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EXPLAINED: Negative Gearing

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EXPLAINED: Negative Gearing

The ALP hopes that removing negative gearing will assist first-home buyers.

The ALP hopes that removing negative gearing will assist first-home buyers.

Image Provided by Queensland State Archives

The ALP hopes that removing negative gearing will assist first-home buyers.

Image Provided by Queensland State Archives

Image Provided by Queensland State Archives

The ALP hopes that removing negative gearing will assist first-home buyers.

Mason Smith, Reporter

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If you’re like me, you’ve most likely sat down in front of the TV and heard the term ‘negative gearing’ being thrown around recently.

With the federal election scheduled for May 18, the talk about this hot-button issue is set to increase dramatically, with the Labor party’s announcement that, if elected, they would get rid of negative gearing on existing housing.

The Coalition Government, led by Prime Minister Scott Morrison, believes that Labor’s plans would be detrimental to Australia’s housing market.

In order to make an informed decision about which side you’re on in this great debate, I thought it would be wise to explain some more about what negative gearing is and how Labor’s proposed changes may affect you.

 WHAT IS NEGATIVE GEARING?

Negative gearing occurs when investors take out a mortgage on an ‘investment property’ (meaning not the house they are living in), and the income generated by the property (e.g. rent) is less than the cost of owning and managing it (which can include the interest on the loan they took out to buy it).

The loss associated with this investment property can then be deducted from the investor’s taxable income, meaning the investor pays less tax, while also making progress towards owning the property.

WHY SHOULD I CARE?

Currently, Australia has some of the most generous property tax concessions in the world. These include negative gearing and discounts on Capital Gains Tax – which is the tax on the money made when an investor sells a property for more than they bought if for.

These concessions make it easier for investors to buy multiple investment properties, and when there are lots of buyers in the market the price of properties goes up, leaving prospective first-home buyers unable to break into it.

LABOR’S PLAN

If elected on May 18, the Shorten Government has promised to:

  • Limit negative gearing strictly to new housing from 1 January 2020 (so all investments made prior to this date will not be affected). This is expected to tempt investors to focus on new housing, which will keep builders employed.
  • Halve the capital gains tax discount for all assets purchased after 1 January 2020 (reducing the discount from 50% to 25%).

The ALP expects this plan will help boost both housing supply and jobs, as well as make it easier for first-home buyers to enter the housing market.

By making existing housing less attractive to investors, there will be fewer buyers bidding for these properties and the price is therefore expected to fall, hopefully into the range affordable by young people. But obviously this won’t please the investors who currently own them and hope to make a profit by selling them.

The opposition also hopes that the removal of negative gearing on new properties will complement their 10‐year plan to support the construction of 250,000 new affordable homes.

Speaking in 2016, Opposition Leader Bill Shorten said the plan will “put the great Australian dream back within the reach of the working and middle-class Australians who have been priced out of the housing market for too long.”

LIBERAL’S REACTION

According a post on their website, the Liberal Party believes that Labor’s plan is flawed and will “accelerate the cyclical weaknesses in housing prices by further limiting housing demand.”

They believe that limiting negative gearing would “punish” the 1.3 million Australians who have negatively geared properties, as well as those looking to sell their properties, as they would be forced to sell those properties in a buyer’s market.

PROS AND CONS

FIRST HOME BUYERS

If nothing is done to reform negative gearing, economists including Saul Eslake believe that first-home buyers in Australia will be in for a tough time.

Eslake has stated that “scaling back negative gearing or capital gains tax concessions for property investment is essential to improving housing affordability for first home buyers.”

RENTERS

You may think that removing negative gearing means rent prices would rise if negative gearing is reformed.

However, Eslake argues that, much like when negative gearing was removed in the 1980s (albeit briefly), the price of rent will not increase dramatically.

Detailing the impact of its previous hiatus, Eslake confirmed that although rental prices increased in Perth and Sydney – which he puts down to the low vacancy rates in those cities at the time – they dropped everywhere else.

While negative gearing is great for those who already have the luxury of purchasing not one, but two (or more) properties, first-home buyers are faced with the prospect of living in a renter’s world if nothing is done to change the system.

With economists predicting little change to rent prices and forecasting greater housing affordability, make sure your voice is heard and you vote wisely about negative gearing.

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About the Writer
Mason Smith, Reporter

Mason is a keen cricketer and Sudoku enthusiast who is passionate about sport, music and the local community. When he's not on the cricket pitch, he's...

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EXPLAINED: Negative Gearing