By Michael Yardney October 4, 2024

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Why Removing Negative Gearing Won’t Solve the Housing Crisis – and Could Make Things Worse

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Why Removing Negative Gearing Won’t Solve the Housing Crisis – and Could Make Things Worse

Key takeaways

The debate around negative gearing is once again heating up, with a particular political party of a Green persuasion arguing that abolishing it could be the magic bullet to solve Australia's housing affordability crisis and housing shortage.

While it might sound like an easy fix on the surface, removing negative gearing wouldn’t just fail to solve the problem – it could actually exacerbate it, making housing less affordable for many Australians, particularly renters.

Negative gearing allows investors to offset the losses from their investment properties against their other taxable income, which is a legitimate incentive that helps keep the rental market alive. Any reduction in negative gearing benefits would significantly reduce rental investment and worsen rental affordability.

In Australia, the government shares the burden of providing essential services such as hospitals, roads, schools, jails, public transport, aged care and public housing with private enterprises that can often deliver them more efficiently and cheaply.

Property investors take on a business risk by investing in a property and expect to get a reasonable return on their investment. However, negative gearing multiplies losses when property prices are flat or falling, and compounds returns in the good times.

If the government took away my tax concessions, I would have to consider my investment options, which would mean raising my rent or investing elsewhere to get the best bang for my buck.

Negative gearing isn't just for the wealthy, and many middle-income earners rely on it to supplement their retirement income. Removing negative gearing would disproportionately impact these investors, and push them to depend more heavily on government assistance later in life.

“Just slug greedy, rich property investors by reforming negative gearing and capital gains tax and it won’t increase rents for tenants or hurt mum and dad investors a bit.”

Really??

Now negative gearing is back on the political agenda following a report that the federal government has asked the Treasury to investigate a potential overhaul of the billions in tax concessions Australia provides to investment property owners.

Let’s dive deeper into why abolishing negative gearing could be counterproductive, drawing on principles I've discussed before.

What is negative gearing and why it matters

The concept of negative gearing allows investors to offset the losses from their investment properties against their other taxable income.

This has been one of the many factors encouraging everyday Australians – not just the wealthy elite – to invest in the property market.

But let’s be clear, negative gearing is not simply a "tax dodge" for the wealthy but a legitimate incentive that helps keep the rental market alive.

So what have they missed?

In my mind, any reduction in negative gearing benefits would significantly reduce rental investment in both new and existing properties and would worsen rental affordability through a reduced supply of investment housing.

A reduced rental supply means lower rental vacancies and increased rents which is the opposite effect of what the politicians are looking for.

Remember that around 30% of Australians live in rental accommodation, of which the vast majority is provided by property investors.

I would argue that these property investors provide an essential service to millions of Australians who choose to, or have to, rent their accommodation and as such, these investors should be treated like all other business people.

More than that…

In our modern society, we pay taxes and expect the government to provide us with certain essential services.

These include hospitals, roads, schools, jails, public transport, aged care and public housing.

In Australia, the government often shares the burden of providing these services with private enterprises that can often deliver them more efficiently and cheaply.

When the government can’t supply enough public hospital beds, private hospitals step up to the plate and receive not only tax deductions for their business loans but also allowances to subsidize them.

So do aged care providers, schools and public transport providers who provide services in tandem with the government.

Our government also provides public housing, but not enough for all those who can’t afford to buy their own property.

While government social and public housing programs are helpful, it is only the private rental market that can deliver rental accommodation at the rate and scale that is required at present.

Property investors save a deposit, buy a property, commit to a loan for 25 or 30 years and run a small business providing accommodation for others in our community.

In return, we expect to get a reasonable return on our investment risk, just like other business people do.

If I set up a dog wash business or a restaurant, I’d be able to claim a tax deduction for legitimate business expenses including loans to set up our business or purchasing business equipment.

Why should it be different for property investors who take on a business risk?

We know that the rent won’t always cover our expenses, but we accept that certain tax benefits, plus long-term capital growth, will make up for this.

Sometimes it does, and sometimes it doesn’t.

Fact is, that while negative gearing compounds returns in the good times, it multiplies losses when property prices are flat or falling.

I know as many people who have lost money in property investment as those who have made money.

Much like most other small business people.

If the government takes away my tax concessions, I would have to consider my investment options.

To ensure a decent return, I’d raise my rent if I could, or maybe invest elsewhere to get the best bang for my buck.

The result would be that rents would rise, and tenants would have to fight over the few rental properties left, or the government would have to invest its own money and buy or build properties and enjoy the pleasures of being a landlord.

The reality: removing negative gearing won’t make houses more affordable

The argument that scrapping negative gearing would instantly make housing more affordable is a simplistic view that doesn’t address the complexities of the market.

In fact, one of the big lessons from history is that removing this tax incentive would most likely reduce the number of properties available for rent.

When you make property investment less attractive, fewer people invest.

This would lead to a reduction in the number of rental properties available and consequently, rents.

