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Tenants will go to the polling booths on 2 July knowing the rental payments on their next lease could increase, but this point has been overlooked in the current debate about negative gearing.
Blogger: Grant Harrod, CEO, LJ Hooker
It could be assumed that the opponents of negative gearing for investment properties don’t appreciate how negative gearing contributes significantly to rental affordability, which is vital to the budgets of many households. One in four dwellings is owned by an investor, adding to the pool of properties available to tenants. The majority of these are not luxurious; they are ordinary homes, with the median capital city rent sitting at $485 per week [at the end of March, according to CoreLogic RP Data].
If negative gearing is restricted, there is a risk that investors will be discouraged from purchasing property, thereby reducing the number of rental options. And when you reduce supply, demand continues to increase, and pricing adjusts accordingly. Furthermore, landlords who currently negatively gear will need to raise rents to cover the loss of income, increasing the budgetary pressures on tenants.
Historically, investors have made up around 30 per cent of housing finance commitments; over recent years, in Sydney, this has passed the 50 per cent mark. During this period, rents have remained flat – around 1 per cent – confirming that the availability of rental property is more than matching the demand. A positive outcome for tenants looking to save for their own home!
In fact, recent LJ Hooker research found that 27 per cent of tenants rent a property to save for their own home. If rents rise by 10 per cent, as expected, this will severely impact their ability to save.
Furthermore, regional and rural towns are expected to be severely impacted if investors drop out of the market. These towns attract less new construction than metropolitan areas, but a high proportion of their populations rely on rental accommodation.
A strong level of investor demand is crucial to delivering new housing stock and lifting the supply of rental accommodation across the country to keep rents affordable.
Likewise, strong investor demand in the existing market, which is more characterised by free-standing homes better suited to growing families, is equally as important to keeping rental accommodation affordable, as well as offering a choice of rental stock in communities where families would like to live.
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.