Three Myths About Negative Gearing Debunked

Three Myths About Negative Gearing Debunked

Listening to the housing industry you would think that property tax concessions single-handedly drive new housing supply, keep a lid on rents and provide an opportunity for middle and low income earners to build wealth. In reality, these costly tax breaks increase speculation activity in the housing market, reduce affordability for first home buyers and primarily benefit high income earners. So why have some of these myths proved so enduring?

The Labor party took everyone by surprise over the weekend when it announced it would limit negative gearing to new housing and reduce the capital gains tax discount to 25%. Proving negative gearing is no longer politically untouchable, the government has hinted its own policy may go some way in the same direction. But even then, some of the myths and half-truths peddled by vested interests have returned to haunt the debate.

Negative gearing is not the housing saviour those in the industry claim it to be. Here are three myths that the housing industry wants you to believe.

Myth 1: Changes will hurt mum and dad property barons

Like many myths, this one relies on some degree of truth – there are many middle income earners who negatively gear – but the emphasis on this group as the primary beneficiaries of property tax concessions relies on a statistical sleight-of-hand.

The government this week pointed out that most people that negatively gear property earn less than A$100,000. This is perhaps less surprising when you consider that so do almost 90% of the population: $100,000 a year puts you well in upper income territory. And the proportion of taxpayers negatively gearing is much higher for those earning over $100,000 than below this amount.

Compounding this myth is the way its proponents use taxable income to show the distribution of tax benefits. People who negatively gear have lower taxable incomes because they are negatively gearing. This explains the high proportion of people with no taxable income owning loss making property investments – their declared losses are so large they have reduced their taxable incomes to zero. When we adjust to look at people’s incomes before rental losses are taken out we see that the vast bulk of the tax concession goes to those at the top. The top 10% of income earners receive almost 50% of the tax benefit from negative gearing.

Three Myths About Negative Gearing Debunked

Capital gains are even more skewed towards the wealthy. The top 10% of income earners receive almost 70% of the capital gains.

But what about all the property investing nurses and teachers we hear so much about? Well, there are some teachers and nurses that negatively gear – around 12% and 9% of them respectively. But they are much less likely to use these tax breaks than anaesthetists (29%), surgeons (27%) and finance managers (23%). And the average tax breaks received by those in the high income professions are also much larger, with the average anaesthetist reducing their tax bill by ten times more than the average teacher.

Myth 2: Negative gearing promotes new housing supply

The property industry argues that tax incentives for investment housing encourage more homes to be built. If so, it is a very inefficient way to do it. More than 93% of property lending is for existing housing.

Because negative gearing increases the price of homes it may encourage a little more building. But the big restraint on new building is not a lack of profitability in housing, but the availability of land and the planning permissions required to increase density in inner and middle suburbs. Tax concessions in this supply constrained environment mainly just bid up prices for the limited new supply.

In any case, most policy proposals carve out new supply. The Labor policy continues to allow full tax write offs for rental losses on new housing. So if anything the proposed policy change would encourage new supply.

Myth 3: Negative gearing keeps rent prices lower

But the most enduring myth around negative gearing concerns its role in controlling rents.

To understand the origin of this myth, we need to explore some history as well as economics.

The property industry claims that rents rose when the Hawke government restricted negative gearing in 1985. But this is a Sydney-centric version of the past. Rents did rise rapidly in Perth and rose somewhat in Sydney. Yet inflation-adjusted rents were stable in Melbourne and actually fell in Adelaide and Brisbane. In Sydney and Perth population growth and insufficient residential construction – due to high borrowing rates and competition from the stock market for funds – not the policy change, led to the rent rises.

Three Myths About Negative Gearing Debunked

The industry also claims that if negative gearing is restricted, landlords will try to pass on some fraction of their higher tax costs by pushing up rents. But will they succeed?

Rents are ultimately determined by the balance between demand and supply for rental housing. In property markets – as in other markets – returns determine asset prices, not the other way around. Rents don’t increase just to ensure that buyers of assets get their money back.

Many other landlords with investment properties that are profitable won’t be paying higher taxes. Tenants will try to beat rent rises by threatening to move. So competition in rental markets will limit material rent rises.

