As our political parties propose and debate changes to negative gearing, we have to wonder why they are bothering to do so. The current issue of affordability of housing is being toted at the reason for proposing changes to parliament, yet, the lag between any changes to negative gearing and their effect means that changes will do nothing, or almost nothing to change property prices in the current market.
Here is how negative gearing works. Investors buy properties whereby the income (rent) they receive from the property is less than the expenses (outgoings and mortgage fees), meaning that the property costs them money to keep, essentially running the investment at a loss. Buying property like this is a marginal investment, meaning that investors will hold property at a loss banking on a return at some point. While most Australians reject the risk involved other kinds of marginal investments, such as borrowing money to buy shares, property seems to be a risk that many people are prepared to swallow. Negative gearing is a spoonful of sugar designed to assist marginal investment in property by offering a tax deduction for losses incurred on the ownership of rental properties. Conversely, those with positively geared property (rental properties that make a positive return) pay tax on that profit.
Why would anyone have a property that they continue to lose money on (i.e. that is negatively geared)? It is because we, Australians, expect that the capital value of property will continue to increase and that the economy will continue to increase and that wages will continue to increase… but will they?
Without overtly saying it…there is some evidence that despite the massive growth in the property market in recent years, we might be looking at a stabilisation of pricing. Things like wages increasing at the slowest rate in history. The average Australian household debt at a record high level of around 187%. The restriction of foreign investment and 457 visas. The mid-year budget from Treasury predicted a shrinking housing sector and it will be very interesting to see what the May budget predicts for property.
Negative gearing isn’t really the issue – the marginal (or risky) investment in property is the issue. That is why any changes to negative gearing isn’t going to make a difference for a long time. It is unlikely (political suicide) that any changes to negative gearing will apply to those properties already owned and that are negatively geared.
Changes to negative gearing for the investment of new purchases will do little to insulate the risk that sits in Australia’s investment margin, indeed it is likely to discourage the investment in property at a time when a lot of people are concerned about the sustainability of demand moving forward…and that could affect property prices.
The general factors that impact property prices (above the individual features of a property) in a market are the number of properties available to purchase (supply), how many people are seeking to purchase (demand) and the resources available to those people (market price).
For anyone thinking of selling, the lack of stock on the market is the biggest factor working in your favour. At least in the Eastern capitals, declining levels of stock have driven buyers to compete aggressively to secure property from the low levels of stock available. The continued low number of listings (specifically in houses over units or apartments) is maintaining high prices, despite the controls that are being exercised on demand including lending restrictions, foreign investment restrictions and the proposed changes to negative gearing. The ‘tipping’ point that people refer to in affordability refers to wage growth slowing, private debt increasing and the lack of certainty about the local market’s ability to continue to drive prices higher.