Why negative gearing is not a strategy

By Victor Kumar
Negative gearing has hit the headlines again courtesy of new research showing changing the long-standing taxation policy will have a big impact on the market and on jobs, too.
Labor first proposed restricting negative gearing to new properties a couple of years ago, which was a time when the strong prices rises in the Sydney market were seen by some politicians as something that needed to be “fixed”.
Property investment professionals, on the other hand, understood that it was just a sign of the Sydney market reaching the peak of its cycle.
Not a strategy
Of course, today, the Sydney market, along with Melbourne, is posting moderate median price falls as the cycle moves into its consolidation phase.
So, its market is very different to when the policy was first announced.
The thing is, it didn’t make any sense then and it makes even less sense now.
What many pollies and some media commentators fail to understand is that negative gearing is not a strategy.
It is a mere moment in time for many investors.
In fact, recent research by PIPA, found that 60 per cent of investors say their portfolio will be positively geared within five years.

With most property investors only owning one or maybe two properties, it stands to reason that a significant cohort of them are people just trying to get ahead like police officers and teachers.
Not only do they help to keep us safe or teach our children, they do so on wages that could be considered average at best.
That usually means that negative gearing helps with their cash flow for a period of time because their incomes were never high to start off with.
So, if the negative gearing policy is tinkered with, the end result is likely the reduction of everyday investors, like those working in essential services, who don’t want to be millionaires, they just want more than merely surviving on the pension in retirement.
No panacea
Likewise, one of the arguments for restricting negative gearing to new dwellings is that it will somehow entice more investors to buy brand-new properties.
In real life, few savvy investors choose to buy new dwellings because the purchase prices are usually inflated due to the various commission payment schemes in new builds.
Labor’s “reasoning” is also holier than an old pair of socks because, even with negative gearing in play today, only six per cent of investors opt to buy new, according to the PIPA research.

Clearly that means that most investors don’t have a strong interest in new properties now and that demand is likely to get even less if the policy is tampered with in the future.
Where to from here?
At the end of the day, negative gearing is one of those political footballs that seems to be bounced around whenever it suits a particular party.
Back in the 1980s, property price growth in Sydney (yet again), resulted in the abolishment of negative gearing by the Federal Labor Government because they hoped it would slow the market down.
However, the policy change resulted in rents soaring in Sydney (and Perth) for example, because demand from tenants was far outweighing supply by investors, as investors left in droves and fringe developers stalled their developments due to their inability to get finance as pre-sales were becoming harder & harder to comply with, especially with a lot of off the plans not even valuing up to the original contract price.
Within a very short period of time, negative gearing was reinstated.
So, if there is anything we can learn from that experience it’s that tinkering with taxation policies in the vain hope it will somehow make things “better” for a small proportion of the population is misguided at best and irresponsible at worst.
When it comes down to it, about 70 per cent of the Australia population hold an interest in real estate, with about two million also owning just one or two investment properties as well.
That’s a fairly big slice of the voting public who probably don’t want to see their financial futures go down the gurgler because of poor decisions that are more representative of populist policies than anything else.