Negative Gearing Affects Renters

If negative gearing is abolished on all but newly-built dwellings, renters will be hit hard.

If landlords lose the ability to write off losses on investment properties, and current rents don’t cover the mortgages and other costs they incur, they will have to increase them until they do.

In Sydney and Melbourne, where much of the investor activity has been focused, the rise in rents in the past twelve months has been 2.3% and 1.4% respectively: the lowest annual increase since June 2006.

Should current taxation arrangements for property be changed, as many are suggesting, rents can be expected to rise substantially.

Because the incentive to buy property to rent out will be severely curtailed, fewer people will buy residential investments, meaning the supply of rental stock will contract: fewer houses means higher rents charged to those who don’t own their own homes.

Australia is already facing uncertain times today, even without the threat of a massive hit to its economy from a policy like axing negative gearing: if a recession comes and there are fewer rental properties on the market, rents will be pushed even higher as those who sell their houses after they lose their jobs compete with existing renters for homes.

As median rents are already far higher in 2016 than they were 30 years ago, steep rises in rents could push an additional 70,000 households into rental accommodation stress – and there’s no guarantee that many of those won’t end up living on the street.

For those who can afford to stay in their rented homes but hope one day to buy houses of their own, the additional costs might just put the dream of home ownership beyond their reach for good.

Some people believe that abolishing negative gearing will make it easier for many young Australians to buy their first home but the reality is that it will do the exact opposite.

Even if property prices fall – which they almost certainly will – and that’s unforgivable.

It just doesn’t make sense.

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.

30 thoughts

  1. The rental market operates with it’s own supply and demand dynamics, investors won’t simply be able to increase rents. It is likely that price to rent ratios see a gradual shift, this will probably be a result of both price falls and rent increases over time, not solely from “steep rises in rents”.

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    1. Hi bullion baron, it’s obviously impossibly for anyone to accurately predict how much rent will rise by, and over how long. But when the supply of rental properties drops, which it will if this policy takes effect, rents will rise – this is as you say, the basic tenement of supply and demand.

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      1. ngaffectsyou, how do you suppose the supply of rental properties will drop? A sale of established property (the type that most investors bid up) must be to either an investor (increasing rental supply) or to a home owner (effectively reducing the pool of renters)…

        Or what could happen is investors pay lower prices, resulting in a higher yield or pay a bigger deposit resulting in a cash flow neutral or positive property to begin with. In times past property was considered a cash flow proposition rather than a loss making activity while you wait for capital gains to exceed the mounting losses…

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    2. Hi Bullion Baron
      You are certainly correct in the supply and demand situation on rent prices.
      My experience in 85 as an agent, was a sharp drop in vacancy rate to zero and rent rises within 6months, and there was not a mass exodus of landlords, as the market was slow and prices sluggish, just no new investors entering the market with new rental supply. The current market may encourage more sell out at the top of the market conditions, so we may lose more rent stock this time around. Some would be home buyers so those tenants would have to move, creating higher demand for current rentals.
      As the opposition policy requires all new investors seeking gearing, to buy new property. In my suburb, investors can buy an existing cottage at 500k and rent at $450 per week. A new house in the same suburb average 900k. Any new investor entering the market, seeking gearing benefit, has to firstly qualify for a 900k loan, under the new responsible lending guidelines. This will severely cut down the current level of investment and new rental supply. Secondly the rents for the new house would have to rise to at least $800per per week. So in time, we have less investors, with fewer new rentals coming online, again at much higher rents, causing increased competition for the affordable existing rental stock. This is acknowledged in economic modelling. Rents will rise, lets hope not as sharp as the 85 experiment in removal, with government backflip in just 2 short years after pressure, not just from Liberals, but from tenant advocacy groups due to hardship. yes, its supply and demand. One third of the population rent, always have , always will, not everyone wants, or can qualify for a mortgage. So with less, more expensive rents available ,how can rents not rise if supply and demand fundamentals apply ?

