WITH the huge amount of attention at present focused on the housing affordability crisis, a number of different ideas on solutions have been proposed. Some of them have seemed sensible, others less so.
One suggestion which continues to be a focus of attention is the idea that negative gearing should be abolished. The argument goes something like this: negative gearing allows investors to offset the losses made on investment properties against other forms of income, thus lowering taxes.
This makes investment properties sought after and, because of demand, raises prices. So, it is thought, eliminating negative gearing will keep home prices from rising. In reality, there would be far less rental property available if it weren’t for this provision because the investment property would become less attractive relative to other investment opportunities (most of which don t carry extra charges such as stamp duties).
Those without the resources to buy would simply suffer, those who could buy, would, replacing the demand gap left by investors and so keep demand (and price) from falling.
As Residential Development Council CEO Ross Elliott points out, the operative word in “negative gearing” is “negative”. In order to benefit from the tax provisions, the investor must make a loss on the investment property. That means keeping rents low to offset costs, such as mortgage payments and rates.
In reality it is a way of allowing the investor to gain tax benefits for subsidising the tenant’s costs. Remove the tax advantage in keeping rents low, and they will rise to cover the investor’s expenses.
Surely no thinking person can believe that this will make housing more affordable.
Ross Elliott adds, “In reality, private investors provide the bulk of private rental housing in the Australian market. They do so only because negative gearing provides an incentive to do so otherwise this capital investment would go elsewhere and there would be a chronic shortage of rental housing.
"House prices would not fall because the bulk of the market is either owned outright or being purchased through a mortgage and the bulk of the market (homebuyers), unaffected by any changes to negative gearing, will always set the price.”