Negative gearing is a perennial hot topic in the housing affordability debate. But as we saw when Joe Hockey and Chris Bowen discussed the issue on Monday night’s Q&A, the debate is based on myth and entrenched bipartisanship.



Rather than increase the supply of housing and keep rents down, negative gearing merely provides a tax break that encourages people to buy speculatively in the housing market – helping to spur house prices and thus reduce affordability.

Negative gearing allows the owner of an investment property to deduct the net cost of owning the property – including interest payments – against their other income.

So, if the amount an investor pays in interest and costs of upkeep of a rental property is greater than the income they receive in rent, then that loss is used to reduce their taxable income.

As the cabinet papers of September 1987 noted, it is “a generally recognised tax shelter”, which is a polite way of saying a legal tax rort.

The cabinet papers of that time are important because in July 1985 the Hawke government had ended the negative gearing, but in September 1987 it restored it.

Those in favour of negative gearing often cite how when the Hawke government did away with it, rent prices shot up.

On Monday night Hockey also used this excuse, suggesting: “If you abolish negative gearing on investment properties, there’s a strong argument that rents would increase.” He argued that when Bob Hawke actually did it in the 80s, there was “a surge in rents”.

He concluded: “If you can see some evidence to say that you would not see any increase in rents if you abolish negative gearing there might be a more compelling case, but I don’t see that.”

The Grattan Institute’s John Daley, who was also on the panel, then interrupted to say: “The good news, treasurer, is there’s lots of evidence already provided.” Daley went on to explain that when negative gearing was abolished, rents across the country – other than in Sydney and Perth – didn’t rise at all.

The data provided by the Australian Bureau of Statistics and the 1987 cabinet papers support this. The annual growth of rents from 1982 to 1990 show that although rents did increase in Sydney and Perth during the period negative gearing was abolished, elsewhere there was no evidence that removing it had any impact:

And the impact across the country of the real price increase of rent – where rent price increases are taken away from overall inflation – was even less pronounced. In Brisbane and Adelaide, rent prices actually increased by less than inflation during that period:

The real reason for the previous increase in rents in Sydney and Perth was due to “local influences rather than tax measures dominate in metropolitan rental markets”, as found in the 1987 cabinet papers.

At the time, the big local influence on rental prices was vacancy rates. In Sydney and Perth vacancy rates before the removal of negative gearing had fallen sharply, and thus, not surprisingly, rent prices went up as people were desperate to find a place:

In Adelaide and Brisbane vacancy rates were quite high and thus rent prices barely rose as renters had a large choice.

But negative gearing alone isn’t the only issue. In 1999, the Howard government changed the way capital gains was taxed – effectively halving it to offer a 50% discount.

This made buying investment housing very attractive. Together with the negative gearing provision, it meant you could buy and run an investment property at a loss and claim that loss off your taxable income, then sell the property later for a profit. You would also pay only half the tax on that profit than on your other income.

Pretty sweet.

And Australians love it. They not only love to own rental property, they love to make a loss on it.

Saul Eslake notes that in 1998-99 (the year before the changes to capital gains tax were made) about 11% of taxpayers owned a rental property and together made almost $700m in profit.

By contrast, in 2011-12 1.89m taxpayers (or nearly 15%) received a rental income, but combined they lost $7.86bn.

John Daley estimates this loss – which also reduces the taxable income of investors – costs the government around $5bn a year in forgone income tax revenue.

And who are these investors?

Last year the ABC’s Michael Janda did some excellent research to bust the myth that it was “mums and dads investors”. The Reserve Bank uses data from the Household, Income and Labour Dynamics in Australia Survey. That survey found that in 2010 that the richest 20% of households were much more likely than other households to have an investment property loan:

And since 2002 there has been a surge in investors within the richest 20%. In 2002 just 16% of the richest 20% of households had an investment loan, by 2010 it was up to 23%:

And, interestingly for those who see the issue as one of baby boomers versus the rest, the big surge in investment property ownership since 2002 has come from the households aged 25-34:

It would seem wealthy young people are just in favour of the tax rort as older Australians. And it is a rort. It does not affect rents because it has little impact on the level of housing stock: 92% of investor housing loans are to buy established dwellings:

So it is really just a subsidy for people who are speculating on the real estate market. Running their investment at a loss, they are ultimately betting on making a profit when they sell the property, then taking advantage of the capital gains tax discount.

A look at rental prices over the past decade shows that rents have actually risen by more than the price of new dwellings purchased by owner occupiers:

So why does negative gearing remain?

Because of the 1.8m investors and the industries behind it.

And while it is a rort, as we have seen, it’s a rort that younger people want to take advantage of.

Grandfathering the laws to keep negative gearing for current investors would just be a case of favouring current property owners over future ones. It would also see a drop in sales as current owners would hold on to their property for longer to take advantage of the laws.

One way to phase out the negative gearing laws would be to do it over five or 10 years or, it would be even better to keep them, but change the capital gains tax rate back to its previous rate.

But I can’t see this happening.

In 2013, the Rudd government suffered all kinds of media and industry criticism for closing the fringe benefit tax loophole which applies to “company cars” that are in reality driven purely for private use.

Australians sure as heck love their cars, but they love the idea of a home even more – the scare campaign against lowering the capital gains tax would be pretty severe and loud.

Laughably, in 1987, the Masters Builders Association suggested that negative gearing “exerted a strong psychological influence on landlords and investors”. Which I guess is a way of saying – don’t bother with the evidence – go with “the vibe”.

And thus it remains.

As Bowen said on Monday night: “I don’t think either side of politics is going to abolish negative gearing tomorrow.”

I think he’s right, more’s the pity.