It has been established time and again that negative gearing plays an important role in the country's tax system, but its impact on the property sector has been a point of debate. As a result, the question of whether to push negative gearing changes has often been left unanswered.
So much has happened, especially in the property market, since the plan for reform was publicly brought up. Your Investment Property revisited this matter with REA Group's Chief Economist Nerida Conisbee to finally explain how a potential change can affect Australia's weakening market.
Kicking off the discussion, Conisbee pointed out that negative gearing changes were initially brought up to mitigate a problem within the housing market.
"The reason that there was most discussion about negative gearing last year was because the market was so red hot, and there was this belief that investors were driving the heat in the market and so [the discussion of negative gearing reform] was saying of something that you could quickly take the heat off the market if you pull back the demand that was coming through investors," she said.
However, times have changed. Conisbee acknowledged that the property market is cooling and that investors have pulled out of the market amid a lot of stress, including difficulty in accessing finance and the fact that interest rates are not going up.
Because this is the case, attempting to implement changes in negative gearing would likely result in negative outcomes. One of the biggest, according to Conisbee, would be a shortage in rental housing.
“Almost all of the rental housing in Australia is provided by momentary investors, so you have a problem in some cities where – without negative gearing – [they’re] not going to have enough investors. And, without enough investors, it will relate to shortage of rental housing and it will relate to increasing rents.”
This leads to the issue of unaffordability. The average renter in Australia is typically young, and most say their biggest single expense is housing.
It’s important to emphasize, though, negative gearing removal is not the only solution for affordable housing. Other programs, like the IOP, have attempted to address it.
"The problem is that when the IOP came out to be a policy, there was no backup plan to provide rental housing, particularly in some areas. The problems in places like Wagga [Wagga] – In Wagga, a lot of people rent, and the reason that they rent isn't necessarily because of low income. They're generally not planning to stay in Wagga for a long time, perhaps because they work in Defence or Education and may need to transfer elsewhere after a set time period,” Conisbee explained.
As you may already know, the Labor party has currently proposed a plan to remove negative gearing from existing properties, but not new ones.
In this situation, Conisbee again goes to Wagga Wagga to illustrate a potential repercussion. Because the city does not need more housing, not very many new homes are being built. As such, if an investor was interested in buying a property there, he or she would not be able to get any negative gearing concession, despite the fact that the city shows a need for more rental housing.
Even bigger cities can have a lot of problems in shortage of rental housing. For instance, Sydney is unaffordable for most would-be renters. “When you're on an average income, you cannot afford to rent [at] an average price,” Conisbee said.
Conisbee reiterated that in Australia, negative gearing is one of the foundational blocks for rental housing, and if it is altered, the nation would need to consider the potential consequences.
Conisbee said she had examined alternatives such as build to rent, which is the main way that a lot of overseas markets provide rental housing such as US and UK. But, there’s a lot of work needed to ensure its effectivity.
Nerida Conisbee will be presenting at the Sydney Property Buyer Expo on 7-9 September at the ICC. Tickets and more info at: www.propertybuyerexpo.com.au - enter YIPVIP for your FREE ticket!
