Leanne Pilkington

Why Negative Gearing Changes are a Bad Idea

Leanne Pilkington expresses her concerns towards Labor’s proposed changes to negative gearing and explains what the reforms will really mean for investors.

The most frustrating thing I have learned in my almost 2 years as REINSW President is that the government often makes decisions based on a headline and doesn’t give enough thought to the unintended consequences resulting from their decisions. I can site numerous instances over the last couple of years but the main concern at hand is the potential changes to negative gearing.

Given I represent real estate agents, I do appreciate that some will be cynical of my motives. Bill Shorten himself recently accused agents of only campaigning against negative gearing because we want to keep prices high, so our commissions are higher. It’s really not about that. It’s about the fact that we know the impact of negative gearing, and we also know that the people who use it as a strategy don’t typically own multiple properties.

Firstly, negative gearing is not a property investment strategy or benefit. It is a legitimate deduction for investment – any investment, shares, business ventures and property. Why should property be singled out?

ATO data also debunks the myth that negative gearing is for wealthy investors. Almost 80 per cent of taxpayers claiming a tax deduction for property earn less than $80k p.a. Wealthy? I don’t think so!

The data also shows that the majority of investors only own one property. Less than 4 per cent of investors have more than 3 properties. Because of that, the concept of limiting the number of properties you can claim would have limited impact.

CPI figures show that the increased investment in housing in recent years has kept growth in rents lower than they have been historically – meaning the current taxation arrangement is in fact a benefit to tenants. For almost the last three years, the annual change in average rents has been less than 1 per cent.

Even the Henry Review in 2010 noted that tax advantages can operate as a subsidy to renters by placing downward pressure on rents. The review also cautioned that any changes to negative gearing should only happen after reforms to housing supply. This was a review commissioned by the Labor government.

The concept of retaining negative gearing for new property is also flawed. Investors will know that when they want to sell the property, they will only be able to sell to owner occupiers or investors not needing to utilise negative gearing. This means their buyer target market becomes smaller.

Super is unlikely to be enough to support us in retirement, particularly the boomers and Gen Xers who have had limited time with compulsory super. Besides, you can’t trust the government not to tinker with our super, right? The Labor policy around franking credits is a perfect example of that. So we do what we think is the responsible thing. We buy a property that we will pay off over time, and hopefully, once we retire, it will allow us to be less reliant on pensions.

So negative gearing will see rents go up and yes, prices will probably come down. Let’s face it, in Sydney prices have already dropped between 10-20 per cent depending on where you are. Already we are starting to see people that bought in 2015/16 experience negative equity. What a devastating result for so many people – often people in the Labor heartlands.

The Master Builders Australia modelling indicates that up to 42,000 less dwellings will be built across the country, which will mean up to 32,000 less full time jobs, up to $11.8 billion less building activity and up to $210 million less renovation building activity. This is the complete opposite of Labor’s claim that their policy will boost housing supply.

At the same time, Labor proposes removing the negative gearing benefits from mum-and-dad investors. They are slashing the tax payable by institutional investors from 30 per cent to 15 per cent to encourage the big end of town to invest in build-to-rent. They recognise that removing negative gearing will reduce rental supply and drive up rents, so they are encouraging the big end of town to take up the slack. How can that make sense?

Bill, wake up before you decimate the housing market, force prices down and rents up! It will be too late to change your mind once you plunge the Australian economy into a recession.