What is the importance of negative gearing?
Investors play an important role in the evolution and shaping of the Australian property market; they boost stock and provide much needed rental accommodation, with a reasonable portion of stock addressing social housing needs.
So with the debate around negative gearing in the public domain recently, it’s a good time to examine the importance of negative gearing for the economy.
Negative gearing – where a person borrows money to purchase an investment without receiving enough income from the asset to cover the interest expenses and other maintenance costs – has enabled many people to become investors. Property investment is not simply the domain of the wealthy: a recent survey of people with properties managed by LJ Hooker indicated 37% had a household income of $100,000 or less. Property investment can be an effective way for people to increase their wealth through capital appreciation.
From an employment perspective, abolishing negative gearing for established properties could reduce employment in a number of sectors. The real estate sector may require fewer strata and property managers and as rental properties require regular maintenance and renovations to meet regulations, a fall in demand would impact trades people, handymen and other service providers.
If there was a deadline for new legislation to be introduced, it could create a rush in sales, followed by a drop-off in buying activity. This sort of activity is never good for the wider market. Such activity hurts everyone from investors to first home buyers and even retirees planning to sell to for the best years of life.
In addition, we would also expect to see both an initial and long term increase in rents as investors look to cover their costs or sell-off property, reducing the available pool of rental properties.
Negative gearing, asset depreciation, repairs and maintenance have long been allowable tax deductions and a key feature of the Australian taxation system, to support investments and maintenance of assets across all industry sectors