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Negative Gearing: The Hidden Force Shaping Australia's Housing Market
55 Plays2 days ago
Over 2 million Australians use negative gearing to claim tax deductions on properties that are losing money—but is it making homeownership harder for first-time buyers? In this episode, we break down how negative gearing works, who really benefits, and what might happen if it were scrapped or reformed. Whether you're a renter, investor, or aspiring homeowner, understanding this controversial policy is key to navigating the Australian property market.
Need help navigating the home buying journey? Get a free pre-approval and explore your options with Hunter Galloway – a trusted mortgage broker for homebuyers across Australia. Call 1300 088 065 or visit huntergalloway.com.au
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Transcript
Introduction to Negative Gearing
00:00:00
Speaker
Imagine a country where over 2 million people claim tax deductions on properties that are losing money. Sound crazy right? Well welcome to Australia where a controversial tax strategy called negative gearing has a nation divided. Now you might be worrying that negative gearing is pricing out of your dream home or potentially making it so you can't afford your rent. That's why today we're going to explore negative gearing, what it means if you're trying to buy your first home or if you're a renter and how it impacts you. I'm gonna look at negative gearing from a neutral perspective.
What is Negative Gearing?
00:00:24
Speaker
We're gonna explore what it actually is in plain English, who's really benefiting from it, how it impacts the housing market, what might happen if you get rid of it, and most importantly, what it means for you. Whether you're a renter, home buyer, or dreamy of buying your first property, understanding negative gearing is critical. Ultimately, it's shaping the Australian housing market, influencing government policies, and impacting your financial future. Before I dive in, please give us a thumbs up. It means a lot to the channel, and if you want more content like this, feel free to subscribe below.
00:00:50
Speaker
Welcome to the Buying Your First Home Podcast, your personal guide through the Australian housing market. Here we tackle the big questions and the small details that come up when buying your first home. From financial prep to finding the right neighbourhood, we're here to ensure that you've got all the knowledge at your fingertips. So let's take the first step towards unlocking the door to your new home.
How Does Negative Gearing Work?
00:01:15
Speaker
So let's dive right in. Negative gearing 101. So what exactly is negative gearing? In simple terms, it's when you borrow money to invest in a property, but the costs of owning that property, like the home loan interest, maintenance costs and taxes are more than the income you're earning from rent. And instead of making money, you're actually losing money each week by holding us that property. Sounds crazy, right? But the kicker is the Australian taxation system lets you deduct that loss from your taxable income.
00:01:38
Speaker
Let me put the jargon aside and break it down with an example. Meet Steve, a standard Aussie investor. Steve buys an investment property for $670,000 in 8-mile planes in Queensland. It's a three-bedroom townhouse. He gets $625 a week rent, but his expenses are $1,019 a week. That's $919 in mortgage interest and $100 for other costs. That means Steve is losing $394 per week by holding up his property. And here's where negative gearing comes in. Steve can deduct a $394 loss from his taxable income.
00:02:05
Speaker
If he's in the 32.5% tax bracket, he's saving about $128 in tax per week. And you might be wondering, why would anyone deliberately want to lose money on investment? Well, Steve's banking on the property value going up over time. He's hoping that when he sells, the capital gain will make up more than those weekly losses. And let's be honest, it probably will if the property market keeps going the way it's been going.
00:02:24
Speaker
The property market for units has grown 6.7% on average over the past 10 years. If we extend that growth rate forward, it means his property will be worth nearly $1.1 million dollars in 10 years time. So he would lose $130,000 due to native hearing, but gained $430,000 in property value. So he's actually making a $300,000 profit on the property over this timeframe.
00:02:43
Speaker
Take into account the $140,000 deposit he's made. It translates into a 223% return on his investment at an annualized growth rate of 12.47%. That makes a better investment than the stock market on average. And that's not even taking rent growth into account. If the annual rent continues to grow at its 10-year average,
00:03:01
Speaker
He's also reducing his losses each year, which means it's more profit. So you can see why Steve would be happy to take some losses on his property. If he didn't have negative gearing, he'd only make a net profit of $225,000 at an annualized return rate of 10%, much less of an attractive investment.
