Negative gearing: the myths, facts and what investors need to know

Every election cycle seems to generate a debate around negative gearing but would changes paring back this property investor tax concession actually impact the property market?

Cog wheels and gear inside a head shape
Everyone seems to have an opinion on negative gearing but far fewer actually understand the pros and cons or how the policy impacts property prices. (Image source:

It’s that time in the political cycle - negative gearing is once again in the spotlight.

Most commentators will tell you altering negative gearing is a death wish for any politician who contemplates it. But that hasn’t stopped The Greens proposing a winding back of tax benefits for landlords.

To fully understand the pros and cons, let’s take a look at negative gearing and the role it plays.

What negative gearing policy is being discussed?

Negative gearing allows investors whose income from a property fails to cover their payments claim that loss and reduce their taxable income.

According to the ATO, over 1.9 million people earn rental income from investment properties, with around 1.3 million reporting a net loss.

That means 600,000 investors didn’t receive any tax benefit, with many of those paying income tax on their earnings.

Over time, many of today’s negatively geared properties will move to neutral, then positive gearing, adding to the government’s tax revenues.

In its current form, negative gearing has been around since 1980. But it was the Howard government’s halving of capital gains tax (CGT) for properties held for at least a year (2000) and, to a lesser extent, allowing super funds to invest in residential property (2007), which saw real estate prices and capital gains truly take off.

Does negative gearing push up property prices?

Negative gearing and CGT discounts do encourage people to invest in residential property, but is this the reason for Australia’s high property prices?

Critics of the current regime point out that comparable countries don’t give investors the sort of leg up Australia does.

So, you would think these comparable countries would be experiencing lower growth in real estate prices than Australia. But it turns out, most have experienced the same pattern of changes in property values as Australia.

That’s because Australia’s negative gearing is just one component adding to a series of factors playing out across most advanced countries.

The steady decline in interest rates over the last 30 years has encouraged more investors to enter the market, prompting banks to shift more lending towards residential property.

That trend was accentuated by government stimulus to address the Global Financial Crisis (2008-09) and the Covid pandemic (2000-2022). On both occasions a lot of the extra money found its way into real estate.

Factor number three is ageing populations across the western world. Older people are more likely to own property and their increasing life expectancy means less property coming onto the market through deceased estates.  

And there’s the other factor, property’s popularity. Just like Australia, people in Canada, New Zealand, the Euro zone and a dozen other places are attracted to property thanks to its record of capital growth, stable earnings and because it is a market they understand.

Hasn’t negative gearing been stopped before?

In 1985, the government “quarantined” negative gearing, leading to many predictions of slumping house prices and exploding rents.

But it didn’t work out that way. During the period the quarantine was in place, ABS figures show rents rose 22 per cent, but in the two years after the quarantine was lifted, rents rose by 21 per cent.

Similarly, data from the States’ Valuers General shows house prices in most cities continued to rise more or less in line with the trends in place before the quarantine.

Critics often point to Sydney’s one year rises as evidence the quarantine pushed up rental prices.

But a closer look reveals local market conditions were the dominant reason, as other major cities saw rents fall while the quarantine was in place.

If it happens, will house prices fall this time?

If this proposal comes to pass, there will be plenty of pundits predicting house prices will fall significantly, but that is very unlikely.

In 2016, the Grattan Institute estimated abolishing negative gearing and halving the CGT discount to 25 per cent would leave house prices 2 per cent lower than they would have been.

It’s an interesting number but let’s be honest, it’s just their best guess.

As for those alarmist predictions of huge falls if anything changes, they sound a lot like those predicting 40 per cent falls in house prices when immigration stopped during the pandemic.

I don’t think negative gearing will be abolished but if it is, I doubt the Australian property market will do anything more than exhibit a few short-term fluctuations.

For one thing, any change would include grandfathering of existing arrangements. That would make landlords less likely to sell their property. So, no rush of investor-owned properties being put on the market.

But more broadly, all the other factors reinforcing Australia’s property prices would remain in place.

Certainly, the problems around building more housing, including the high cost of housing construction and limited land releases for development (especially in Sydney) will continue.

So would the high development charges and tight planning restrictions in most of Australia’s inner and middle ring suburbs.

It is this last factor which has proven the most potent, as it is the inner and middle ring suburbs with limited options for home buyers and investors that have seen the biggest price rises over the last 30 years.

So, will a restriction on negative gearing have an impact?

Yes, over time it will play a part, but other factors like the strength of the economy, interest rates and the development of housing in areas buyers want to live in will be much more important.

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