A rental property is said to be negatively geared if the owner’s expenses (including mortgage interest and maintenance) exceed the rental income, so that the property makes an annual loss. If the tax system allows negative gearing deductibility, that loss can be deducted from other income for tax purposes. Abolition of this deductibility, loosely known as “abolition of negative gearing”, would make the owner’s expenses deductible against the rent alone — not against other income.
SPIN: Negative gearing deductibility helps renters and first home buyers by encouraging property investors to “supply accommodation”; the larger the supply, the lower the rents and prices.
FACT: The only investors who actually add to the supply of accommodation are those who build new accommodation. Therefore, if negative gearing deductibility were really intended to maximize the supply of accommodation, it would be allowed only for new construction — not for future purchases of established properties. But in fact the negative gearing rules fail to distinguish between new and established properties, giving no incentive to build rather than buy. So the supply of accommodation is lower than it could be, and rents and prices are consequently higher than they could be. That’s good for current owners of rental properties, but bad for renters and first home buyers.
VERDICT: Negative gearing deductibility could help renters and first home buyers if it were done properly. But it isn’t. It’s done so that established property investors get a tax break at the expense of other taxpayers plus higher rents and prices at the expense of renters and first home buyers.
February 25th, 2008 at 7:28 pm
Dr.Putland
Your short article ‘Negative Gearing - Incompetence or Conspiracy’ is the best succinct description of what is causing the housing affordability problem in Australia.
It appears to me that a sort of covert neo-feudalism is sucking the life out of the next generation.
I have written a parody of the situation that you might enjoy reading if you have 5 minutes free.
The address is -
http://zzalanz.googlepages/home
then go to investorsruleok
I am doing what I can do to embarass the architects of this problem (Treasury) into action.
Any suggestions as to how I can help curtail the monster in our midst would be greatly appreciated.
Alan
February 25th, 2008 at 7:31 pm
Dr.Putland
Just realised the parody address was incorrect.
The address should have read -
http://zzalanz.googlepages.com/home
then go to investorsruleok
Cheers
Alan
September 10th, 2008 at 2:37 pm
Who determines this is fact and on what basis?
FACT: The only investors who actually add to the supply of accommodation are those who build new accommodation. Therefore, if negative gearing deductibility were really intended to maximize the supply of accommodation, it would be allowed only for new construction — not for future purchases of established properties. But in fact the negative gearing rules fail to distinguish between new and established properties, giving no incentive to build rather than buy. So the supply of accommodation is lower than it could be, and rents and prices are consequently higher than they could be. That’s good for current owners of rental properties, but bad for renters and first home buyers.
September 10th, 2008 at 2:39 pm
Its the supply of Accommodation for Rental Purposes & not Accommodation overall why the govt provides negative gearing assistance.
September 12th, 2008 at 11:35 am
Dear Rick,
Investors who buy existing homes don’t add to the overall supply, but merely turn homes for sale into homes to let. This does NOT address the shortage of rental homes, because the reduction in the supply of homes for sale throws potential owner-occupants onto the rental market, so that the increase in supply of rental homes is offset by increased demand. If you really want to address the shortage of rental homes, you have to address the OVERALL supply, not just the supply of rental homes. But if you only want to PRETEND to address the shortage of rental homes, the existing negative regime is a great way to do it. That’s why it’s so firmly entrenched.
September 12th, 2008 at 11:37 am
Correction: “existing negative regime” should have been “existing negative gearing regime”. But it is indeed a negative regime.