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Negative gearing: debunking myths and examining the economic landscape in Australia - featured image

Negative gearing: debunking myths and examining the economic landscape in Australia

There is a lot of misleading information out there about things economic and it seems even more so when you combine property and taxation.

Negative gearing is a case in point.

Negative Gearing2

Australia is a one-off?

For example, it has been stated that Australia is the only country that allows for negative gearing deductions.

But this is not the case.

There are plenty of other countries that allow negative gearing deductions.

Germany, Japan, Canada and Norway all have very similar systems to ours, with rental losses able to offset total income tax payable and unused losses able to be carried forward to offset future tax liabilities.

Other countries have similar systems, albeit slightly less generous, where rental losses can generally be used to offset future rental income but no other forms of income (e.g. wages income).

These countries include France, the United States, Ireland and Finland.

Also, two countries - Spain and Sweden - do not allow negative gearing but nevertheless have some allowance for rental expenses to reduce overall tax liability.

Negative gearing 101

To "gear" an asset - such as a rental property - is to borrow to buy it. 

An asset is "negatively" geared if it loses money.

A rental property is negatively geared if the rent charged does not cover the expenses of the landlord, including interest payments on the loan and other costs such as repairs, land taxes and rates.

When someone at the barbie mentions negative gearing, they are mostly referring to the ability to deduct such a loss against another source of income, typically as wages.

As a result, negatively geared investments are most attractive to individuals with higher wages and hence high marginal tax rates.

At present the Australian tax system places no restrictions on the ability of taxpayers to negatively gear investment properties. 

There are no limitations on the income of the taxpayer, the size of losses, or the period over which losses can be deducted.

Also, although it is most commonly used in the housing market, negative gearing can apply to any form of asset. 

But this scheme is now up for debate with both the Greens thinking about limiting negative gearing to new builds. 

And as one would expect the BS is flying around, thick and, fast.

But before we look at what actually happened last time negative gearing was stopped – between 1985 and 1987 – let's review the current state of play.

Negative Gearing

Current state of play

According to the 2023-24 annual summary of tax expenditures by the Federal Treasury – a riveting reading I can tell you! –  investors claimed $27.1 billion worth of deductions for “maintaining and financing property interests”.

These deductions totalled just $17.1 billion in 2020-21.

Treasury did not release the share of exemptions for rental losses – also known as negative gearing – for the most recent year.

In 2021, though, 1.1 million investors reported losses of $7.8 billion and claimed a tax benefit of $2.7 billion.

The spread of benefits in 2020-21 showed 80% of the tax reduction for rentals went to those above the median income, while 37% was collected by the top 10% of earners.

Looking forward it is projected that negative gearing could cost close to a $100 billion over the next ten years.

At present some one million people in Australia currently negative gear in some form.

That is one in nine taxpayers.

So doing anything in this space is going to peeve a lot of folks.

Yet it has been estimated that if negative gearing was not reinstated in mid-1987 then some 400,000 additional people – that’s just under two Canberra’s worth of residents – could have owned their own home.

If negative gearing was to be abolished there is a wide-ranging debate as to what could happen.

What happened between 1985-1987?

Below are eight charts that outline what happened between 1985 and 1987 when negative gearing was previously paused in Australia.

Chart 1 shows that the vacancy rate across Australia actually rose.

Australia Rental Vacancy Rate

This didn’t happen uniformly across the country – for example, they fell in Brisbane, Perth and Sydney, but rose in Adelaide and Canberra (see charts 2 and 3 for more detail) - but on average across the country, the rental vacancy rate rose by 2% from 2.2% in mid-1985 to 4.4% in mid-1987.

Past Vacancy Rates

Chart 4 tells me that, despite a rising vacancy rate, annual rental growth was elevated between 1985 and 1987.

Australia Annual Rental Growth

Typically, rental growth slows during periods of rising vacancy rates and vice versa as overlaying charts 1 and 4 will confirm.

It was often stated back then that rents rose at that time due to slowing dwelling starts – see chart 5 - against rising annual population growth.

Australia Annual Dwelling Commencements

See chart 6. 

Australia Annual Population Growth

However, in mid-1985 there was an annual demand to build around 100,000 new dwellings per year and by mid-1987 that need rose to 115,000 or 15%.

Yet whilst new housing starts fell by 25% there was still an oversupply of new housing stock coming through as shown by the annotated figures in chart 5.

The real culprit was rising interest rates.

See chart 7. 

Australia Cash Rate

The official cash rate rose from 11.75% in mid-1985 to 13.2% in two years’ time.

In between 1985 and 1987, the cash rate hit 19.4% for a short period of time.

It was this rise that stopped a lot of buying activity, and hence housing starts and pushed up rents as investors tried to cover higher borrowing costs.

I can tell you from personal experience that mortgage rates were very high around that time.

Our first home loan carried a 17.5% annual interest rate.

Developers were also paying over 20% per annum on their finances.

Yet despite the removal of negative gearing, high-interest rates and an oversupply of new digs, Australia’s houses grew in value between 1985 and 1987, maybe not at the same annual clip as the long-term average, but pretty close to it.

Chart 8 shows that Australia’s house values are pretty resilient, only entering negative growth periods of short periods and only six times since 1981.

Annual Change In Median House Price

Looking forward

Many folks in the housing industry think that property values will fall; many investors will sell; vacancy rates will fall further drop; rents will increase faster and building starts will plummet. 

Lots of wills!

Whilst others believe that any impact is likely to be slight.

I am in the second camp.


Because much of what was said last time negative gearing was removed was bulldust. 

Negative gearing was reinstated for political reasons, not due to economics or policy error.

I do think that history largely repeats.  

Well at least it rhymes a lot.

About Michael is director of independent property advisory Matusik Property Insights. He is independent, perceptive and to the point; has helped over 550 new residential developments come to fruition and writes his insightful Matusik Missive
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