The rental market is already tight, and making it even harder for investors would exacerbate this problem, making it tougher for tenants who are already struggling with high rents.

Who really benefits from negative gearing?

Contrary to popular belief, negative gearing isn’t just for the wealthy.

In fact, a significant portion of property investors who benefit from negative gearing are “mum and dad” investors trying to secure their financial future.

These are ordinary Australians with modest incomes looking to build wealth and prepare for retirement.

Removing negative gearing would disproportionately impact these investors, stripping them of a crucial avenue to build long-term financial security.

Sure removing negative gearing or fiddling with Capital Gains Tax exemptions may save the government some money in the short term, but it would hurt the very people it claims to protect in the long run.

Many middle-income earners rely on this strategy to supplement their retirement income, and taking it away could push them to depend more heavily on government assistance later in life.

The 1980s experiment: what history tells us

We don’t have to speculate about the consequences of removing negative gearing – we’ve seen it happen before.

In the 1980s, when the government temporarily abolished negative gearing, rents surged dramatically in Sydney and Perth.

The resulting rental crisis forced the government to reinstate the policy just a few years later.

It’s a clear lesson that removing negative gearing doesn't make housing more affordable – it just shifts the problem to renters, who end up bearing the brunt of the policy change.

Instead, policymakers should focus on addressing the real issues that drive up housing prices.

Impact on housing supply and construction

Investors don’t just buy existing properties – they help drive the construction of new dwellings.

When investment demand slows down, construction activity declines, leading to fewer new homes being built.

This is particularly problematic because Australia already faces a housing supply shortage, especially in the affordable rental market.

If we discourage investors from participating in the market by removing negative gearing, fewer properties will be built.

This, in turn, exacerbates the housing shortage, especially for lower-income families who are more dependent on the rental market.

We’d end up with fewer properties available for rent and higher competition among tenants, driving rents even higher.

As I’ve often said, the solution to the housing shortage isn’t to discourage investment but to encourage it in a way that increases the overall supply of properties.

Negative gearing and the broader economy

One of the less discussed but equally important consequences of removing negative gearing is its impact on the broader economy.

The property sector is a significant contributor to Australia’s GDP, and any policies that reduce investor confidence can have a ripple effect across multiple industries, including construction, finance, and even retail.

The slowdown in construction, in particular, would result in job losses and reduced economic activity.

The real solutions to housing affordability

The conversation around negative gearing often distracts from the actual root causes of the housing affordability crisis.

As I’ve outlined in past articles and my podcast, the real culprits are the lack of housing supply, restrictive planning laws, and infrastructure bottlenecks that limit where and how much we can build.

Here are some more effective solutions:

Streamlining Planning Approvals: Cutting red tape and making the planning process more efficient would enable developers to bring more properties to market, increasing supply and easing pressure on prices.

Investing in Infrastructure: By improving transport links and amenities in outer suburbs, we can make these areas more attractive, dispersing demand and reducing pressure on inner-city prices.

Encouraging Build-to-Rent Developments: Institutional investment in large-scale rental housing, known as build-to-rent, could provide a steady supply of rental properties and help stabilise rents.

Offering Incentives for New Housing: Instead of penalising investors, why not offer additional incentives for those who invest in new properties? This would encourage the construction of more homes, increase the rental supply, and create jobs.

Supporting Private Property Investors

Another crucial piece of the puzzle is encouraging private property investors who are already providing much-needed rental accommodation.

These everyday Australians play a vital role in the rental market, yet they often feel under attack from constantly changing legislation and policy uncertainty.

Frequent changes to rental laws, taxes, and regulations not only create frustration but also discourage potential investors from entering the market.

By giving property investors a sense of stability and certainty, we can encourage more of them to provide rental housing.

This approach is not only quicker but also more cost-effective than offering large incentives to corporations to build "build-to-rent" projects.

After all, private investors have been the backbone of the rental market for decades, and with the right incentives, they can continue to play a significant role in addressing the housing shortage.

If governments focused on providing consistency, perhaps through long-term legislative frameworks or tax incentives, more private investors would be motivated to expand their portfolios or remain in the market.

This could help meet the demand for rental accommodation far more rapidly than waiting for large-scale, build-to-rent developments to materialize.

In essence, supporting and encouraging residential property investors should be a priority if we genuinely want to see an increase in rental housing supply and affordability in the short to medium term.

Final thoughts

Removing negative gearing would be a knee-jerk reaction to a complex problem and would likely make things worse, not better.

It’s an approach that targets a symptom rather than the root cause of Australia’s housing affordability crisis.

If we want to make housing more affordable, we need to increase the supply of homes, not discourage investment.

The answer to the housing crisis lies in encouraging more construction, cutting red tape, and investing in infrastructure – not in penalising the very investors who help keep the rental market afloat.

By understanding and addressing the real factors driving the housing crisis, we can create a fairer, more affordable market that works for everyone.

About Michael Yardney Michael is the founder of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.