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Dangers of Changing Negative Gearing

Changes to negative gearing could be just around the corner in Australia, with Labor making promises of reform if they win the next federal election. The proposed changes have been designed to help first-home buyers enter the property market, with negative gearing under Labor only applying to new properties. Despite the good intentions of this plan, a number of real estate experts think it's a bad idea, and one has even come out saying it could tip Australia into a recession.

Negative gearing reforms were first pitched by Labor leader Bill Shorten before the last federal election: "We will put the great Australian dream back within the reach of the working and middle class Australians who have been priced out of the housing market for too long." The new policy will only affect investments made after the date of implementation, which will be a yet-to-be-determined date after the next federal election. Along with stopping taxpayers from claiming tax deductions on investment properties, the Labor plan will also see the capital gains tax exemption halved from 50 to 25 percent.

According to the Grattan Institute, the top 20 percent of people involved in negative gearing get 53 percent of the economic benefit. The Labor policy could make it easier for first-home buyers to enter the market by slowing down the top-end of town. However, while the wealthy definitely benefit the most from negative gearing, it's important to note that almost 1.3 million Australians own a negatively geared investment property, and more than half of these 1.3 million people earn less than $80,000 a year.

While Labor's plan is supposed to make it easier for everyday people, voters are mixed on the idea according to the latest polls. Labor’s $32 billion plan to trim back negative gearing had mixed reactions in the latest Ipsos poll, with 44 percent of people against the policy and 43 percent in favour. While voters still prefer Labor over the Coalition at 54 to 46 percent, the crowd-pleaser policy is not getting the strong support that many expected. Interestingly, it was Baby Boomers, or those over 55, who provided the strongest support for Labor's plans at 47 to 41 percent.

Not all experts are sold on the idea, either, with chief economist at UBS, George Tharenou, saying he was worried about the effects of the change on the wider Australian economy: "My concern would be that if you were to make a material change to tax policy at the same time as banks are tightening lending standards, it could exacerbate what's already a downturn into something more serious". Mortgage company boss "Aussie John" Symond went one step further by saying "it could tip Australia into recession".

Tim Lawless is also concerned about the new proposal, with the Head of Asia Pacific research company CoreLogic saying the changes could result in less investment in the housing market: "We could see more investment demand funnelled into new housing, but of course we know that buying into a new housing market is fundamentally higher risk than buying into the established market... New housing quite often has a long settlement period, particularly if you are buying into the apartment sector. Anything can happen between when you sign your contract and go to settle."

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