Removing negative gearing would only make matters worse

Removing negative gearing would only make matters worse
Terry RyderDecember 7, 2020

Whenever there's a perceived crisis in real estate, those who enjoy blame games will demonise negative gearing.

Top of the list of crises that exist in the minds of the paranoid and the misinformed is the affordability crisis. Affordability for buyers and affordability for renters.

There's a vast pile of research data disproving the idea of an affordability crisis for buyers - an idea that's largely the result of Sydney-centricity in mainstream media.

Equally, there is no rental affordability issue, except for people living on welfare benefits or the minimum wage, as outlined by Kasy Chambers of Anglicare Australia in a interview on ABC News 24 earlier this week.

One of the most interesting of current real estate phenomena is the lack of rental growth in capital cities in the past 12 months and in the past three to four years. Only Darwin and Perth have had strong rental growth in recent years and even there it has dissipated in the past 12-18 months.

One of real estate' core issues is the low level of residential yields in the major cities. This is because residential rents are too low, relative to sale prices.

Eliminating negative gearing may slow down investor buying, but it won't cause prices to fall.

But perceptions of poor affordability persist.

The cure-all beloved by many with loud voices attached to soft brains is to eliminate negative gearing tax benefits.

In terms of my personal situation, I don't care whether negative gearing exists or not because I don't own negatively geared properties. I prefer assets that pay their way.

But removing negative gearing would solve nothing. Rather, it would make many matters worse.

The fuzzy logic that leads some to believe it would do good is that price rises are caused by investors - and that property investors are essentially driven by negative gearing benefits.

But price rises are not caused by investor activity, in most cases. Investors are a minority force in the market and are motivated to buy, without emotion, at the lowest possible price.

The biggest force in residential real estate, and the sector with the motivation and financial capacity to pay a high price, is the group known as 'next time buyers' - i.e. home buyers other than first time buyers. People upgrading to a better home, often driven by emotion. If anyone drives up prices it's them.

So eliminating negative gearing may slow down investor buying but it won't cause prices to fall.

What it will do is cause rents to rise - a lot. Without the tax offset, residential property as an investment will lose its appeal for some, especially those buying in the major cities. A shortage of rental properties will develop quite quickly, as happened last time negative gearing was eradicated (before being rushed back in). Sharp rises in city rents will follow.

I note that Kasy Chambers of Anglicare, in calling for government action to improve rental options for those on very low incomes, stopped short of advocating an end of negative gearing because she recognised the problems it would cause.

The other factor never discussed in this increasingly wacky debate is the longer-term impact for the nation. Australia wants its citizens to invest to create retirement nest-eggs, thereby easing the growing budget burden from paying pensions to an aging population.

I’ve heard people argue that the federal budget could save billions each year if it wasn’t paying out on negative gearing tax breaks, but the long-term cost would be far greater if Australians stopped investing in residential property to provide for their retirement.

You can contact Terry via email or on Twitter. 

Terry Ryder

Terry Ryder is the founder of hotspotting.com.au.

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