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  2. I agree with mclachlan. Renters have to be the big losers in this change as they were in 85. Just look at the McKell Report (in USEFUL LINKS) see FIG 4 Page 15 and you’ll see investors already don’t /can’t/ won’t buy new property for all the reason mclachlan points out. And OK .. say an investor does buy a new property. Who does he sell it to ? It’s then second hand with no NG benefits. Increased risk ! I reckon existing investors will benefit from higher rents, but new investors will simply choose NOT to invest in property. Construction will slow and overtime the rental pool will decrease. Rents have to rise. It only takes a few percent to change a market from a supply /demand point of view. With 30% of the households choosing to rent, this is a ‘large ball of wax’ that we’re tampering with.

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    1. That’s exactly what I (a struggling first home buyer) wants. We want people to stop investing in property so first home buyers have a better chance at getting into the market and owning their own home. How is it fair that a perk that benefits the already wealthy, is fair anyhow? And don’t tell me that being able to afford an investment property, doesn’t make you wealthy.

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      1. Hi Lucas, falling property prices wont help you if the economy crashes – you will be paying higher rent while saving for a deposit and may not have a job to service a mortgage. On top of that, banks will make it even harder to borrow money so it may prove just as difficult as it is now for you. We are lobbying on affordability for first home buyers on other fronts – this issue needs to be addressed in a way that will work for everyone and all the evidence says it won’t.

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  3. My two bobs worth. Negative gearing is basically government subsidised rental housing. Small investors like myself invest in residential real estate to reduce our tax burden, this lowers rents and both I and the tenant win. Getting rid of negative gearing gets rid of the tax breaks and the cheap rents.

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  4. I am a bookkeeper/ financial manager for small business and my day to day job is to help struggling small businesses stay afloat. It does not take a professor of economics to see that the P@L under labour would be scary to say the least. They even justify spending the $42B or so you costed to fund company tax cuts over the next 10 years, without taking into account expected revenue and growth from the corporate tax cuts.
    I am sick and tired of hearing that home ownership for young people is the hardest it has ever been.
    My husband and I bought our first home in the late 1980’s, a weatherboard cottage in Carlingford for $200k.
    Within a few months our interest payment rose to 17.5 and our home decreased in value so our mortgage was in in effect higher than the value of our home.
    At the time my take home pay as a full time worker was approx. $350 per week.
    The interest on $200K @ 17.5% was $673 per week.

    2016 – House value approx. $900k to $1m
    Interest on $1m @ 4.5% = $865 per week
    Comparable take home pay 2016 approx. $820 per week

    You may wonder how we found it possible it the late 1980’s
    We purchased the home as an investment property, sharing with another couple in similar circumstances and ……we negatively geared.
    Sure there are excesses to negative gearing and one way or another they should be addressed but before we make sweeping changes, pleases give a thought to the first home buyers who have recently purchased. It would not take much of a decrease in value of their home (which may happen soon anyway due to many unit blocks nearing completion creating a possible over supply in some areas) to put them in a position where their mortgage becomes higher than the value of their home.
    We would then have a rerun of the early 1990’s….the recession we had to have resulting in foreclosures and unemployment.
    There have always been fluctuations in affordability of homes …. Especially in capital cities.
    Many factors contribute, recently, historically low interest rates, lack of supply, and foreign buyers.
    Sydney is not a great place to invest for rental return, the yield is woeful. Many investors are purchasing in country areas. Changes to negative gearing could therefore affect supply of affordable rental properties in regional Australia.

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  5. If negative gearing is abolished, renters could afford to buy their own house, greedy landlord can be bankrupt and sell their property for $20 🙂 1+1=3

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  6. I read somewhere that a high number of negatively geared residential properties are currently left vacant and that the owners are not interested in entering the rental market. If negative gearing on existing dwellings is abolished or changed, would not these currently unavailable properties become available to renters? Also, if there are so many unoccupied potential rental properties available, how would increased rents be the result?