Some investors may sell their properties if tax concessions are less generous. This might reduce house prices, but it will not increase rents. Every time an investor sells a property, a current renter buys it, so there is one less rental property and one less renter, and no change to the balance between supply and demand of rental properties. Indeed, one of the benefits of changes to negative gearing is that it makes housing more accessible for first home buyers.

The Labor party was brave to propose changes to negative gearing and capital gains tax concessions. But until changes like these are made, the property industry will continue to try to muddy the debate with myths and half-truths, and most ordinary Australians will be the losers.

Danielle Wood, Grattan Institute and John Daley, Grattan Institute

This article was originally published on The Conversation.


  • No surprise that people on higher tax brackets can take more advantage of tax deductions!

    ATO Tax stats 2012-13 is here:–100-people/

    Of the 15% of taxpayers with rental income, 10% had a net rental loss and the other 5% had a rental profit.

    More importantly:
    People with the top three taxable incomes paid 27% of all net tax.
    The next six paid 20% of all net tax.
    So the top 9% paid 47% of all tax.

    Do high income earners pay their fair share of tax? No way – they pay much more!

    In the USA there is land tax based on the value of the property – including principal place of residence. Offsetting this is a tax deduction for the mortgage, so in reality equity is taxed rather than the pure value of the property.
    In the US capital gains (and dividends) are taxed at a flat rate – no need for indexation or CGT discounts.

    I think its time the discussion considered how other countries deal with these issues rather than just peddling the politics of greed and envy.

    • What those fail to account for is what proportion of total income that top 9% earned. Quoting the “percentage of total tax paid” without that figure is meaningless if trying to demonstrate whether they pay their “fare share”.

      Proof once again that statistics can be misused to support any argument.

  • The crux of this matter is housing affordability. The elephant in the room that no one in the media to prepared to discuss that first and even second home buyer’s expectations have escalated disproportionately to their incomes.

    I have been in the building industry for over 20 years and in that time have been in roles that give me access to vast number of current housing plans for construction as well as up to date in depth data from the like of BIS Shrapnel and the relevant housing authorities and major building products suppliers nation wide. Two things stand out to me from having this information at hand.

    1. The size of houses has increased dramatically. Houses under 100m2 were common 20 years ago. There were carports instead of the now common single or double lock up garage with remote roller door. Decks and pergolas and often said carports or even driveways and landscaping were often extras people saved for at a later date just so they could get their foot in the door on the new home.

    Houses now are pushing close to 200m2 under roof., Not only that, standard wall height has jumped up in size, a 2.4m wall height is not a common thing any more. 2.55m or 2.7m is now more common.

    Please want open plan living, this causes increases in all aspects of the structural materials and to labour and crane hire and transport costs.

    2. People expectations on the quality of finish has jumped at an astounding rate. First home buyer houses with custom design layout kitchens, stone or imitation stone bench tops, soft slide drawers, stainless steel kitchen appliances, built in robe storage, ensuites, in roof storage, fully landscaping, window designs, 400mm, 600mm, or even 900mm tiles. More complex designed roof lines, better finish plasterboard, larger architrave standard sizes and on and on.

    I could easily come up with a home design for under under a $1000 per square metre to a fine quality utilising contemporary yet based model finishing materials but it wouldn’t sell, because no one wants to settle for 200mmx200mm tiles on their walls or a basic laminate bench top without the breakfast bar anymore.

    I just wish some of these reports would actual start comparing all aspects of the issue to get a real perspective before simply claiming everyone has it so tough today.

    Regards, a single guy negatively gearing on a salary under 100k.

    • I loathe open plan designs – they turn a house into a hut (or tent). Houses in tropical area may save on cooling, but in Melbourne / Sydney / Adelaide the heating costs in winter are disastrous.

      When it’s an investment property the consolation is I don’t have to actually live in it. Trouble is, I’m looking to upgrade my own home and nothing I’ve seen feels right.

  • I don’t think anyone really knows what will happen if these changes are produced. These statements are not “myths” that are “debunked”, they are more like possible outcomes.

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