Impact on Housing Market
00:03:14
Speaker
Negative gearing has been around for a long time. It's been part of the Australian taxation system since 1936, the same year sliced bread was first sold in the country.
00:03:22
Speaker
Originally, it wasn't specifically designed for property investment. It was just a general rule that if you borrow money to earn income, you can deduct it from the interest. Fast forward today and negative gearing has become a big deal in the Australian property market. In the 21 financial year, around 2.25 million Australians claim negative gearing deductions. That's about 8.5% of their total population. So why does it matter to you? Well, whether or not you're trying to buy your first home looking for an investment or just trying to find an affordable place to rent, negative gearing is playing a role in shaping the property market that you're dealing with. Which brings us to our next question, is negative gearing a clever investment strategy or a bit of a tax route for the rich? Let's find out. This topic has really been dividing economists, politicians and everyday Australians. So what's all the fuss about? On one side, we have those who argue that negative gearing is inflating property prices, making it harder for first-hand buyers to just get into the market. The argument usually goes like this. Negative gearing makes property investment more attractive due to its tax benefits.
00:04:10
Speaker
More investors in the market mean increased competition for properties, and the increased demand drives up house prices. Dr. Judith Yates from the University of Sydney puts it bluntly. She believes negative gearing has contributed to house prices being 9% higher than otherwise would have been. That's a massive jump, especially if you're trying to save up for your first home.
00:04:25
Speaker
But there is another side to the
Pros and Cons Debate
00:04:27
Speaker
debate. Supporters of negative gearing actually argue it's helping the rental market stabilize and make it more affordable. Here's their reasoning. They argue negative gearing encourages investment rental properties. More rental properties on the market mean more choice of tenants and the increased supply helps increase the rentals.
00:04:41
Speaker
The Australian Property Council claims that negative gearing promotes investment in the rental market, ensuring that there is rental supply for those who need it. They argue that without these incentives, we'd see shortage of rental properties and skyrocketing rents. But the debate doesn't stop just at housing affordability. There are bigger economic implications that you need to consider. Supporters of negative gearing point out that property investment creates jobs in construction and related industries.
00:05:01
Speaker
The Housing Investment Association estimates that for every $1 million invested in new housing, 17 new jobs are created. Other critics counter that there might be more effective ways to stimulate the economy, job growth without distorting the housing market. And this is where it gets more complicated because the housing market isn't just affected by negative gearing, it's affected by a whole bunch of different factors. You've got interest rates, population growth, urban planning policies, foreign investment, employment rates and heaps more. So as you can see, negative gearing is just one piece of this intricate puzzle.
00:05:28
Speaker
And that's why predicting the exact impact to change this negative gearing is pretty hard. So as we dive deeper into this topic, just keep in mind there are going to be no simpliances. The effects of negative gearing can ripple through various aspects of the economy and society. So we've explored the debate around negative gearing, but let's follow the money trail. Who's really cashing in on this tax strategy? Here's something I was pretty surprised at.
Who Benefits from Negative Gearing?
00:05:46
Speaker
The top 10% of income owners in Australia nearly receive 50% of the total benefits from negative gearing. That's right, half the pie goes to those already at the top of the income ladder.
00:05:55
Speaker
But before we jump to conclusions, let's break this down further. Number one, low to middle income earners. More than two thirds of people who claim negative gearing deductions earn less than $80,000 a year. But the average rental loss claimed is only around $2,050 per year. When we look at high income earners, they make up a much smaller percentage of negative gurus, but they claim a much bigger deduction. The top 10% of earners claim an average of $15,000 or more per year. To put this in perspective, imagine negative gearing benefits as a pizza.
00:06:20
Speaker
Everyone gets a slice, but some slices are much, much bigger than others. So why is there a disparity? High income owners often have more capital invest so they can afford to take on larger losses and benefit more from the tax deductions because they've got higher tax rates. It's a little bit like a financial snowball in effect. The more you have, the more you can potentially benefit.
