Negative Gearing Affects Investors

If negative gearing is abolished on all but newly-built dwellings, investors

  • Will no longer be able to buy strategic investments, looking to acquire high value properties in prime locations that will realise the best gains over time.
  • Will no longer be able to write rental losses off against other tax, creating a disincentive to invest in property at all.
  • Will find it harder to sell their investments if and when they want to dispose of them, as there will be no incentive for other investors to buy.
  • Will find their investments worth less, as the lack of incentive for other investors to buy them will translate directly to reduced capital growth.

Halving the capital gains tax discount from 50% to 25% is a false economy: quite simply, there will be less capital gains to be taxed.

Almost every Australian belongs to a superannuation fund that invests in property; axing negative gearing means returns will be lower, impacting ordinary people when they retire.

Most people who self-manage super buy property, and these people will be hit even harder.

The average deduction for a loss on negatively geared property, according to recent Australian Taxation Office figures, is $10,000; in the overwhelming majority of cases, this means people with one or at most two investment properties.

Abolishing the deduction may cost these investors up to $3,500 per year. In many cases, this could be the difference between an Australian family on a modest income being able to afford to invest in property – and help provide for themselves in later life – or not at all.

While statistics vary, roughly 90% of investors who negative gear property own just one or two properties each, and 78% of them earn less than $100,000 per year. Is it really worth kicking these hard workers trying to get ahead just to get at the 10% with more than two properties?

And if negative gearing is so bad, why retain it for new properties at all?

Negative gearing affects everyone. Why risk so much right now?

Authorised by Jock Kreitals, 16 Thesiger Court, Deakin ACT 2600

Copyright © Real Estate Institute of Australia 2016. All Rights Reserved.

17 thoughts

  1. As soon as I heard Bill Shorton mention this policy, I got ice in my veins. This policy gives me the hebie jebies. I believe our biggest problem is that we have foriegn investment into property, that to me seems to be driving the prices up. We sell off coal, iron, farms, property and our jobs. Now the government wants to punish those who are trying to get ahead by increasing their net worth in property. This is tall poppy syndrome in a really bad way.

    Like

  2. Core Logic and the RBA have recently voiced concern on the over-supply of apartments in the capital cities which was obvious to most in the industry anyway. The foreign lending has been in the news recently too with questionable practices from overseas borrowers, their agents and very likely the big banks. The result is that settlement risk for inner city and inner suburb apartments is through the roof. With an attack on negative gearing, who is going to buy these apartments in the near future???? What is opposition thinking? The remedy for unaffordable housing is not to crash the industry but ensure low employment and higher investment in the economy. The politics has been short-sighted over the last couple of decades but this is an absolute joke!!!

    Like

    1. Hi Andy, a bit of value? Ross greenwood this morning estimated every 1% fall in prices equates to $63billion being ripped out of the economy – and if recent estimates comes true we could be talking about 15 times that over four years. That’s not helping the kids get a leg up, that’s economic devastation. Imagine all the first home buyers who purchased homes in the last year or two, who in four years will have properties still potentially worth less than what they paid for them? Imagine if interest rates go up, or if they lost their jobs and they’re forced to sell? None of this is good. There are better ways to help young buyers – we are currently lobbying in all states on this front. This policy is poorly through through and verging on irresponsible.

      Like

  3. What a rubbish, self serving article. Current investors won’t be negatively affected (apart from being limited to adding only new properties to their expanding portfolios, thereby actually stimulating the construction industry) as Labors policy won’t apply to existing investment properties.

    Ross Greenwood, not sure what to say about this guys report. Assuming property prices fall, which assumes that demand will fall against supply (Really? We’re OK to assume this??) That assumption is too stupid.

    If property prices don’t continue to rise on the current trend then investors will have made a bad bet, but won’t be out of pocket (Maybe Ross is factoring in abnormal inflation?). Maybe Ross’s $63 billion is equivalent to how much investors would have been better off investing in something other than existing properties. Have you looked into that REIA?

    Like

    1. Hi michael clearly you haven’t read the report greenwood is referring to – maybe check out the link to Sqm research report on our links page. Given SQM have been named by afr as Australia’s most accurate property forecaster, we reckon their opinion is worth listening to – and bearing in mind they’re pro negative gearing reform and STILL don’t agree with labors policy, that’s saying a lot.

      Like

  4. As much as the Real Estate Institute would like to believe that real estate growth can outstrip inflation indefinately, the reality is that the market is severely over valued. We do need to reduce the incentive to invest in property.

    High property values are a blight on society as well as the general economy.

    Like

    1. Hi Rob, we don’t expect markets to continually rise, that never happens. In fact, market are already correcting in many areas outside Sydney and Melbourne, some by quite a lot – especially WA and other mining areas. The problem is if you take a blunt tool like the Labor or Greens policies on the table currently, it just won’t work. In fact, it’s likely to make things even worse in markets that are already struggling, potentially resulting in homeowners with negative equity.

      Lastly we would add that real estate agents make money out of turnover (ie the number of sales) much more so than price rises. When it comes to the price falls, that won’t affect us so much, but we are very concerned for the assets of the many Australians who own property.

      Like

  5. If Labour gets in and implement this policy, I fear it will crash the fraigle economy. We no longer have the demand of natural resources to sugar coat the poor decisions of the past few governments. People tend to forget whilst we may have lower property prices say a drop of 10% and this may be perceived to be more affordable, unemployment will increase as the economy is not stimulated and no growth. It might be ok to have lower property prices but if you are unemployed, how could you afford to buy a property? What is more unaffordable? If you work hard and be smart about your finances, you should be rewarded.

    Like

  6. Victorian State Budget 2016/17 pages 147 /148 …. Land tax will rise by 28.3% in 2017 ! Our governments have no limit to how much they will financially rape the property owner. And they expect people to ‘carry’ this kind of increase in expense with no NG !! ….and then have their CG taxed ( much more heavily) when they do sell. ….no way… numbers just don’t add up ….residential property will cease as an investment class.

    https://s3-ap-southeast-2.amazonaws.com/budgetfiles201617.budget.vic.gov.au/2016-17+State+Budget+-+BP5+Statement+of+Finances.pdf

    Like

  7. If NG is removed I understand any losses can be applied against any capital gain upon sale, is that true? Also, if the CGT concession is removed entirely, will the capital cost base return to being indexed wrt inflation as it was before the CGT concession was introduced? At the time I understood the concession was to encourage longer term investment in housing, shares etc and so removed some volatility caused by short term investors. The concession was to also replace the indexation, so will that come back?

    Like

    1. Hi Neil…it really depends on how the election pans out. If Labor was in power for example, they have indicated they would allow losses to be carried forward and offset against CG, however they haven’t yet gone into the detail you’ve queried re indexation. If the Greens were involved, there’s less detail around that, but they have indicated they want to remove all neg gearing and CGT concessions, even on existing investments. We will hopefully know more soon

      Like

      1. Hi Neil,
        IMO if Capital Gains are to be fully taxed ( i.e. zero discount ) that would be a real ‘nail in the coffin’ of residential property as an asset class. Capital gains are ‘earned’ over many years, but taxed as if all the income is earned in one year. Hence some kind of ‘adjustment’ is fair. It used to be by indexing for inflation over the ownership period …then it was simplified. Yields are already very low. Costs like Land Tax , rates and insurance are increasing all the time faster than CPI. If NG is axed and CG is fully taxed there goes the game.

        Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s