The debate on negative gearing is heating up in Canberra as Labor seeks to change policy on the most sensitive of tax issues. In the mix of this discussion is a handful of powerful lobbyists such as the Property Council of Australia (former employee: Scott Morrison) and the Housing Industry Association, who are warning that house prices and rents will rise if there is an end to negative gearing.

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They say negative gearing helps keep renting affordable. But the reality is:

there is no evidence to demonstrate real estate agents offer property for rent at a discount or to the lowest bidder because the landlord is negatively geared;



no negatively-geared landlord prefers to earn less than what they could rent their property for versus the market price or higher;



the downward trend in rental prices indicates there is no housing shortage;

despite the lobby’s claims that landlords would withhold properties from the market if negative gearing were scrapped, the opposite would happen as rising tax bills force investors to sell.

On top of all this, we have some politicians telling the public how negative gearing primarily benefits the middle-class mum-and-dad investor such as nurses and police officers. Yet as a snapshot of who benefits, tax figures show that property investors from the wealthy electorates of Higgins and Wentworth incurred net rental losses of $214m and $185m respectively in 2012/13. This was 46-times and 40-times the electoral average alone. This data tells us that middle-income professionals are not the primary beneficiaries. Between politicians and the lobbyists, the public is told one thing, yet reality is telling us the contrary.

Rents today are relatively cheap as a tenant can’t leverage rents as opposed to buying. In fact, compared with income, rents are cheap enough where a couple working full-time at McDonald’s on minimum wage could afford to live in, say, the high-end Melbourne suburb of Toorak. The same could not be said of their ability to afford to buy a home even in much cheaper neighbourhoods due to massively inflated housing prices. But in our financialised housing economy, there is a banking system run by managers and economists who believe it’s a good idea to lend many hundreds of thousands of dollars to investors who run properties at a loss and have no means to cover their debts in the event of a significant downturn in the market. This risky lending model employed by the Big Four banks and other lenders represents a clear and present danger to the Australian economy. Especially when Australia’s household sector is now the most indebted in the world and a growing number of landlords can’t break even in a record low interest rate environment.

The Reserve Bank, the Australian Prudential Regulatory Authority, federal treasury and parliament have ignored the risks in the mortgage market run like a casino where everybody wins. The Australian public is likewise blind to these risks, believing the upward trend in housing prices is sustainable.

But as we have now started to see in a host of towns across Australia, that carnage is king when it comes to the housing market with price falls to match those seen in Ireland and Spain.

For example, Kate and Matt Maloney, a young couple from Moranbah in Queensland who were honoured as investors of the year in 2012 by Your Investment Property Magazine, owe lenders $5.8m in mortgage debt on a depreciated property portfolio currently worth $2.3m. The Maloneys, like many other property investors in mining towns, were lured by the spruikers and property market “educators” who claimed that interest-only loans and negative gearing were a sure bet to new found wealth.

As the debate about negative gearing hots up, the public conversation should include people like the Maloneys whose voices have so far been ignored. These are the property investors who could testify that the market does not always go up.

The risks posed to Australia’s economy and banking system by Australia’s highly leveraged housing market are already baked into the mix. As more and more Australians are now holding a mortgage underwater (particularly if they are negatively geared), the whole problem becomes irreversible. Ending or grandfathering negative gearing would hasten the breakdown, forcing the RBA to follow the US Fed, Bank of England, European Central bank and Bank of Japan into printing money.

With the evidence already telling us a crash in the housing market is on the way, whether the Australian government decides to end, grandfather, or keep negative gearing, house prices will once again become affordable. Just not the way 99.99% of the population could ever conceive.