Negative Gearing critical for new housing construction

Negative gearing has been in the news lately, especially with the federal elections coming up in just a few weeks’ time. However, a recent report has highlighted the importance of negative gearing and why this should not be changed.

According to the latest CoreLogic analysis of the Australian residential market, more than 2 million Australians own an investment property worth a total of $1.3 trillion. However, what you might not realise is that these investors are driving the supply of low income housing – with over 53% of all investment properties worth less than $500,000.

Ken Morrison, Chief Executive of the Property Council of Australia said, “Rents across Australia have fallen by 0.2 per cent over the past 12 months – benefiting the millions of Australians who rent”.

He added, “The Opposition has proposed radical changes to the treatment of investment properties that will raise an additional $32 billion. Much of this will be passed on to tenants and will limit new investment.

“Investors are already paying stamp duty, council rates, land tax and capital gains tax. According to the ABS, Australians are already paying over $45 billion in property taxes.  In NSW, for example, stamp duty alone adds $35,000 onto the price of the average property.”

When looking at the CoreLogic data further, it also shows that the majority of Australians who own an investment property, own just one property – with an average of 1.28 rental properties per investor.

According to Mr Morrison, the report shows that negative gearing is an essential tool for young people as well as middle income earners to help secure their financial future. Two in three investment property owners who earn taxable incomes of $60,000 to $80,000 claim a loss against their property. It is middle income earners that are therefore most likely to claim a negative gearing loss.

He added, “While 50 – 64 year olds are more likely to own an investment property, it is younger people who are more likely to negatively gear.”

As well as helping middle income earners save in tax, negative gearing is also critical for new housing construction. Approximately 40 per cent of mortgage demand for new housing is from property investors. Investors play an important role of creating additional supply, which in turn helps to ease the pressure on housing affordability. With less supply, combined with an increasing demand from population growth, property prices will continue to go drastically up and up.

If investors turn away from investing in property, then numerous jobs are also at risk including tradies and subbies and could add pressure on the economy with rising unemployment.

Currently the NSW, Queensland and Victorian Governments are looking to introduce new surcharge and tax increases for foreign investors purchasing property. The Victorian government is set to increase its stamp duty surcharge from 3 per cent to 7 per cent in July as well as hiking up the land tax surcharge for absentee owners from 0.5 per cent to 1.5 per cent. This could be a big mistake and these excessive taxes and surcharges could put off foreign investment altogether.

The Labor government, led by Bill Shorten propose changes to both negative gearing and capital gains tax from July 2017. However, only new dwellings will still be able to benefit from negative gearing. For those buying new property off the plan, then these changes will not affect you. It is only investors of established property that will lose out if Labor come to power.

If major changes to negative gearing do occur, then it could mean a reduced new housing supply and increased pressure on rents.

So, why shouldn’t the government change negative gearing? Here are five good reasons:

  1. Increasing demand through growing population – As the population of Australia continues to grow, there is the increasing need to provide housing to cater for this demand and negative gearing helps to fuel this demand.
  2. Fall in property prices – If changes to negative gearing do occur then investors will be less motivated to invest in property. This could create a fall in property prices with a lower demand and increased supply.
  3. Retirement affected – One of the major reasons that people invest in property is to help fund a comfortable retirement. With tax benefits reduced then property investment becomes less attractive and more Australians will be reliant on the Government pensions which adds pressure on future budgets.
  4. Economy – Without negative gearing, property owners will have to make up the shortfall of cash themselves to cover the mortgage repayments. No one really wants to be forking out cash from their own pockets, so there could be a slowdown in the number of properties bought. This could lead to a rise in unemployment within the property industry, whilst governments will receive less stamp duty due to less properties being bought.
  5. Middle income earners lose out – Two thirds of those who claim negative gearing has a taxable income of less than $80,000. Although many Australians take advantage of negative gearing, it is only the higher income earners who garner the greatest benefits and not middle income earners.
If you would like to learn more about why negative gearing is critical for new housing construction and how this will affect you, it’s best to speak to one of our Property Consultants at iBuyNew. Our Property Consultants have years of experience within the property industry and can show you how much tax you could save by negatively gearing your property.

Call us today on 1300 123 463 to book a meeting today.
Published on 21st of June 2016 by Marty Stanowich
Marty Stanowich
Marty Stanowich

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