Have you ever stopped to wonder what would happen if the government banned – yes, banned – negative gearing. It seems almost unimaginable considering how that nation’s entire investment and commercial property marketplace is built on tax deductible debt, yet this morning we are reading that the Reserve Bank of Australia is urging the Government to consider its future. That means, people would not be able to deduct expenses from their property that exceed the income.
Negative gearing is done to stimulate investment and stimulate is what it is doing is what it is doing here in Australia right now. By allowing people to deduct their negative expenses from their personal income, it encourages them to focus on long term capital returns of investment over the short term fluctuations of cyclical property revenue. And each time the heady winds of property investment catch hold and prices start charging forth we see those who are uncomfortable about the boom start to cry about how negative gearing is driving it.
But you ask yourself, without negative gearing where would the rental market in our country be? If you stop and read the property papers, undersupply has until recently been the big word in property. Chinese investment has underpinned an apartment boom that is not necessarily driven on gearing in Australia. Our love for bricks and mortar in our country is long and strong. Despite being cyclical, Australians always seem to come back to property as their primary asset choice, and with negative gearing it is attractive to many in the middle income brackets. But it is gradually becoming more and more unaffordable. In fact, today, housing prices are indeed so high that people need to be able to bridge the gap of owning an asset by being able to deduct their losses… don’t they?
The Reserve Bank thinks not. They have lodged a submission with the Parliamentary Enquiry on home ownership this week that pushes our nation to address the investor-led surge in property prices that the Reserve Bank Governor Glenn Stevens says is now “crazy” in Sydney.
“The Bank believes that there is a case for reviewing negative gearing, but not in isolation. Its interaction with other aspects of the tax system should be taken in to account,” the RBA told a parliamentary inquiry on home ownership.
According to the Sydney Morning Herald today, the RBA said that being able to deduct legitimate expenses incurred while earning an income was an “important principle in Australia’s taxation system, and interest payments are no exception to this.”
If being able to negatively gear meant that landlords accepted lower rental returns, the policy may be helpful for housing affordability for renters, it said.
However, it also said that when combined with the 50 per cent discount investors receive on capital gains, negative gearing “may have the effect of encouraging leveraged investment in property.”
But in true form, Treasurer Joe Hockey has ruled out action on negative gearing refusing to bite the hand that feeds his government. Meanwhile the Labor party have come out this week and placed their policy under “review”, perhaps looking to score points from those who cannot afford to leverage it.
Readers here have been through several property cycles in their lives, and have seen heady days come and go without government popping the gearing bubble, even when they have gone on far longer than people were comfortable. But it leads us to the question – do you think the Government should attempt to pop the bubble this time or let free markets reign?