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Recent debates on negative gearing have me reflecting on Economics 101 at the University of Otago in New Zealand.
We were introduced to Adam Smith, a man widely recognised in the field of economics for his book, The Wealth of Nations. His basic concept is that the economy works best via a mechanism called “the invisible hand”, where nations let this so-called invisible hand guide them to outcomes most optimal for their economy, finding equilibrium without government or other interventions forcing it into an unnatural state.
If we abolish negative gearing, whereby inviting in the “invisible hand”, will it lead to optimal outcomes for investors and tenants? To answer this question, we need to take a deep dive into negative gearing and what it ultimately achieves.
Negative gearing is a financial practice where an investor borrows money to invest, and the income generated by this investment is less than the expenses. It’s a common strategy in the property market, allowing investors to deduct losses from their taxable income. Despite years of controversy and commentary from various sides of politics, negative gearing remains a pivotal aspect of Australia’s economic and housing market strategies, offering several benefits to investors and the broader economy. The tax perks associated with negative gearing are significant. Investors can deduct the costs of owning and maintaining rental properties from their overall income, reducing their taxable income and, consequently, their tax liability. It makes property investment more attractive while enabling investors to manage risk more effectively, helping to foster a culture that can lead to substantial long-term capital gains.
Negative gearing encourages individuals to invest in the property market, which can ultimately drive an increase in the supply of rental properties. This investment not only helps meet demand for housing, but also supports property prices by ensuring a steady flow of investments. The infusion of capital into the real estate market stimulates growth, benefits property development, and can make housing more accessible in the long run.
A recent Ray White Economic Update by my good friend and Ray White Group chief economist, Nerida Conisbee, reflected on OECD data showing that between 1996 and 2021, there were an additional 1.1 million rental properties provided by investors in Australia. Community groups in that period only contributed 41,000 homes, while the government recorded a net loss of 53,000 rental properties. Why are we even thinking of irritating our housing market’s greatest feeder? It’s essentially everyday Australians carrying the burden of supplying rental properties. As we swim through the muck of a housing crisis, it’s madness for policymakers to be advocating for a removal of a practice which acts as a salve on rental stress.
Negative gearing also plays a crucial role in stimulating economic activity beyond the property market. By encouraging investment in real estate, it indirectly supports the construction industry, creating jobs and promoting growth. Furthermore, the ripple effect of this investment benefits a wide array of sectors including retail, services and manufacturing, all of which are integral to our Australian economy.
A criticism of the negative gearing policy is that it disproportionately benefits wealthier investors and can distort the housing market. However, this overlooks broader economic benefits, including increased housing supply and economic stimulation across the various sectors stated above. Moreover, the policy supports middle-income earners who invest in property to secure their financial future, thereby promoting a more inclusive investment landscape.
Negative gearing remains a cornerstone of Australia’s property investment strategy for good reason. By fostering investment, stimulating economic growth and offering tax advantages, it plays a crucial role in the health of the housing market and the broader economy. Criticisms exist and will no doubt endure, but the overall benefits of negative gearing for Australia are clear, making it an essential policy in our country’s economic framework. Sending signals of change is a real threat to investor confidence and has the power to significantly derail residential property supply, exacerbating our already overwhelming housing crisis.
Avi Khan is the group CEO and principal of Ray White AKG.
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