The implications of removing negative gearing on property

Labor’s new strategy to remove negative gearing on 2nd hand rental properties will create some very interesting implications for rental property investment. Whilst the obvious is the lack of deductibility of interest, it is the secondary considerations that will impact many investors.

An astute investor will always consider their exit strategy when making their initial investment decision. Now that second hand rental properties will no longer be eligible for negative gearing the only exits when an investor buys a new property will be to an owner occupier; to a cashed up investor; or an investor who will wear the implications of interest non-deductibility.

Often these properties are not the most desirable for an owner occupier as they are built and designed to be rental properties. For a cashed up investor the cash return from rents is at this point very low, and they will only enter into the market if the rental return improves. Similarly for an investor wearing the implications of interest non-deductibility, they will desire a much greater rental return.

The implication will be for rents to increase or for market value of properties reduce, the latter not being very palatable to current investors.

In our region, the bulk of those involved with negative gearing are usually medium income earners who are looking for an option to invest outside of superannuation. With 57551 rental properties in Mackay, our market can’t afford a further hit to values.

But of course, many of these investors can still invest in shares and business investment, so depending on your betting on the Federal election, there may be some asset allocation realignments done before the next election.

1 ATO data quoted by the Property Council of Australia