Negative gearing changes are inevitable

Be warned. Negative gearing rules for residential properties are going to change — and sooner than you think.

There is a lot of confusion surrounding “home affordability”. The real issue is not the restricted or untimely release of appropriately zoned and serviced land that is controlled by local government, nor is it anything to do with interest rates at the Reserve Bank level.

Rather, it is simply because Australians in general have become comfortable with buying homes that are more expensive than they can realistically afford.

The majority of Australians would be far better off if they were to focus on contributing more superannuation and less to luxury “frivolous” expenditure. So the answer to home ownership in Australia is all about smaller dwellings, higher density and more humble specifications.

However the issue of “affordability” is a political football, so we will ultimately end up with some soft adjustments to the regime of “negative gearing” property investment.

This should satisfy the complaints of those who incorrectly argue that the affordability issue would be deflated if investors were taken out of the formula.

I predict — for the wrong reasons — that within the next two years legislation will reduce the scope of “negative gearing”, as a taxation benefit. It will not affect commercial property (retail, industrial, office), but will be solely related to residential — and will not be retrospective.

The fundamental change will be that from the date of introduction any investor will be able to buy one more property under the same rules. If they buy a second property, the extent of deficit income deduction for taxation purposes will be limited to 75% — and for third and subsequent properties 50%.

That will be the end of it. If I am correct, this will be “lip service” to the issue of affordability but will be as far as the federal government of the day will go. This should not deter residential investors who should buy for growth fundamentals rather than tax deductibility.

The ultimate change in legislation is likely to be poorly handled and confusing, but be reassured and have faith in this analyst’s predictions.

Paul Scanlan from targus writes: I’m not sure if “struggle street” would agree with luxury “frivolous” expenditure. The issue is definitely a lack of savings culture … and that starts at home/school. Incentivisation (government and tax) and education is the issue.

Darren Finlay of Finlay Homes writes: Lets hope this does not come true. Reducing the negative gearing benefit will only cause rents to raise to keep in touch with reduced investor returns, meaning it will only put more pressure on people renting and catch them in the rent cycle. People might say this will force people into the buying markets if rents go up, but if they can’t afford to buy they will be caught in the cycle. As a builder/developer no one has shown me a way to bridge the affordabilty gap. Time will tell, thanks for your thoughts, good debate!

 Richard Waddington from JP Morgan writes: The sustained strength in residential property prices has always been about the scarcity (limited supply) of land….given the lack of properties being built/bought and offered back to the rental market, how much will the unwinding of negative gearing cost the government in funding accomodation and votes?