What might negative gearing changes mean for the housing market?

A proposal from the Australian Labor Party (ALP) aims to reform negative gearing, and News.com.au says that Aussies are conflicted on the issue.

But what is negative gearing, and why are the proposed changes so controversial?

What would change?

To first cover the basics, negative gearing is when a homeowner takes out a loan for a property, and the gross income received from the property, after expenses, is less than the cost of owning and maintaining the property. These costs include interest on the loan.

This creates leverage because investors will likely have to pay less taxes at the end of the year, since the losses are offset against other income. Additional benefits may arise when investors make more long-term profits on the investment property when value increases.

Under the proposed government policies, negative gearing would be limited to only those properties that have been newly built. In addition, the ALP wants to halve the 50 per cent capital gains tax discount.

Why is it controversial?

Critics are saying that reforms to limit negative gearing to newly built homes will give some investors an unfair advantage in the market over first-time home buyers. The changes may only end up benefiting high earners across the country.

Prime Minister Scott Morrison defends the current policies, saying that if negative gearing was completely abolished, that it would essentially be inviting a housing market crash. He says that the policies will help the prices fall in a more controlled way, bringing it into a “soft landing.”

But first home buyers especially have been benefiting from housing price decreases, especially in Sydney and Melbourne, where prices have fallen 3.5 per cent on average in the past year. News.com.au reports that the downturn was a welcome change for those Aussies who felt they were being priced out of the market, with prices on the rise in prior years.

Clearly, a new negative gearing environment will affect different people based on their individual circumstances. If you have questions about negative gearing or borrowing regulations, contact our team today.