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Over recent weeks the debate about whether negative gearing should be abolished has re-surfaced and critics of the policy have once again overlooked some important facts.
Blogger: Paul Bennion, Managing Director, DEPPRO tax depreciation specialists
Over recent weeks the debate about whether negative gearing should be abolished has re-surfaced.
Critics of negative gearing argue that it gives an unfair advantage to property investors at the expense of first home owners.
They point to the declining number of first home buyers in the Eastern States property markets during the past year and argue that these first home buyers are being priced out of the real estate market by investors.
However, critics of negative gearing overlook the practical rather than hypothetical consequences of its abolition.
For example, when the Hawke Government abolished negative gearing back in 1985, it led to a dramatic reduction in the number of property investors in the real estate market and inturn the supply of rental properties.
As a result of this flight of investors from the property market, weekly rents throughout Australia surged by 37% and by a massive 57% in Sydney.
The reality is that most advanced economies throughout the world provide tax advantage to people who buy property.
Australia is no exemption and negative gearing has allowed many hard working mum and dad investors to purchase rental properties and reduce their taxable income.
Without these tax incentives and rental homes provided by the private sector, Governments throughout Australia would be placed under huge financial pressure to provide social housing at a massive financial cost to the whole community.
At the same time, negative gearing encourages the construction of many new investment properties each year that creates employment opportunities and tax revenue for all levels of government throughout Australia.
While it is true that the number of first home buyers have declined over recent months, the reality is that house prices are driven by supply and demand.
A major defect in the Australian housing market over recent years has been the supply of housing and this can be corrected by more pro-active measures by all levels of government such as reducing red and green tape to reduce the cost for developers to bring on new housing projects at more affordable prices.
At the same time, financial institutions need to relax their lending requirements to first home buyers which have become very draconian following the GST.
Providing affordable housing in Australia can become a reality through maintaining a proper balance between providing competitive rental homes through government tax incentives such as negative gearing and also increasing the supply of owner occupier properties by making it easier for developers to deliver new homes.
Negative gearing occurs when the rental income of a property is not enough to cover the total costs of managing the rental and re-paying the interest portion of the loan.
Property refers to either a tangible or intangible item that an individual or business has legal rights or ownership of, such as houses, cars, stocks or bond certificates.