Negative gearing removal alone is no silver bullet to housing affordability

As someone who works analysing housing markets every day it is good to see that housing policy is back on the agenda especially considering that we currently don’t have a Federal Housing Minister.

The lack of a Housing Minister at the Federal level is intriguing when you look at some of the statistics relative to the housing market.

According to CoreLogic RP Data the total value of residential property at the end of May 2015 was $5.9 trillion.

To put this in perspective, gross domestic product (GDP) for Australian was recorded at $1.587 trillion over the 12 months to March 2015.

The Australian Bureau of Statistics’ housing finance data showed that as at April 2015 there was $1.392 trillion in outstanding mortgage debt to Australian banks, building societies and credit unions. negative

Meanwhile, the share market garners plenty of attention, as at April 2015 the market capitalisation of listed domestic equities was $1.693 trillion.

Based on this data it would be fair to say that housing is Australia’s largest and arguably most important asset class.

Even the value of Superannuation clocks in at a much lower $2 trillion, nearly three times smaller than the overall value of housing.

Given the importance of shelter and the runaway growth currently being experienced in Sydney and, to a lesser degree, Melbourne home values, it is no wonder that housing is becoming a politically very sensitive topic.

In particular negative gearing has become a topic of plenty of debate over the past few weeks.

While the current Government have ruled out changes to negative gearing, both the Labor and Green parties are highlighting potential changes to their policies.

Negative gearing allows owners of investment properties to offset their expenses (losses) against their taxable income and as a result it can reduce their taxable income.

While this most certainly makes investment attractive the suggestion that negative gearing alone drives up the cost of housing is somewhat debatable.

Chart 1

The above chart shows the total value of net rent claimed by individual taxpayers by financial year up to 2012-13.

Net rent is gross rent minus applicable deductions such as rental interest, depreciation and costs such as capital works. 

What you will immediately note is that prior to 1999-00 the net profit or loss made from rent was fairly negligible.

The Federal Government made changes to capital gains tax in September 1999 and this has seemingly helped to make negative gearing much more attractive than it was previously.

In September 1999 the Federal Government made changes which offered investors a 50% discount on capital gains tax when they sold their property if they held their investment for at least 12 months.

As the first chart shows, since the 1999-00 financial year net rental losses have spiked.

This would seem to suggest that the 50% discount to capital gains tax has conspired to make negative gearing of residential property a much more attractive investment option.

Chart 2

If we take a look at the most recent financial year’s taxation data available there are some interesting statistics about negative gearing and who is claiming the benefit.

In terms of the number of individuals claiming net rent, 68.9% of claimants had a taxable income of less than $80,000.

While more taxpayers with a taxable income of less than $80,000 claim net rent losses, only 13.1% of all individuals with a taxable income below $80,000.

On the other hand, more than a quarter (25.8%) of all taxpayers with an income of more than $80,000 claimed net rent.

In terms of the value of these losses, individuals earning less than $80,000 claimed rental losses of $2.781 billion or an average of $2,050 per claimant. 

Individuals earning more than $80,000 claimed $2.613 billion in rental losses at an average of $4,276 per claimant.

More people on incomes below $80,000 claim rental income but that is largely due to the fact that 81% of taxpayers had a taxable income of less than $80,000.

Conversely, a greater proportion of total higher income earners own rental properties and the typical losses claimed from these properties are much larger than those with taxable incomes below $80,000.

Chart 3

In my opinion negative gearing is essentially a way in which the Government outsources social housing to the private sector or at least this should be how it works.

If we take a look at dwelling approvals data you can see that very few new approvals have been granted to the public sector over the past three decades. 

Typically more than 90% of all dwelling approvals over any month are granted to the privates sector with very few being approved and ultimately constructed by the public sector.

Ultimately the private sector takes on the role of construction of homes and it appears private citizens are incentivised to provide rental accommodation via the provision of negative gearing.

If negative gearing were removed no doubt housing would still be an attractive investment for some who are seeking to be positively geared however, you may find that fewer people are attracted to housing as an investment option because of the absence of the tax deductions which negative gearing provides.

The data shows that a greater number of people on lower taxable incomes claim rental losses than those on higher incomes however, as a proportion of total taxpayers a greater proportion of high income earners claim rental losses and the value of these losses is greater for higher income earners.