00:06:36
Speaker
And this is where it gets a bit interesting because supporters of negative gearing argue it's not just a strategy for the wealthy. They point out that mainly middle income Australians, teachers, nurses, police officers use negative gearing as a way to build wealth for the future. Critics, on the other hand, see it differently. They argue that negative gearing is widening the wealth gap in Australia. As property investors who tend to be wealthier benefit from tax breaks and capital gains, it becomes harder for non investors and first-time buyers just to get into the market.
00:07:00
Speaker
Let's consider an example. Sarah, a nurse, earning $75,000 a year, negatively gears an investment property. Her tax saving might be around $2,000 a year. Meanwhile, Michael, a surgeon, earning $350,000 a year, also negatively gears a property. His tax saving would be over $10,000 a year. Both are using the same strategy, but the benefits are far from equal.
00:07:18
Speaker
And now you might be thinking, but those high income owners are taking on more risk, right? And you'd be correct, negative gearing involves making a loss. The strategy banks on future capital growth outweighing those in the short term, a gamble that doesn't always pay off. So if it is just leave us all, the distribution of negative gearing benefits raises important questions about the fairness of our tax system and the housing market. Is it widening their wealth gap or providing some incentive for property investment? And how does this impact those trying to buy their first home? Well, let's explore what happens if we scrap negative gearing altogether.
What if Negative Gearing is Abolished?
00:07:44
Speaker
The ripple effects could surprise you.
00:07:46
Speaker
And this isn't hypothetical, it's been a real political battleground in the recent years. Let's start with recent history. In 2019, the Australian Labor Party proposed a major reform to negative gearing. The party proposed it would limit negative gearing to new houses only, while maintaining it for existing investors. They also proposed a half the capital gains discount.
00:08:02
Speaker
It became one of the biggest issues. The Libs argued against Labour saying it would crash the housing market, while Labour insisted it would level the plating field for first-home buyers. In the end, Labour's unexpected election loss was partly due to the policy, showing that how politically sensitive it is. This recent political history highlights the challenges to when you reform, but also raises a pretty important question. What would actually happen if negative viewing was scrapped or significantly changed? Let's look at some predictions. House prices.
00:08:25
Speaker
A study by the Reserve Bank of Australia suggests that removing negative gearing could potentially lower house prices by 1.2%. That might not sound like a lot, but on a $500,000 house, that's a $6,000 drop. For a first-time buyer where you're trying to scrap everything together, it can make a big difference. Number two, rental market. This is where things get a little murky. Some experts warn that scrapping negative gearing could lead to a max exodus of property investors, reducing the amount of rental properties available and pushing out rents.
00:08:48
Speaker
And three, investor behavior. If negative gearing was abolished, some investors might rush to sell their properties, potentially flooding the market, causing a bit of a drop in prices. To understand why predictions vary so much, let's take a trip back to 1985. That year, the Australian government did actually abolish negative gearing. So what happened next? It's a tale of two cities, interestingly.
00:09:06
Speaker
In Sydney and Perth, rents actually shot up. In other capital cities, rents stayed flat. This example from 1985 shows us the impact can be varying depending on the local market conditions. So it's not as as simple as a cause and effect. And if you fast forward to today, the rental market, even supply landscape is completely different.
00:09:21
Speaker
The 2019 election debate showed us that a lot of Australians fear any big changes to property rules. I think this is going to be important for politicians moving forward. Let's not forget about the poor economic impacts too. Property investment is a pretty big deal in Australia, supporting jobs and construction, real estate and other investments. Any major changes to property investment rules could have ripple effects throughout the economy.
00:09:40
Speaker
Think about it. It could be huge. We're talking job losses, drops in consumer spending and impacts on economic growth if these things aren't done properly. And that is an important point to consider. The effects of scrapping negative gearing wouldn't be felt evenly across the country. Different cities and regions have different housing markets. So the impact could vary a lot depending on where you live. So what's the takeaway from this? Well, clearly scrapping negative gearing isn't a simple fix.
