So we all know that Property Investment and Negative Gearing are popular topics among Australians. The removal of Negative Gearing was a major policy discussion in the recent federal election and it came under heavy scrutiny. For Labor, it was the lead runner on the path to change. History now tells us that it backfired as a strategy to win the votes of the Australian people. According to Labor, Negative Gearing was exclusively used by a ‘wealthy’ class of Aussie and that it was in the best interests of the majority of Australians for it to be removed. Turns out the Australian people didn’t feel the same way.
I certainly didn’t. I’m sure most of you have safely assumed that I’m a fan of Negative Gearing. No wonder. I own a property investment business, I’m a property investor, lots of my family, friends and clients are invested in property and my kids are in property investment videos! All valid reasons, but it goes beyond that. Let me explain.
The Australian property investor at some point in their life makes a decision to invest. What does that mean for a Blue Wealth client? They take the risk of investment, engage a solicitor, borrow money from the bank, deal with the property manager, house a tenant, manage the maintenance, pay insurance and pay the other costs. For all that, the government gives investors a tax benefit of around $8,000 per annum on a new property. Investors invest in the hope of gaining capital growth while getting the tax benefit along the way to help them hold the property long enough for it to grow.
If the property investor didn’t get the tax benefit that helps them hold the asset, it would be less likely that they would embark on the investment journey. No Negative Gearing means less investing. Less investing means less supply and therefore less properties for renters to rent. Rents rise. If the property investor isn’t out there buying property which stimulates supply then there will eventually be a shortage of housing for those who need it. If property investors aren’t driving the housing supply it will inevitably fall back on the government to supply this housing. My questions is this: can the government house a person, a couple or a family in a single dwelling for $8,000 per annum?
The research we did in an attempt to answer this question gave us a broad price range. Industry reports outline that the cost for each dwelling of social housing is between $164,000 and $614,000 and the price was influenced by geography. Sydney would obviously be more expensive than Wagga Wagga based on land values. This cost will range between $9billion – $33billion, with no return on investment.
Whether it’s $164,000 or $614,000, it’s a whole lot more than $8,000 per annum, and this is just to get the housing off the ground and doesn’t take into consideration ongoing annual costs.
Aussie property investors are providing housing for those who need it. For me that’s a public service that the government pays very little for. We won’t hear about the abolition of Negative Gearing for at least 20 years or at least as long as it takes for people to forget how it was a contributing factor to Labor losing the unlosable election.
Census data indicates there are 2,561,302 rental properties in Australia, equating to 30.9% of the property market. This equates to over 6.6 million Australians housed by rental properties today. This number is increasing at a rapid rate as Australia’s population grows.
Turns out that Negative Gearing has been an incredibly effective social housing strategy and that Aussie property investors have been providing a significant and important community service for decades.
Imagine what rents would be if the incentives were slashed? … and that is assuming that people bothered investing in property any longer.
Thanks for making it simple Tony!
Thank you Tony for the blog. I understand the value and positive side of negative gearing and appreciate its contribution to the housing issue. To go and say that investors are in the public service for the government is a bit of a far fetch Robin Hood. It might a question of what is the basic value here.
Housing like food, water, health and education should be a human right. The government is responsible to provide us all of the above or at least do all that is possible to make it easier and affordable to get to get. So said the socialist. But the capitalistic is in control and the logic is to make it easier for the investors (richer) to expand their portfolio by sweated them with the likes of negative gearing.
As I don’t have a full understanding of finance and economics (I am more of a scientist so I do get the maths) my question is:
What if negative gearing would be available to first home buyers only or all home owners? Would that increase home ownership in Australia and decrease the burden of housing as mortgages are now a big chank of one’s income.
(Don’t get me wrong I am a Bluewealth customer and about to invest with them)