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    1. Hi Matt, it’s usually foreign investors who “land bank” and prefer to leave their properties vacant – and they don’t use negative gearing anyway. To negative gear, you do have to show an income, ie the property has to be rented out. So the simple answer to your question unfortunately is no. Rents will increase because supply will fall while demand won’t – it’s basic economics.

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  7. I have recently bought two investment properties. I rent out both properties at under market rates as they were long term tenants that were in the properties when I bought them. I was tempted to increase the rent but was informed by the real estate agent that the one tenant , being elderly, could not afford a higher rent and gave indication that he would need to move on in the event of increased rent. I took the humane approach, and left rent unchanged at $50 under market on $320 per week, should NG fall away I will simply need to push up the rent to 370 per week. As I invested my savings into these properties I am not willing to sell them as I would simply lose all my savings to agent fees and reduced property value under new policy. There are new properties being build in the area but they would demand higher rent. So in my case the tenant will loose.

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  8. Well lets look at negative gearing in a different view of how many properties that sit empty ? That figure has been estimated at upto 90000 properties in Sydeny and 80000 properties in Melbourne are vacant; let alone the number of commercial properties that you can drive down any shop strip and see vacant.
    Here’s an idea that could suit both sides of the equation, investor and those looking to rent.
    If a property is vacant for greater than say 4 months without then being tenanted for a minimum period of say 12 months then rates on the property are tripled and over time made multiples higher with all excess above normalised rates to be paid by the investor and enforced by the tax department rather than local council. As a fine by the Tax department would also stop the investor claiming the additonal expense as a deduction.

    i would suggest a scale 4 – 12 months 3x rate adjustment penalty
    12-24 months 5 x rate adjustment penalty
    24+ months 8x rate adjustment penalty

    As an example a property has rates of $1500 normally, Property is vacant for 12 months then the investor would pay their normal rates to council and the tax department would impose an rate adjustment penalty of ($1500 x 3) x 8/12 = $3000 tax penalty.

    This would encourage the investor to release the property pool into the rental market and actually seek a tenant without sitting on the property and claiming negative gearing benefits because they’re not really seeking a tenant by asking for an unrealistic price or not even seeking a tenant.

    On the commercial side of the ledger this would more than likely see the removal of most of the excess stock that is present and continuing to rise across the nation. Some will say that the landlord will seek to pass these costs onto the tenant but with supply and demand economics in play , they will have a very hard time at doing so because a tenant will simply not pay that asking rate.

    The way it could be monitored is the analysis of utility use at the property as was utilised in the study that predicted the number of unused properties in the opening statement. The supply of dcuments showing either rental agreement or utility usage verified by Utility supplier onus would lie with the owner rather the tax department. If satisfactory evidence could not be supplied then the fine would be issued and payable.
    The end benefit of this is that most of the actual available rental property would actually be in use and available. Those that refuse to rent their properties for whatever reason either pay the extra costs or sell the property because the cost is uneconomic. The need to build more and more property stock is also lowered and leaves open space open a little longer.

    I understand that this idea will be more than likely be attacked by most who have negative geared properties but i also ask why would it ? This plan would only affect those who hold property stock without actually wanting to make them available. And before people with holiday homes jump up and down i believe that could be also addressed in a carefully drafted policy to protect them.

    It also sits well within the idea of what negative gearing was aimed at too. Invest in property to provide additional stock for rent and we’ll allow a benefit. I am a strong advocate of investing and want to ensure that my tax dollars are spent wisely rather than just given away without any benefit to the community as a whole and sorry but the format of the current negative gearing does just that.

    The time for a radical change is thinking is now and i challenge anyone who argues against this need for change to come up with a plan that will be effective and realise a benefit for all Australians and not just the minority.

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    1. HI Anth, thanks for posting. Investors who leave their properties empty don’t actually qualify for negative gearing, so your idea isn’t actually relevant to this debate. Generally, it’s overseas investors who tend to “land bank” (leave investment properties empty) and they can’t use negative gearing anyway, so this is not a problem that can be solved by any change to negative gearing arrangements.

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  9. 10% rent increase claim makes no economic sense.

