A Property blog by Paul Bennion.
Over the past week there has been a heated debate about negative gearing since the Federal Labor Party announced that it would quarantine negative gearing benefits to just new home building if it wins the next election.
The Federal Coalition Government have attacked these proposed changes to negative gearing but have still left the door open to their own possible changes to negative gearing as a way to reduce the huge budget deficit.
Critics of negative gearing argue that it gives an unfair advantage to property investors at the expense of first home owners and low income earners.
They point to the declining number of low income and first home buyers in capital city property markets during recent years and argue that these property buyers are being priced out of the real estate market by investors.
However, this argument ignores the fact that market forces are now coming into play with low interest rates now resulting in a residential building boom that is resulting in an easing of property prices in major capital cities such as Sydney and Melbourne.
Affordability is driven by supply and demand and when government tries to intervene in this equation, it can distort the market to the detriment of property owners.
Even encouraging a debate on negative gearing can creates uncertainty in the minds of investors.
We have to remember that the vast majority of property investors in Australia are just mum and dad investors who are using property as a way to create wealth for their retirement.
By indicating there will be future changes to negative gearing, political leaders will only discourage people from investing in property and become reliant on the government pension to fund their retirement which does not make financial sense.
There are now around 2 million taxpayers in Australia who own investment properties and if only 10% stop investing in property as a result of changes to negative gearing, this means that there are 200,000 taxpayers more open to rely on the government to fund their retirement.
The negative impact that changes to negative gearing can have on investor confidence was highlighted back in the 1980s.
When the Hawke Government abolished negative gearing back in 1985, it led to a dramatic reduction in the number of property investors in the real estate market and inturn the supply of rental properties.
As a result of this flight of investors from the property market, weekly rents throughout Australia surged by 37% and by a massive 57% in Sydney.
History shows that changes to negative gearing would undermine investor confidence in the property market and discourage people from buying investment properties.
The reality is that most advanced economies throughout the world provide tax advantage to people who buy property.
Australia is no exemption and negative gearing has allowed many hard working mum and dad investors to purchase rental properties and reduce their taxable income.
Without these tax incentives and rental homes provided by the private sector, Governments throughout Australia would be placed under huge financial pressure to provide social housing at a massive financial cost to the whole community.
And this does not take into account the additional number of people who would stop trying to fund their retirement through property investment and want the government to fund their retirement through a government pension.
It simply does not make financial sense to tinker with negative gearing which delivered critical private sector investment into the property sector over many years for the benefit of the whole community.