Negative gearing is a fundamental factor driving investment decisions, new research shows.
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With a chronic shortage of rental properties, and lack of affordable housing supply, is it time to have another look at negative gearing?
New research from the University of Technology Sydney (UTS) provides the first concrete evidence that negative gearing is a fundamental factor driving investment decisions. This may explain why house prices are rising, despite higher interest rates.
Negative gearing is the ability to offset investment losses against personal income. It occurs when an investor uses debt to buy an asset, such as a rental property, which cannot produce enough income to meet interest payments and other related expenses.
UTS property economics expert Dr Mustapha Bangura and Associate Professor Chyi Lin Lee from UNSW used dynamic modelling to examine the changing relationship between Sydney house prices, investor numbers, population growth, interest rates and other key factors over 27 years.
Their research paper, The impact of negative gearing on the investment decisions of housing investors: the case of Greater Sydney, was recently published in the Journal of Housing and the Built Environment.
“In the upside-down world of Sydney real estate, during times of lower yield, the number of investors actually increased, and vice versa. Losing money was not a deterrent, due to Australia’s generous tax laws,” said Dr Bangura.
“We discovered a residential investors’ profile in which negative gearing is being used to cushion any net rental loss during periods of low yield while expecting capital growth over their holding period.
Our results could be used by tax and housing policy makers to recalibrate tax laws relating to negative gearing, especially for residential investment.
Dr Mustapha Bangura
“The results suggest that investors will continue to compete with home buyers in areas of limited housing supply, despite low yields. If we want to help more people move from renting to owning, then negative gearing needs to be recalibrated,” he said.
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The United Kingdom and New Zealand are phasing out negative gearing, and there are lessons to be learned from their experience, said Dr Bangura. Compared to other countries, Australia’s negative gearing policy is one of the most generous.
Australia previously experimented with prohibiting negative gearing in 1985 but it was reversed due to fears of rising rental costs. There continues to be extensive discussions around negative gearing, and whether investors can continue to invest in residential properties even with rising costs.
Dr Bangura’s analysis shows they can. “Negative gearing is the key lever that needs to be pulled to increase home ownership. Government savings can then be invested into new housing, increasing supply, and avoiding pressure on rents,” he said.
“Our results could be used by tax and housing policy makers to recalibrate tax laws relating to negative gearing, especially for residential investment.”