their future. This is in sheer contrast to the image of the incredibly wealthy commercial landlord taking advantage of the negative gearing scheme in order to avoid overpaying in taxation which is the primary target for scrapping the scheme.
By removing negative gearing, the opposite could occur with the average mum and dad investors being priced out of the market by commercial landlords due to the reduced buying power of a majority of investors.
There is also of course the obvious issue with the removal of negative gearing, being the reduction of new housing stock being constructed consequently furthering the issue of housing affordability and the shortages of supply. In this situation the government would have to meet the demand by providing more public housing, of which the cost is far greater than the tax concessions allowed under the negative gearing scheme.
Negative gearing is intended to be a business mechanism essentially treating an investment property as an income producing business asset allowing losses associated with the maintaining and servicing of that asset to be deducted from the taxable income, not as the “tax rort” many critics of the scheme claim it to be.