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PoliticsSocial issues

Negative Gearing: Who Wins?

(Nguyen Real Estate, 2016)

Negative gearing has occurred in Australia for decades, gathering the speculation and admiration of different groups in society- yet amongst this attention still lays the question as to who the real winners and losers are.

Negative gearing exists when total expenses in maintaining a purchased property with the help of borrowed funds exceeds the total income accrued from that property- the payments by rent occupiers. Costs are generally associated with equipment replacements and long-term sustainability such as a broken cabinet or leaky tap. It can also ensure that if shortcomings in rent do not meet the interest rates to hold the property, investors are legally able to qualify for a lesser tax bracket to make up for this, even if they’re annual income is greater.

The subject has long been a contentious platform and social outcry for millennials under the conviction that it strains housing affordability. Multiple Australian economists are amongst this view, agreeing it raises house prices primarily because costs become offset, contributing to Australian properties becoming some of the most expensive in the world. This enhances the root of one side of the argument- the idea that it’s an open gateway for those in a higher tax bracket to not only get into the market but to dominate. Reclaiming a relevant portion of those expenses back is considered a key incentive only encouraging investors to continue purchasing properties. Currently 30 per cent of Australian households are rented. By the end of 2017, Australia had the sixth highest rise in annual property prices since the early 1960’s with an approximate eight per cent increase per year, essentially driving up prices for the everyday home buyer. According to the Australian Council of Social Service (ACOSS), a third of properties negatively geared as an investment property were by those earning $500,000 or over. Statistics from the Grattan Institute in 2016 supported this, noting the unequal distribution of deductibility benefits where 47 per cent went to the top 10 per cent of income earners and 68 per cent went to the top 20 per cent. In forefront of the argument, figures like these subliminally challenge the role of the policy in benefitting the economy as a whole or those on the fine end of town.

This criticism has circled since the 1970’s and lead to Australia’s first ban of negative gearing on new properties by the Hawke government in 1985. The reform quarantined any losses made from owning rental properties. Although this only lasted two years, the action highlighted the predicament of a sabotaged tax system where fairness was unaccounted for and instead was replaced as a cheat sheet for the rich to accrue more assets.

Brett Compton is the Director for Ray White City Residential Perth and stands in contrast to this view. He believes negative gearing is not directed at limiting lower income earners from the market but instead stimulates rent inclusion by relieving government pressure in having to allocate funds for the housing market to accompany Australia’s growing population.

“The market is not only made up of investors, but owners and occupiers. We need investors, otherwise there wouldn’t be places to rent and if there wasn’t any, the government would have to go out and builds hundreds and thousands of houses,” he says.

“There are negative gearing rules because it’s a lot cheaper to give tax breaks to people who buy houses then it is for the government to build for those who can’t afford to buy them. Then they’d have to accommodate for bigger issues like urban sprawl by having to build new schools and shops for properties further out.”

In affiliation with this perspective, Partnering Director of Verse Property group Steve Erceg adds the current international investment policy has allowed foreigners to place more money on properties to avoid higher risk in their own countries.

“When looking at driving prices, we can see it was foreign money coming into the country (Chinese and Indonesian specifically), and these countries don’t have a stable government,” he says.

“They want to invest in Australia because they know it’s safe and that’s also made it harder for millennials.”

In relation to Hawke’s decision, both Compton and Erceg believe although renting prices went up specifically in Perth and Sydney, causing investors to briefly leave the market, it wasn’t purely due to the abolition but the combination of other significant factors such as West Australia’s mining boom, the influx of people moving onto the west coast from over east (countering for high levels of supply and demand), as well as hefty inflation rates. Statistics released by ABC’s ‘Fact Check’ in 2016 are in line with this, pointing out negative gearing couldn’t have been the sole cause of the price surge otherwise rents would’ve increased across all cities.

The motives behind Australia’s top two parties’ stance on the subject have created a tug of war, believed to be ostensibly related to their deep-rooted ideologies. The Coalition’s general favouring of deductibility tactics was profound in their dissatisfaction of the 1985 policy and is still addressed today. One of their key campaigning points during the 2016 double dissolution election was the promise to refrain from sloshing tax benefits and this was considered another way of acquiring votes of middle to high income earners. In that same year, it was later revealed on Network Ten’s ‘The Project’ that the top electorate who gained highest average loss belonged to Prime Minister Malcolm Turnbull’s electorate of Wentworth, claiming 20,000 in rental NET loss.

The Mignacca family case is also an accurate testament to this. Julian and Kim Mignacca owned a family home and negatively geared a second investment that wasn’t for them but their one year old daughter, Addison. Along with the Labor party’s backlash, multiple media sources covered this as a contemporary crisis in the housing market where the Australian dream of owning a home seemingly became something you inherited, if lucky. In saying so, the Labor party dictated the housing market as a strict playground reducing social mobility for millennials and your average Joe.

Erceg suggests however removing negative gearing today would create greater consequences for young people with a much larger population than that 20 plus years ago.

“When you give investors this benefit, prices come down and there’s more houses available but if you strip this deductibility spur then owners will pass on costs to tenants.”

In the absence of a consensus among Australians, negative gearing merely remains in the hands of those who form government. While the discussion has not only raised affordability concerns but accessibility questions too, negative gearing will surely continue to spark a public debate for the foreseeable future.

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