There has been lots of discussion lately about potential changes to negative gearing. It would need to be a very brave (read, secure) government to remove or even tamper with it, as it would impact many asset classes… not just property. It is so deeply entrenched in our property market that any change would alter the market balance and cause unforeseen knock on effects.
For property, negative gearing is only available on rented property, so the impact will hit tenants as well as owners. Residential real estate investment is at the sharper end of the property investment return spectrum, and any reduction in negative gearing would make it less attractive to many investors. There would be a cooling off of the market, making many new apartment developments not financially feasible. Some may think fewer developments is good, but less developments = less new apartments = reduction in supply of rental property = increased rent. Normally increased rent would then cause an increase in prices, but without negative gearing the dynamic has altered, so the acceptable return to investors has shifted and rents would stay higher, and prices would stay lower. It’s not sounding like a great policy so far.
One may argue a cooling market is a good thing as it makes housing more affordable. Well it really only makes rental property more affordable. On average tenants move every 2 years as their circumstances change. But is someone who moves every two years, about to buy when they will have to pay 5% stamp duty every 2 years? That is about one years rent in tax. (don’t get me started… a topic for another day…) So for now, they will have to suffer higher rent.
According to SQM Research the vacancy rate in Melbourne is 2.3% as at June 2015 which is already tight so a change to negative gearing could be very bad news for renters. Also the Federal Government can ill-afford new ways to disengage voters right now which suggest there wont be a change any time soon.