Negative gearing is now the new hot topic. Property prices have been rising for over a decade now, but negative gearing has suddenly become the main reason. Why ?

Politically the Labor government see it as a point of difference and a vote winner. Who doesn’t want to see lower house prices in an effort to give our younger generation / children a chance at home ownership? Maybe it’s the millions of home existing home owners that don’t want to see their sacrifices and hard work eroded by a change in policy. Maybe they prefer to see higher prices and simply lend their children the money.

There is little doubt that investors increase demand for property, but is that enough to drive prices to the levels we see today. Why are investors singled out when it’s clear that demand is driven by other participants such first home buyers, existing home owners looking to upsize or down size, foreign investors, Superfunds, developers. It’s also driven by low interest rates, population growth, which if it continues at the rate its going, will place further upward pressure on prices, unless there is an increase in supply.

The supply side is not often mentioned. It’s not a “vote winner” as generally it tends to show our current and prior governments failings in this area. So best they don’t mention that, and blame investors.

As accountants we sit down with our client when choosing a property and calculating the return. There is little or no emotion in the decision to purchase. It’s all around the numbers. So come auction day, it’s the investor that generally pulls out first when the price is being battled out by owner occupiers. The emotion is at an occupier level, so you do see some crazy bidding. An investor generally walks away, while a home owner, who is getting sick of missing out, drives the price up in the hope they can secure it and end their search. Now it’s important not to confuse a developer with an investor. A developer may indeed push the price up beyond anyone’s purchase price if they perceive value in a development. Axing negative gearing will not necessarily deter the developer. Yes a developer sells to investors, but they also sell to home owners. So if you deter developers and their developments, you also contribute somewhat to drying up the supply of residential housing.

There is the argument that negative gearing is a burden on the federal budget. It wouldn’t be alone. Our concern is that the data is one sided. Anytime we see “the cost” of some tax policy, we rarely see the benefit quoted. It’s a little like a sporting event like say the Grand prix. We know the cost, but no one can measure the benefits with any accuracy. Now we don’t blame them, it’s virtually impossible to calculate accurately, but at least acknowledge that it does exist and have some open discussion and analysis.

No one of either side of the argument for or against negative gearing can really predict the outcome of removing or modifying negative gearing. There are valid arguments on both sides of the table, and each argument can be refuted. What we do know is that the outcome is unpredictable and if we get it wrong, fixing it isn’t going to be easy.