00:10:00
Speaker
Scrapping negative gearing could potentially help first-hand buyers while making properties a little bit more affordable. But it also could cause short-term pain in the rental market and the broader economy. And the debate from the 2019 election just shows how divided the country is on this specific issue. Which brings us to an important question. Is there kind of a middle ground where where everyone can meet in the middle and be happy? Could we reform negative gearing rather than scrapping it entirely? Well, let's have a look at some of those solutions and what's possible. So we've explored the ins and outs of negative gearing and what might happen if it's completely scrapped.
00:10:26
Speaker
But here's the thing, negative gearing isn't the only factor that's affecting housing affordability in Australia.
Proposed Reforms and Solutions
00:10:30
Speaker
Let's go beyond the hype and try and explore some other solutions. A phase-out limiting negative gearing to new properties. In the situation which was proposed by Labor in that election, investors only claimed negative gearing on newly built properties. The good thing is it could encourage more construction, new homes and housing supply. The downside is it could create a bit of a two-tier property market with different rules for new existing properties and even impact rent that way.
00:10:49
Speaker
Another proposal could be capping negative gearing reductions. You could set a maximum cap on how much investors can claim per property per year. There's even another proposal recently I saw where it was a maximum of say two investment properties per investor just to help even out the rules. The negative of this is it might discourage investors reducing rental supply and potentially make it more unaffordable for rent. Three, increasing capital gains.
00:11:10
Speaker
Currently, there's a 50% discount or concession if you own a property for over 12 months for your capital gains. So, if you make $100,000 gain, you hold it for three years, you only pay tax on $50,000 at your normal tax rate. So, getting half the capital gains for free. If they change this, it could lead to investors that hold properties. This change was proposed where it would be on a certain date forward. So, any properties that were owned before that would still have the 50% capital gains exemption.
00:11:34
Speaker
So the downside is it might lead to investors holding up to properties longer because they're still going to get a few percent capital gain. It's going to be better for them to hold longer. They'll get higher gains, make more profit, et cetera. So it could actually reduce market liquidity and make less properties available for sale. There's also changes proposed to the first homeowner scheme, co-ownership schemes, et cetera. but This still doesn't help the underlying supply issue. There's still not enough houses for the amount of people living in the country.
00:11:56
Speaker
It's been good to see some changes proposed in Melbourne around stamp duty for off-the-plan properties but I think more needs to be done around this ah both at both the state and federal level to help increase the supply of properties across Australia. All these solutions aren't mutually exclusive. Many experts argue to address housing affordability issue requires a comprehensive strategy combining many of these proposals. Every solution is potentially going to come with unintended consequences.
00:12:16
Speaker
We saw that with the home builder scheme where the government was giving grants, ended up pushing up with the prices of building contracts and made it less affordable to build a home. And it's the same if we suddenly start limiting negative gearing to new properties, it could cause a rush of investors selling old properties potentially destabilizing the market. This is why a lot of economists are proposing gradual changes rather than massive overhauls. It's all about finding the right balances, addressing affordability concerns without causing unnecessary disruptions to the broader market. At the end of the day, the housing market is extremely complex and interconnected. Changes in one area can have ripple effects for the entire system. So which of these proposals you think could work best? And how might they impact your property journey? All right, so time to bring it all together and explore what it really means for you. Whether you're a first home buyer, renter or investor, let's look at some practical takeaways on how to change this evolving landscape.
00:12:57
Speaker
So we've journeyed through the complexities of negative gearing, explored its impacts and considered other solutions. But let's all bring it together to find a fair solution, one that balances the need for investors, renters and homeowners. The key word here is balance. Any changes to negative gearing policy needs to weigh up multiple factors. We need to consider housing affordability. How's it going to make it easier for first home buyers to get in the market? Rental stability. How do we ensure that there's enough rental properties for people to live in? Economic impact.
