Abolishing negative gearing would be bad news for the property market

The Australian government has declared a fiscal deficit of $12 billion but the situation does not warrant the abolition of Negative Gearing. Stacey Moseley for the Real Estate Business writes that the proposition to abolish Negative Gearing in order to redeem the Federal Budget could have some serious consequences for the property market.

Abolition of Negative gearing cannot succeed practically

Increasing Medicare levy by half a percent and eliminating Negatively Geared properties are being sought as restorative means to decrease the fiscal deficit. However, this may turn out to be an imprudent move, warns Moseley. As a first, the idea can only work in a Utopian world. Nobody is attacking its theoretical value but it has little chance of practical success.

$5 billion in tax deduction claims

The Australian property market has hit a very bright patch and any move to abolish Negative Gearing could mean sending the market into doldrums once again. Prime reason for the proposed abolition- The government stands to save around $5 billion in tax deduction claims if negative gearing becomes a thing of the past.

Government is taking a short-sighted stance

The government might just be looking at a short gain, not willing to observe what a difficult transition period it would bring the market into. In addition, suggests Moseley, the amount of $5 billion wouldn’t find any better use than constructing 5,000 to 10,000 new homes. This would only imply a supersaturated rental market at the cost of falling number of investors.

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Borrowing capacity is a must

I think that the point Moseley makes is already finding a consensus among economists. Negative Gearing is a leveraged investment principle largely run on the concept of borrowing money for buying assets. Even if those assets do not bring in enough initial profits to set off the interest on loan amount, government should not play with the borrowing capacity of investors. After all, in a liquidity-strapped bust phase of the property cycle, this borrowing capacity keeps the investment portfolios afloat.

Wait for the properties to become positively geared

Moreover, abolishing Negative Gearing would only mean a lot higher rents, fewer house constructions, and investors fleeing away to different market sectors altogether. Properties ideally become positively geared with time, thus allowing the government to fill their coffers with the capital gains taxes levied on them. A little patience may just be the need of the hour.

What would you do if negative gearing was abolished?