Is Negative Gearing to Blame for First Home Buyers’ Woes?

Is negative gearing killing the first home buyer market?
Photo: Paul Coster

The ABS Housing Finance data for November showed that first time buyer loan commitments fell to a fresh low of 12.3 per cent, while investor loan commitments experienced further growth. 

With first time buyers clearly struggling, many are holding the availability of negative gearing of investment property responsible for the continual decline of this segment. 

Aussie Home Loans founder John Symonds even went as far as to say that negative gearing is killing the first home buyer market. 

What is Negative Gearing and What Role Does it Play in the Housing Market?

Essentially, negative gearing is a tax incentive that allows investors to claim losses associated with their investments against their income, including wages and salary.

The controversy surrounding negative gearing in property comes from the argument that it encourages investors to pour their money into the established market and compete for houses against first time buyers, therefore driving up property prices.

“Many are holding the availability of negative gearing of investment property responsible for the continual decline of [the first home buyer] sement.”

According to independent property advocate Catherine Cashmore, investors make up almost half of the active buying market in cities such as Melbourne and Sydney.

“The proportion of investors pouring into the established market, which is essentially a limited pool of second-hand dwellings, has inflated values and created a widening gap between price and rental yields,” Ms Cashmore says.

How Negative Gearing Works: A Simple Example

An investor borrows $380,000 at a rate of 5.5 per cent to buy a unit for $481,500. The net return from rental income is 4 per cent.

On an annual basis, the net income the investor receives is $19,260. The interest cost of the loan however, is $20,900. This gives a net investment loss of $1,640.

Negative gearing allows the investor to offset this loss of $1,640 against other income sources, therefore reducing the investor’s overall tax liability. 

Many investors expect the real return on a property investment to be the capital gains when the property is eventually sold.

Benefits of Negative Gearing Include Lower Rent

Whilst it is debatable as to whether investors would enter into the housing market solely to reap tax benefits, negative gearing has undoubtedly been an attractive tax incentive that has helped to create a source of rental accommodation. 

Taking this away could risk investors exiting the market, therefore driving up rental prices.

“Many experts believe that… the surge in investor activity is fuelled by low interest rate, renewed confidence in the economy and disappointment in the performance of the share market.”

According to Real Estate Institute of Australia deputy president Morgan Shearer, this is exactly what happened on an attempt in 1985 to change negative gearing.

“Rents rose 37 per cent across Australia and by 57 per cent in Sydney,” Mr Shearer says. 

Is Negative Gearing Killing the First Time Buyer Market?

In the absence of any detailed studies commissioned to analyse the impact of negative gearing, it is difficult to say whether tax breaks have been the main culprit for first time buyers’ woes.

However, experts such as Lisa Montgomery from Resi Mortgage believe that rather than negative gearing, the surge in investor activity is fuelled by low interest rates, renewed confidence in the economy and disappointment in the performance of the share market.

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