What Happens If Negative Gearing is Abolished?

There's been a lot of chatter lately about the possibility of negative gearing being scrapped or modified in Australia, and it's got property investors and the broader market buzzing.

If you're an investor or just someone keeping an eye on the market, you might be wondering what this could mean for you and the country as a whole.

What Is Negative Gearing?

In simple terms, it's a tax benefit that allows investors to deduct any losses they make on rental properties from their taxable income. For many, this has been a key incentive to invest in property, especially when rental income doesn't quite cover the mortgage and other expenses.

Potential Changes

Now, with the federal government reportedly looking into options to curb the use of negative gearing and capital gains tax deductions for property investors, many landlords are feeling uneasy. Without the tax breaks from negative gearing, holding onto a negatively geared property could become significantly more expensive. This is especially pressing given that many investors are already dealing with increased expenses like higher interest rates—thanks to 13 interest rate rises—as well as rising costs for insurance, water, energy, and maintenance. In some areas, investors are reportedly claiming up to $88,000 a year in tax-deductible losses. That's a hefty sum that, if no longer deductible, could put a strain on their finances.

Moreover, investors are limited in how much they can raise rents and how often, which means they can't always offset increased costs by passing them onto tenants. This could lead to more investors choosing to sell, potentially leading to forced sales in some cases.

Shifts in the Housing Market

But it's not just individual investors who are feeling the heat. The broader housing market could see some significant shifts if negative gearing is altered. For starters, if a large number of investors decide to sell their properties, we could see a marked increase in market housing supply. While that might sound like a good thing for buyers, it could also lead to a decrease in property values, or a period of stagnant growth, if demand doesn't keep up with the supply increase.

The Rental Market

On the rental side of things, fewer investment properties could exacerbate the existing rental crisis. With less rental stock available, tenants might find it even harder to secure housing, potentially driving up rents even further. Some experts suggest that scrapping negative gearing could discourage new investments in rental properties, leading to a longer-term shortage in rental supply.

The Construction Industry

There's also the impact on the construction industry to consider. Negative gearing has been credited with encouraging investment in new housing, which helps boost supply and supports jobs in construction. Changes to this policy could reduce the incentive to invest in new builds, potentially slowing down the rate at which new housing comes onto the market.

It's a complex issue with no easy answers. On one hand, removing or altering negative gearing could free up significant funds—some estimates suggest billions of dollars—that could be redirected into other areas like social housing.

On the other hand, the immediate effects on investors and the housing market could be disruptive, leading to unintended consequences like increased rents and decreased housing affordability.

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