Stop the Distraction: Negative Gearing Isn’t the Real Issue

There is one thing that Australian politicians are really good at – possibly the only thing - and that is diverting attention from the real issues and scapegoating others for the problems that they, the politicians, have caused.

Right now, the core issues impacting Australian households include the housing shortage, the high cost of creating desperately needed new homes, the chronic rental shortage and the reality that rents keep on rising.

It’s noteworthy that the recent AGM of the Commonwealth Bank reported that they have had to provide emergency payment arrangements to 132,000 customers who are struggling to pay their mortgage amid a cost of living crisis and very high interest rates.

We also have saturation media coverage of the plight of tenants paying higher and higher rents amid a chronic shortage.

So, what are politicians and journalists obsessing over? The issue of negative gearing.

Now, what relevance does negative gearing have to the issue of the housing shortages and the high cost of building new homes and the chronic shortage of rental properties?

The answer is: None.

It has no relevance whatsoever.

Scrapping negative gearing won’t fix any of these problems – but it will make some of them noticeably worse.

Recently columnist James Kirby wrote about this in The Australian.

He wrote:

“Experts are warning the government’s review of property tax concessions could make housing affordability worse, with New Zealand’s recent failed attempts to do something similar cited as an example of what could go wrong.

“After the NZ government cut tax incentives for property investors three years ago, the volume of investment funds entering the residential market halved. And as the supply of rental property evaporated, rental prices soared.”

Kirby wrote: “The attempt to change New Zealand’s version of negative gearing – and its capital gains tax regime – were widely seen to have backfired and a new government has since progressively reversed the original changes.”

However, Kirby points out, the Treasury in Canberra is now assessing the same tax territory with a review of negative gearing (where property investors can declare losses against tax) and Capital Gain Tax.

Kirby says: “While Anthony Albanese has distanced himself from the review – insisting it is an internal move by Treasury – tax changes around property investment are highly sensitive, especially as the ALP’s Shorten-era election loss was significantly due to unpopular plans to restrict investor tax incentives.”

Ray White group chief economist Nerida Conisbee says: “The current tax incentives ensure we have enough rental housing, if you cut those incentives you only have to look at New Zealand to see what may happen – New Zealand is now the least affordable rental market in the world.’’

Kirby wrote: “Put simply, making property investment less attractive will drive investors out of the market. The only question is the degree to which they will flee and that in turn depends on conditions at the time. In New Zealand the reform measures were imposed as prices were falling and interest rates were rising – exacerbating the blowback from investors who cut their funds in the NZ market from $21bn in 2021 to just $11.8bn in 2024.”

Kirby also referred to the fact that Paul Keating as Australian Federal Treasurer scrapped negative gearing in 1985 and then, two years later, reversed his decision and reinstated it in 1987.

And that was because the end to negative gearing benefits caused a shortage of housing across Australia and rents rose sharply.

It’s time for Australian politicians and journalists to stop obsessing over side issues like negative gearing and focus on the core issues in the housing industry – which is the shortage of dwellings, the high cost of fixing that shortage and in particular the chronic under-supply of rental properties.