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The Phasing Out of Negative Gearing: What’s Next for Australia’s Property Market?
The Australian government has recently announced the gradual elimination of negative gearing—a revered aspect of property investment that has been in place since the 1930s. This move has sparked a heated debate among investors and economists regarding its potential ramifications on the rental market and housing supply.
Key Points from the Recent Budget
In the latest budget report, the government outlined its intentions to phase out negative gearing while maintaining the concession for current beneficiaries and newly constructed homes. Critics argue that this reform could lead to higher rents and a decrease in the availability of new housing, a concern echoed by experts from the Treasury and the Commonwealth Bank.
According to Treasury forecasts, average rents could rise by approximately $2 per week over the next decade. This sentiment was echoed by Commonwealth Bank’s senior economist, Trent Saunders, who noted the close relationship between housing supply and rent growth. He anticipated a muted increase in rent, aligning with Treasury’s estimates.
Historical Context: The Hawke/Keating Era
The debate surrounding negative gearing is often compared to its removal during the Hawke/Keating administration from mid-1985 to late-1987. Many believe this policy shift triggered a surge in rental prices. However, data indicates that only 8% of rental properties were negatively geared prior to this change.
During the same period, inflation rates were notably high, with the Consumer Price Index (CPI) peaking at 7.6%. While rents in cities like Sydney and Perth increased significantly (8.8% and 11.6% respectively), other regions, such as Brisbane and Adelaide, saw rent declines, demonstrating that local factors heavily influenced rental pricing.
Documents from the Hawke cabinet indicated that they believed local conditions played a more significant role in the rental market than tax policy. Even after negative gearing was reinstated, the divergence in rental pricing growth across cities persisted.
Recent Trends in Investor Activity
Post-2017, the percentage of new mortgages allocated to property investors fell dramatically from 40.5% to 27.6%. This decline followed a period of stricter lending regulations initiated by the Banking and Financial Services Royal Commission and the Australian Prudential Regulation Authority’s (APRA) directives.
Interestingly, despite this significant drop in investor demand, national weekly rents rose by only 3.6% over three years—approximately 1.2% annually—showing that a reduction in investor participation did not automatically lead to steep rent increases.
Conclusion and Future Implications
The proposed changes to negative gearing are set to reshape the landscape of property investment in Australia. However, it remains uncertain how profoundly these adjustments will impact rental prices. While past experiences suggest a lack of direct correlation between investor activity and rent inflation, various factors, including local economic conditions and population trends, are vital considerations.
The policy change is designed so that existing arrangements are "grandfathered," meaning current property owners will not feel immediate effects. The transition will likely unfold gradually, reflecting the cautious optimism shared by institutions like Treasury and Commonwealth Bank.
Ultimately, this issue is multi-faceted, influenced by factors beyond simple financial calculations. Australian society’s affinity for property investment complicates this scenario, highlighting the importance of understanding both monetary and behavioural dynamics within the property market.