    Rents are never set according to cost plus principle. If that were true, rents would go down every time interest rates went down – something that we never observe.

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    1. Hi TD – no-one can accurately predict the number, hence why we’ve said “up to”. But we can say rents, like any other good or service, is set according to the balance between demand and supply. Lower return means fewer investors and hence fewer properties. Fewer properties equals higher rents. It’s clear and to give you some comfort. supported by the recent financial modelling by independent researchers.

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  10. To be able to negative gear as a landlord, following conditions must be met:
    1) Sufficient Australian income to get finance and benefit from the tax incentives.
    2) There is a rental income.
    3) There are interest and other expenses allowed by ATO.

    In general, new properties are preferred by investers as these provides the maximum benefits.

    Remember, the incentives are provided so that the private market can make up the shortfalls in housing supply for those unable to buy. If the incentives are scrapped, the government will still have to supply enough houses for renters at the expense of all taxpayers.

    Removal of negative gearing will sure decrease the appetite of investors to choose houses as their choice of investment, therefore decreasing supply of rental properties. Now the question is: What will happen to rent if supply of houses decrease, assuming demand is unchanged? Anyone who understand basic economics should be able to answer.

    The effect of changing negative gearing is not limited to decrease investment in houses and increase of rent. The flow-on effect will affect construction workers, realty employment, and all the peripheral activities surrounding housing supply.

    It is useful to be able to analyse the whole picture in problem solving. Politicians are very good at changing people’s focus on a paticular segment of an issue to benefit from it.

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  11. Scarry the way you put it.

    Negative gearing is proposed grandfathered for current rentals and allowed for new construction after July 2017. Not mentioned by you. So mums and dads and everyone else can still negative gear if they choose. That’s very fair.
    What does a 30 year old house that has changed investors 4 times do for the economy except help the investors, sure there is a consistent rental property availabe but the property is locked up and causes the property bubble.
    Now consider a new construction how many people are employed on site and in the office of the builder or in govt offices in council or providing roads utilities etc to build this property. Taxes from all that can offset the negative gearing to some extent.
    Surely this is better for the economy as it helps it to grow. The current model is stagnation of the economy to the benefit of a few.

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    1. Hi Wayno, we have to disagree with you there – if you read through our website you’ll see we have talked in detail about the grandfathering arrangement (there’s a whole section as to why existing investor interests are not protected despite this clause) and the misinformation over new construction. If there was to be a surge in construction, you’d find developers thrilled with the policy – they’re not, they’re fighting it just as hard as we are, because they believe the same thing we do. That it will cause massive negative effects on our economy and won’t actually result in more construction. Please, at the least, take the time to read through the SQM Research report on the links page and you’ll understand more of what we’re talking about to be true.

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      1. I was replying to this one blurb that was put out and authorised by someone associated with your website.

        QUOTE
        If negative gearing is abolished on all but newly-built dwellings, renters will be hit hard.

        If landlords lose the ability to write off losses on investment properties, and current rents don’t cover the mortgages and other costs they incur, they will have to increase them until they do.
        END QUOTE

        This was the scare I was referring to and it is just not the current proposed policy of the ALP.

        I DO NOT have to go through your whole website to discuss your position. I just need to refer to this focused biased blurb and discuss it alone after all they are the words and focus you wanted out in the public.

        If on the other hand You had made reference to other pertinent facts that’s different.

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        1. HI Wayno, obviously it’s difficult to distill such a complex topic in a few words, which is the content you’re referring to – everything we’ve put out encourages people to come to the website to learn more. We stand behind this statement though – it’s absolutely true and since we put it out has been backed up by not one but two independent research houses – the only two who’ve modeled the actual Labor policy.

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    1. Hi Tony, fact is, the labor party’s policy actually benefits the wealthy. If you look closely, you’ll see the same losses people can claim now against wages (which is what negative gearing is) can still be claimed under labor, just only against other investment income – ie shares, dividends bank deposit interest ect. Who do you think has these things in their portfolio? Think carefully before you vote, things are not always as they seem.

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