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Exposing the Myths of Negative Gearing

negative gearingShould negative gearing be abolished? My answer is an unequivocal NO. The good point is that people in power will never be encouraged enough to abolish it. The verdict is hung but negative gearing stays and it should stay that way.

Investors have been in total control

For starters, negative gearing deals with the practice of offsetting property expenses (mortgage and repair, among other things) as tax deductions. A great part of the debate about negative gearing has been fueled by the fact that across the well-performing areas of Australia, investors have completely led the charge. Now, investors are a capital growth-hungry breed and they do not really mind the fact that the rent received is lower than the monthly mortgage repayment for their portfolio.

Positive cash flow is for the non-investor class

They are inclined to argue that positive cash flow or the rental yield principle is good for next home buyers and owner-occupiers but for the investor class, capital growth is the mantra and this makes negative gearing a smart strategy. We must remember that they also get the bonus of discounted capital gains tax (in the vicinity of 50%).

Those arguing in favour of abolition feel that it is the only way to shove the property speculators out of the market and re-establish first home buyers who are all but elbowed out of the real estate race.

So what’s the fuss about anyway?

Think of the present situation: financing can be procured for less than 5%. Yield is close to the 4% mark in reasonably placed suburbs. So, how much difference does it really make?

Prices will rise irrespective of negative gearing

We will all agree that the non-porous border of Sydney will cramp up any chance of extending the expanse of real estate. So if we start by assuming that there is only so much land at our disposal and the population is growing at a steady pace, it will not be difficult to come to the conclusion that the demand-supply equation will drive prices up, irrespective of whether negative gearing stays or gets abolished.

Negative gearing, I say categorically, is not the silver bullet we should be seeking for price reduction. Yes, if emphasis needs to be given, it must be paid to the capital gains tax rebate. That may change the market balance and shift things which are apparently biased towards the investors.

Should negative gearing stay or get abolished?