00:13:19
Speaker
What are the broad implications for jobs, growth, and tax revenue? Fairness. How do we create a system that doesn't just benefit high income earners? And market stability. How do we implement changes without causing any unnecessary market disruptions? Finding the balance here isn't easy. It's like trying to solve a Rubik's Cube. You fix one side, you often mess it up the other. And that's why a lot of advocates say we need to be measured and careful with our approach here. yeah Some compromises could include a gradual fade out instead of abruptly scrapping negative gearing. We could look at reducing the deductible percentages over several years. This could give the market time to adjust with any sudden shocks. There could be targeted reforms. We could look at limiting the
Conclusion and Policy Recommendations
00:13:52
Speaker
negative gearing benefits on factors like investment income, the numbers of property earned, or the type of property. What I like about this proposal is it could maintain incentive for mom and dad investors, but reduce the benefits for large scale property speculators. Supply slide measures. Any changes to negative gearing could be implemented alongside policies to boost housing supply, such as planning reforms, build-to-rent schemes. At the end of the day, this could offset potential reductions in rental stock. By grandfathering existing arrangements, new rules would only apply on future property purchases, allowing current investors to maintain their arrangements. This could reduce the potential sell-offs, which could mean less properties for the rent, putting up rental costs.
00:14:23
Speaker
I think at the end of the day what's also missing is complementary policies. Things like increased investment in social and affordable housing, improving transport infrastructure, open up more areas for housing, programs that boost financial literacy and help people understand that they have housing options and all the government schemes out there. It's crazy right? There's no perfect solution here. Any policy change is going to come with trade-offs that are likely to benefit some groups more than others and there's going to be disadvantage to all.
00:14:43
Speaker
The goal here is really to find an approach that's going to benefit our society while minimizing all the harm. I think what is really clear is addressing housing affordability requires an ongoing debate, careful analysis and willingness to refine policies over time. This is not going to be a silver bullet. Saying you're going to build a million houses over the next five years without a plan to do that is just silly. We need to have collaboration at all levels of government to make sure these goals are achievable.
00:15:04
Speaker
making informed decisions. Wow, so we've deep-dived into the world of negative gearing, explore its impacts and consider potential reforms. But what does it all mean for you? Well, whether you're a first home buyer, a renter, an investor, let's break down how you can use this information to make informed decisions. Well, first, let's recap what we covered. Negative gearing allows property investors to deduct rental income losses from their taxable income. It is a controversial policy that some argue inflates housing prices, while others say it keeps rents affordable. The benefits of negative gearing are not evenly distributed with high-income earners receiving a large share. Scrapping or changing the need for gearing could have wide-ranging effects on the housing market and broader economy. But what does this actually mean for you? Well, as first-home buyers, you want to stay informed of any policy changes. This could impact housing prices or the ability to enter the market. You definitely want to look at first-home buyer schemes and benefits in your state. This could help you get a leg up over investors.
00:15:51
Speaker
And where possible, don't just consider the purchase price. Consider ongoing costs and potential for capital growth. For renters, understand how negative gearing affects the rental market. It may influence the availability and cost of rental properties. Keep an eye on policy debates. Changing to negative gearing could impact rent prices and the quality of rental stock.
00:16:07
Speaker
For investors, you want to review your investment strategy. Don't just rely solely on tax deductions and make the property investment worthwhile. You want to stay informed about policy changes and how they might affect your investment and consider diversifying your investment strategy or looking at cash flow of positive solutions that don't rely on negative hearing. I think it's really easy to get caught up in this debate and getting really one side on either.
00:16:25
Speaker
It's important to think critically about the housing market and understand how interconnected it is and how all these changes can impact everyone at different levels. And remember, while negative gearing is an important factor in the Australian market, it's not the only one. There's interest rates, employment trends, population growth, and heaps of other the factors that shape the property market.
00:16:41
Speaker
As we wrap up, take some time to think about your current housing situation and what your future goals are. How could some of these concepts impact your future journey? Are there steps you can take now to put yourself in a better position regardless of these policy changes? The Australian property market may seem complex, but armed with the knowledge and clear understanding of your own goals, you can be in a much stronger position to navigate successfully. But let me know what you think in the comments below. You think it's going to benefit you, you think it's going to be bad for the market, um you know, your future goals, everything else. If you need any help, at Hunter Galloway, the home for home buyers across Australia, so we'd love to have a chat.
00:17:09
Speaker
Hit us up at huntergaloy.com.au and until next time, see you later. um