There has been a lot of talk recently about tax reform and removing or amending Negative Gearing for property. The idea of reducing the tax incentive of investing in residential real estate in my view is extremely foolish and the people who are protesting the most for change are most likely to be the most effected with significant increases in rent and property prices in both the medium to long term. It is a simple equation of supply and demand. If the average investor looses the tax concessions then they will most likely not purchase an investment property. Around 80% of all loss making investment properties owners earn $80,000 so the removal of negative gearing will have a substantial effect on affordability. This will significantly reduce demand for new properties, resulting in a a reduction in supply which will lead to an increase in rents and property prices. There will be strong pressure on those who already have property investments to increase rents to compensate for the reduced tax benefits. This is what happened in 1985-87 when the Hawk-Keating government removed negative gearing. It was an absolute disaster and was reversed after 2 years. You would think once bitten twice shy!

Here are 10 important reasons for negative gearing:

1.   Negative gearing increases investment supply with almost 1.9 million of Australians investing in the residential property market (Attachment A). The arrangement keeps rents lower than they would otherwise be.

2.   Negative gearing in its current form for the purpose of property investment is complementary to the goals of the Government in addressing the supply of rental accommodation.

3.   The majority of investors are ordinary mums and dads who have only one investment property which is often part of a self funded retirement plan.

• Taxpayers who earn an annual income of 80,000 own 80% of all loss-making properties;
• Almost three quarters, (73%) of investors have only one investment property;
• Less than 10% of investors have three or more investment properties (Attachment B).

4.   Negative gearing of property is equitable across all asset classes. These same rules apply for other types of geared investment, i.e. shares. To amend the current negative gearing provisions for housing would be treating real estate differently to other asset classes and create a distortion on the investment landscape and result in a resource misallocation.

5.   The Hawke Government abolished negative gearing for property in 1985 only to have it reinstated in 1987. During that period, rents increased by 57.5% in Sydney, by38.2%in Perth and by 32.0% in Brisbane, highlighting the importance of upholding the arrangement. The Henry Review — released in 2010 and led by then Treasury Secretary Ken Henry— acknowledged that negative gearing applies downward pressure on rents.

6.   Abolishing negative gearing may not make housing more affordable to owner occupiers as there will be a supply side response as well as a demand side response. Indeed some commentators say that it is unlikely to make housing more affordable.

7.   Similar to home buyers, demand from property investors is usually met through existing housing rather than new construction. Estimates show that upto9ü% of investors have purchased existing property. Only 18.6% of first home buyers and 18.9% of changeover buyers purchase new housing. Australia has a severe undersupply problem, with annual dwelling completions averaging 2% of the housing stock. What should be addressed is the housing supply issue.

8.   The Real Estate Institute of Australia estimates the impact of implementation of the Henry Review recommendation to replace the current negative gearing arrangement with the introduction of a 40% discount for income from rental properties would lead to an increase in the weighted average capital city median house rent by 2.4% (Attachment C). In the current tight rental market expectations are for outcomes similar to the mid-1980s.

9.   The Henry Review warns that because of the constraints on the supply of housing, amendments to the taxation of rental housing should only be adopted following reforms to the supply of housing.

10.The removal of negative gearing would increase demand on social housing— an area that governments have been struggling to address.

Source: REIA-Amanda Lynch; Ricardo Saad