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Negative gearing policy reform has been a widely discussed topic in Australian politics in recent years.
Negative gearing allows investors to make a loss on the shortfall they make on rental properties. For example, if the home loan repayments for your rental property are greater than the amount of money you’re making in rental income, you are making a loss that you can recuperate tax benefits from. The loss is offset against your salary, reducing your taxable income. Critics say negative gearing is contributing to rising house prices and making it more difficult for young people to enter the market.
In 2016, Federal Opposition Leader Bill Shorten announced a proposed policy reform that would not allow homebuyers to enjoy a tax benefit if they purchased existing homes. They’d only be able to negative gear brand new homes. He argued it would ‘level the playing field for first home buyers.’ The proposal would save $32 billion over a decade, he said.
According to Professor Richard Reed, Chair in Property and Real Estate at Deakin University, there are a few factors to consider. ‘Removing or decreasing the benefits of negative gearing will lessen the incentive for investors to purchase residential housing, which in turn decreases the amount of investment in housing,’ he says. Prof. Reed explains that many individuals would not invest in residential property if they couldn’t benefit from negative gearing. This means if you’re heading to an auction or buying privately, you’ll face less competition from investors. With less competition, prices could become more reasonable for people entering the market.
Prof. Reed says investors help to prop up the rental market, which is essential for students and people without enough income to purchase a home. ‘According to economic theory, there would be less rental supply and therefore a higher rent would be paid.’ Although he says a dip in rental supply and subsequent spike in rents could take some time to take effect, but it’s something long-term renters would need to be aware of.
If negative gearing only applies to new homes, we could see a rise in property development, Prof. Reed says. But given the lack of space in existing metropolitan areas, this could drive a housing boom in outer suburbs. You can only take advantage of negative gearing if you don’t live in the property – you must lease it out instead. If there’s no rental market because there’s not enough demand or the location doesn’t have sufficient transport and amenities, it’s not a necessarily a wise investment. If you don’t have a tenant, you’re stuck with the repayments.
What should the government do about negative gearing tax concessions?
Curious about how the real estate market works? Check out property and real estate courses at Deakin University.
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