You hear something about it every day in the press. Someone or other is holding forth about negative gearing. Some say it is bad for the housing market and makes it more difficult for first home buyers.
It is certainly true that fewer first home buyers are participating in the Australian dream of home ownership and it should be a concern. I wonder however whether we can simply blame one thing, negative gearing, for this happening. Perhaps there are other factors. New generations might have other priorities which could include spending their money on living life and gaining experiences through travel and other forms of education.
Let’s start by trying to define negative gearing in simple terms.

• Negative gearing starts with an investor borrowing to purchase an income producing asset.
• That investment can be, and more commonly is, in investment property but it can also be in other investments such as shares.
• Crucially the investment is not capable of making a profit due to operating costs, mainly due to bank interest, being greater than rental income.
• That resulting loss can then be offset against other taxable income giving the investor a tax break.

You might ask why would an investor purchase an income producing asset which is going to operate at a loss and the tax break will only recover part of the loss. The answer of course is that the investor is not thinking about the short-term loss but of the longer-term objective of making a capital gain. Experience tells us that real property increases in value over time and that can be at a greater rate than the cost to the investor of the accumulated operating losses adjusted for the negative gearing tax break. In addition, when the asset is sold the investor is eligible for a 50% discount on capital gains tax if the asset has been held for 12 months or more on a contract date to contract date basis.
To the average person, investing in real-estate appears to be more attractive than shares because it is something we all have a respect and understanding for. Real estate is something that you can touch and feel. On the other hand, capital growth on Investments in shares is possibly not as predictable but perhaps more attractive to those who know and understand the share market.
The current political debate about negative gearing (and the capital gains discount) may be unsettling for potential investors but I am not convinced that it will be the “turn off” anticipated.
For one thing mum and dad investors who are interested in putting something aside for the future will continue to see real estate (or shares) as the only clear option available. Superannuation is of course, the other option but it is preserved until retirement age and does not give the same flexibility if there is a need for cash in an emergency.
We will eventually see how the debate turns out in an environment where the last federal budget reduced the effect of negative gearing by disallowing some previously allowable deductions, the Australian Labour Party has stated its policy on negative gearing and capital gains which would see a further reduction in tax breaks and the Greens have just announced its policy which would effectively eliminate the capital gains discount over five years and limit negative gearing to one property.
I guess we will see.

~ Ian Sharpe