The Effect Of Negative Gearing

Of the two million Australians who own an investment property, the Property Council of Australia estimates that almost 1.2 million utilise negative gearing.

Negative gearing allows investors to buy investment properties on borrowed funds on the basis that rental income does not cover the mortgage repayments with the shortfall being offset against the investors other taxable income. Through negative gearing the “loss making investor” is effectively subsidised by the Australian taxpayer.

Apart from the fiscal problem this creates for the country, in principle I don’t agree with a policy that:

1. Encourages and indeed rewards what would otherwise be bad investments.
2. Artificially increases the demand for residential property and in doing so raises the market equilibrium price.

There is no question that schemes like negative gearing and the first homeowners grant cause a shift in the demand curve thereby raising prices. The problem is that when you turn them off you shift the demand to the left, which will reduce the equilibrium price.

The real question is how does the country wean itself off such schemes?