The longer term net rental losses chart indicates that negative gearing alone didn’t really result in a high level on net rental losses however, when the capital gains tax discount was halved that seemingly made negative gearing much more attractive and the losses began to add up.

While scrapping negative gearing would likely provide a saving to the Budget bottom line, I believe it is unlikely to result in the substantial improvement in housing affordability that many are hoping for. 

gearing negative

Arguably removing the capital gains discount which was introduced after negative gearing is a good first step to addressing the problems and then Government can revisit negative gearing.

The housing market has many moving parts that result in relatively expensive housing prices here in Australia.

While the removal of negative gearing may help improve the Budget bottom line it is unlikely to be the silver bullet which improves housing affordability.

Zoning restrictions on developable land which drive up the cost of housing, the tax-free nature of the family home, stamp duty, the mass-centralisation of our population and shortage of jobs away from the major capital cities all conspire to make housing less affordable.

Any discussion about improving housing affordability shouldn’t solely focus on just one of the issues such as negative gearing rather it needs to look at all of the factors which contribute to high housing costs.

Want more of this type of information?

Cameron Kusher


Cameron Kusher is Corelogic RP Data’s senior research analyst. Cameron has a thorough understanding of the fundamentals such as demographics, trends & economics. Visit

'Negative gearing removal alone is no silver bullet to housing affordability' have 4 comments

  1. June 22, 2015 @ 10:52 pm Hamish

    The only alternative to negative gearing (which allows losses from one source i.e. property investing, to be offset against income from a completely different source e.g. your job) is to allow property investing losses to be carried forward and offset against future profits.

    Over time I would expect as the market value of a property increases, that rent would also increase and eventually the rent would exceed the interest, depreciation and outgoings. Not sure how long that might take though? 

    If the losses were lost completely then rents will go through the roof as landlords seek to cover costs. We saw this in the Keating era.

    So if there was a change in treatement, and losses were only able to be carried forward, this will ony defer but not eliminate the effect of negative gearing. I don’t think this is understood by many and certainly not those practising the politics of greed and envy.

    [who knew that the people able to take advatage of a tax deduction were the small proportion of taxpayers earning enough money to actually pay tax! – the usual 80/20 rule applies here where the vast majority of tax is paid by a small fraction of people]

    In the USA the rate of tax on capital gains is 15%. So someone on a marginal rate of 40% (say) then the 50% discount reduces the effective rate to 20%. This is still higher than 15%.

    Also (and the commentator on ABC 774 Melbourne on Saturday morning did not understand this) that the cost base is reduced by depreciation. So on sale the profit is calculated based on the reduced cost base i.e. the depreciation is clawed back. If negative gearing was changed, then the method of calculating any capital gain would also be impacted.


    • June 22, 2015 @ 11:38 pm Michael Yardney

      Most people don’t understand how depreciation is added back to CGT


  2. June 23, 2015 @ 11:27 am Lynton

    To get this straight, the present suggestions seem to be saying that the ability to claim the interest on the loan be removed. This is what negative gearing is – it’s not the claiming of all deductions. This means normal expense and on paper deductions would remain and it would only be the debt which was not deductible. What the negative gearing detractors fail to realise is that there is little merit in removing the ability to claim interest charges as part of initial losses from property investors yet allowing it to stay for share investors and businesses. Property investors are just as much in ‘business’ as the others, so why should they not be allowed to make these kinds of legitimate claims? Imagine if we removed it for everyone who runs investment businesses – the outcry would be enormous. More importantly, those discussing this also fail to recognise the holistic impact which, in my opinion, actually threatens the ability of the government to collect taxes. You see, while most property investors start the early years in a negative position, the action of rental increases often moves a property from being negatively geared to positively geared quite quickly. A positively geared property is one on which you pay tax, as you make a gain, and since property is usually a long term hold for most, it’s a fact that most investors, over their investing lifetime, will end up paying more tax than they claimed in those early years. Add to that the fact that, in building a property portfolio an investor’s main aim is to become financially secure in the future then property investors are also working very hard to reduce the burden on the welfare system, by working toward a time when they will not qualify for the pension! Short sighted debate.


    • June 23, 2015 @ 9:37 pm Michael Yardney

      Negative gearing does not only imply interest costs, but could be repairs and depreciation as well.
      What may have been positive geared could also become negatively geared if interest rates rise


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