What the fight against negative gearing is missing

There’s an easy way to save the government $1.7 billion annually.

Just slug greedy, rich property investors by reforming negative gearing and capital gains tax and it won’t increase rents for tenants or hurt mum and dad investors a bit. Really?

That’s the recommendation in a recent well-publicised report from the Australian Housing and Urban Research Institute (AHURI), a left-of-centre organisation that I believe doesn’t really understand how property investors think.

The AHURI suggests reforming negative gearing and changing capital gains tax could make the Australian housing market more “sustainable and equitable”.

I see it as just another attempt to stimulate debate on negative gearing and encourage the government to tax entrepreneurial Australians

They seem concerned that negative gearing allows investors to claim a tax deduction when their rental income is less than their expenses, saying this cost the federal government $3.04 billion in 2013-14.

The AHURI report explains that negative gearing and the capital gains tax discount incentivises housing investors to take on debt and they believe this potentially makes the housing market less stable and crowds out first home buyers.

What have they missed? 

In my mind, any reduction in negative gearing benefits would significantly reduce rental investment in both new and existing properties and would worsen rental affordability through a reduced supply of investment housing.

A reduced rental supply means lower rental vacancies and increased rents which is the opposite effect of what the AHURI is looking for.

Remember that 30% of Australians live in rental accommodation, of which the vast majority is provided by property investors.

I would argue that these property investors provide an essential service to millions of Australians who chose to, or have to, rent their accommodation and as such these investors should be treated like all other business people.

More than that, in our modern society we pay taxes and expect the government to provide us with certain essential services. These include hospitals, roads, schools, jails, public transport, aged care and public housing.

In Australia the government often shares the burden of providing these services with private enterprises that can often deliver them more efficiently and cheaper.

When the government can’t supply enough public hospital beds, private run hospitals step up to the mark and not only receive tax deductions for their business loans, but also allowances to subsidise them. So do aged care providers, schools and public transport providers who provide services in tandem with the government.

Our government also provides public housing, but not enough for all those who can’t afford to buy their own property.

While government social and public housing programs are helpful, it is only the private rental market that can deliver rental accommodation at the rate and scale that is required at present.

Property investors save a deposit, buy a property, commit to a loan for 25 or 30 years and provide accommodation for others in our community. In return we expect to get a reasonable return on our investment risk, just like other business people do.

We know that the rent won’t always cover our expenses but accept that certain tax benefits, plus the long term capital growth, will make up for this.

Sometimes it does, and sometimes it doesn’t.

Property investment is a real and effective method for bolstering the savings of middle Australia, while at the same time providing accommodation for those who the government can’t or won’t help and should remain as is.

What if the government removes negative gearing?

Before the last federal election, Labor leader Bill Shorten pledged to reform negative gearing if he was elected into government, scaring the public with lines like: “The great Australian dream of owning your own house could be the great Australian nightmare of being locked out of the housing market”.

And he is still pursuing the same policy lines today.

What he doesn’t seem to understand is that while negative gearing compounds returns in the good times, it multiplies losses when property prices are flat or falling.

I know as many people who have lost money in property investment as those who have made money. Much like most other small business people.

If the government takes away my tax concessions, I would have to consider my investment options. To ensure I get a decent return I’d put up my rents if I could, or maybe I’d invest elsewhere to get the best bang for my bucks.

If others did the same, the result would be an increase to rents and tenants being forced to fight over the few rental properties left. Or the government would have to invest its own money and buy or build properties and enjoy the pleasures of being a landlord.

Of course, the government already provides some public housing, but not enough, leaving the task of providing rental accommodation not only in our capital cities, but also in regional Australia and in the remote parts of Australia, to private investors.

Property investors have chosen to run their own little property investment businesses.

If I set up a dog wash business or a restaurant, I’d be able to claim a tax deduction for legitimate business expenses including loans to set up our business or purchasing business equipment. Why should it be different for property investors who take on a business risk?

How does negative gearing affect property values?

To say removing negative gearing will “stabilise our property markets” is a smoke screen.

Just look what happened to property prices overseas in countries like the US and parts of Europe where negative gearing isn’t allowed. Over the last decade they experienced a boom and a subsequent bust of much greater magnitude that we have gone through.

What lobbyists may not recognise is that borrowing in order to undertake productive investment actually helps economic growth because value is being added. After all, there will always be some investments that have lower returns than the interest expenses on the loans taken on to acquire them.

This economic reality has nothing whatsoever to do with tax.

For example, a typical property investment may start off with a large loan and lowish rent. As time goes by the loan is paid down and the rent increases.

Overall the investor makes a profit and the tax office gets its share of this.

Actually, there is not as much loss of revenue to the authorities as some critics believe because for every dollar of interest claimed as a tax deduction by a borrower there is a corresponding dollar of interest assessable to a lender.

But that’s not all …

If the government stops the availability of negative gearing benefits the danger arises that there may be unintended consequences. It is possible that even following a positive cash flow strategy you end up negatively geared and suffer.

What if:

• Interest rates rise after you buy your investment?
• Rents fall, or your property becomes vacant for a period of time? or
• You have to undertake a major repair of your investment property.

To deny the person making a commercial loss like this a tax deduction would be to inflict a double whammy on them and increase their hardship unduly.

The bottom line

Any reduction in negative gearing benefits would significantly reduce rental investment in both new and existing properties and would worsen rental affordability through a reduced supply of investment housing.

A reduced rental supply means lower rental vacancies and increased rents.

Property investment is a real and effective method for bolstering the savings of middle Australia, at the same time providing accommodation for those who the government can’t or won’t help, and should remain as is.

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