Why negative gearing is bad

Negative gearing has received its fair share of heat as Australians look for a way out of the current housing affordability crisis.

But is negative gearing one of the major causes of the current supercharged housing market? Or should we be looking elsewhere?

We asked some financial and property experts to bust a few of the myths.

Negative gearing = unaffordable housing

Competition at auctions isn’t driven solely by investors looking to negatively gear. Picture: Getty

Financial advisor Bruce Brammall says it would be folly to pin the blame for a lack of housing affordability solely on negative gearing, given the concept has been used for decades – both in peak times and low periods.

“It’s not something that’s only happened in the last five years or so and now it’s why we have this current ‘affordability crisis’,” Brammall says.

“It’s been around forever, it’s not some new phenomenon that’s been added into the mix and therefore is causing this.”

Negative gearing is an investment strategy

While negative gearing does cut down the overall cost of owning an investment property, the property is still a loss-making asset in the short to medium term.

Brammall says no one dives into a property investment with the sole intention of having it negatively geared.

“Negative gearing is a tax benefit, it’s not an investment strategy. Negative gearing means that you’re losing money on a cash basis on a property. Nobody’s aiming to do that.

“It’s something that helps investors in the first five to 10 years of owning your property, and after that they’ll hopefully be earning a positive income, and then they’ll be paying tax on that income,” he says.

Abolishing negative gearing is the answer

AllianceCorp Property Experts managing director Jason Paetow says that ending negative gearing would likely see house prices cool off in some areas, particularly the inner-city, but it could also have other potential effects that would impact housing affordability.

Paetow says landlords would look to cover the shortfall from losing their tax breaks by bumping up rents, which would then impact renters’ ability to save for a house deposit.

“Established properties would become less attractive to investors as the holding costs on these properties could increase by several hundred dollars each week, which most investors won’t stomach.

“We must remember that housing affordability is not just about the ability to purchase a home– we can’t forget the tenancy market. There was a period during the 1980s where negative gearing benefits were abolished and during that time we saw rent rates increase and the waitlist for public housing skyrocketed. It could be a case of robbing Peter to pay Paul,” Paetow says.

Most buyers have got no chance

Struggling first-home buyers aren’t doomed, says Brammall. Picture: Kate Griffin

While many Australians wonder if they’ll ever see the back of the current housing boom and will ever be able to buy their own home, Brammall insists it’s only a matter of time before the market turns.

“Every time this happens – every three, four, five years or so – we have a run-up in prices and all of a sudden they’ll start calling it an unaffordability crisis and the like. But the fact is that property is cyclical and we’ve gone for a bit of a run recently,” he says.

“It happened in 2002-2003, then it fell for a couple of years, then it started happening again in 2007 and then it fell for a little bit, and then it started rising and it probably happened again in 2011.”

“We just get to a point in every property cycle where the concern becomes fever pitch, and it’s usually at about that time that the market hits a peak and starts coming off again. To blame it on negative gearing, I don’t think, makes a lot of sense,” he says.

Negative gearing helps major investors dominate the market

Fears that the use of negative gearing is dominated by investors who own numerous properties are unfounded, Brammall adds.

In fact, only a small proportion of investors own more than one investment property, with most owning a single investment.