n its most simplistic form, negative gearing for investment housing
allows investors to deduct their losses against their personal taxable
income. These losses may occur when the investor incurs costs such as
interest on a home loan as well as maintenance and other small expenses
on an investment property. However, it is important to note that
negative gearing is not unique to the property asset class; it also
applies to businesses and shares in Australia.
The most important thing to realise about asset negative gearing is
that it is fundamentally offsetting a loss. Although you can claim that
loss on your tax return, the investor must carry the cost of that loss
throughout the year. Ultimately, when investing, most purchasers would
be hoping that rental rates increase over time and result in the asset
moving from a loss-making one to an income-producing one.
It is also important to note that between September 1985 and
September 1987, negative gearing laws were changed. The government
quarantined negative gearing interest expenses on new transactions. As a
result, investors could only claim interest expenses against rental
income, not other income.
Given that negative gearing provides a benefit to investors, we look
at the impact these changes had on the investment market over the
two-year period. The first component is the impact the changes had on
the rental market.
According to the rental component of CPI data, rents across the
capital cities rose by 21.8% over the two years to September 1987 (the
period during which negative gearing laws were changed). The increase
in rents was most pronounced over the period in Sydney (26.1%) and Perth
(31.1%). As a comparison, over the two years to September 1985, rental
costs rose by a lower 17%.
Click to enlarge
The data clearly shows that rental growth was present over this
period and it was greater than it was over the two-year period directly
preceding it (The above chart shows the period for which the negative
gearing rules were changed and are bolded black). Here you can see that
rental growth was well above average, particularly recent averages, but
it was not unprecedented, with rents growing by a greater amount on an
annual basis in late 1982 and early 1983.
Another important determining factor is the demand from investors
over this period. Unfortunately the Australian Bureau of Statistics
does not provide information on the number of loans to investors; rather
it provides the total value. The total value of investment finance
commitments in September 1987 was 41.5% higher than in September 1985.
These figures seem to suggest that at that time there was no weakness in
demand for investment housing, however, a clearer outcome would be
apparent based on the number of loans rather than the value.
The reason why negative gearing was reinstated in September 1987 was
that it was proclaimed that rents rose sharply on the back of a fall in
housing market investment. However, it doesn’t look as if investment in
the housing market dried up throughout this period. Rents clearly did
rise quite sharply throughout, as demonstrated.
Many in favour of removing negative gearing from property say that it
should occur due to the fact that housing is an unproductive asset
My argument is that given that housing provides shelter, if investors
don’t purchase these assets, it would then be the responsibility of the
government to provide this shelter. Ultimately, that would mean that
anyone that pays taxes would be funding housing for those who can’t
afford it themselves.
One of the arguments against negative gearing is that the tax
deductions afforded to investors in the housing market reduces
government revenue. However, if investors did not provide shelter to
those who can’t provide it to themselves, government revenue would
already be reduced due to the fact that this responsibility would fall
on the government.
If we look at the recent Australian Bureau of Statistics (ABS)
dwelling approvals data, it is interesting to see just how much of the
new housing supply is created by the private sector as opposed to the
public (government) sector. According to the ABS dwelling approvals
series, which began in July 1983, between July 1983 and October 2012,
4,355,266 dwelling approvals have been given to the private sector
compared to just 228,843 to the public sector. Over the last 29 years
(give or take a few months), public housing approvals have accounted for
just 5% of all dwelling approvals. This is less than 8,000 approvals
by the public sector each year!
Over the 12 months to October 2012, 145,515 dwellings approvals were
granted to the private sector (98.6%) compared with just 2,065 to the
public sector (1.4%).
The most recent census data shows us that of those homes occupied,
29.6% are rented (investment properties). Based on this data, if we
assume that without the private sector building homes for investment
purposes, the public sector would have to account for 29.6% of all
dwelling approvals to cover those in rental accommodation. Over the
past 12 months this would have equated to 43,684 dwelling approvals. If
we also consider that the median home price across Australia as at
October 2012 was $386,000, and if the government had to buy the land and
build 43,684 homes, this would cost the Government of the day
$16,861,900,480 based on the number of approvals and the median home
Of course this is a rather simplistic calculation and if the
government were to build homes on its own land it would cost less, as
that figure includes land and building. Also, it is unlikely that
private investment in residential housing would cease without negative
gearing but I would expect that it would fall.
The most recent taxation statistics data shows that over the 2009-10
financial year, $4.81 billion in net rental deductions were claimed by
In order for the government to break even to allowable deductibles
from tax returns they would have to be building those 43,684 homes at a
cost of $110,100. Based on the current median home price across the
country at $386,000, they would have only been able to build 12,461
homes over the past 12 months or 8.4% of the total building approvals
over the past year. It should be noted that not all new builds are for
investment purposes but if we assume that 29.6% are there is a
When you look at these figures it is obvious why negative gearing is
unlikely to be removed. Whether the removal of negative gearing
impacted investment or not, and whether it lead to an increase in rents
is a secondary concern relative to how much it would cost the government
to supply public housing for the almost 30% of Australians that don’t
own their own home.
These figures are not to suggest that if in the case negative gearing
was removed, there would be no investors in the market however, the
appeal of negative gearing is part of what attracts many investors to
the market. Without negative gearing it is likely that there would be
fewer investors and therefore less private developers delivering new
homes coupled with a greater need for the public sector to provide
housing. The flow on effect may also be that there would likely be
lower demand for housing credit. Although some proclaim removing
negative gearing would cause house prices to fall, I would expect that
new housing supply would be even tighter as developer’s struggle to
achieve pre-sales for new development, this may in-turn force prices
higher than they otherwise would be.
By looking into the figures in more detail, it makes good economic
sense for the government to allow housing investors to negatively gear
their properties so that the significantly greater cost of providing
social housing is not borne by the Government and ultimately the
Cameron Kusher is senior research analyst at RP Data.