Federal Budget Eyes Changes to Negative Gearing for Multi-Property Investors
As the Federal Budget approaches in May, potential modifications to negative gearing settings are under scrutiny, alongside possible adjustments to the capital gains tax discount. Negative gearing allows property investors to deduct losses from their investment properties against their taxable income, with benefits varying based on the investor's tax bracket. Reports indicate the government is considering removing negative gearing for investors who own three or more investment properties, a move seen as politically advantageous amid public perception of investors as market villains.
Impact on Investors and Rental Market Dynamics
According to 2022-23 Australian Tax Office (ATO) data, approximately 97,300 investors, or about four per cent of Australia's 2.26 million investors, hold three or more negatively geared properties. Of these, 60,700 own exactly three properties. If the proposed changes are implemented, these investors might sell some properties to stay below the threshold and retain negative gearing eligibility. This could temporarily boost housing supply for homebuyers but is unlikely to significantly improve affordability. Conversely, it may reduce rental stock, putting upward pressure on rent prices as investors seek to offset losses through higher rents, thereby decreasing affordability for tenants.
Unintended Consequences for First Homebuyers
It is widely argued that investors compete with first homebuyers, leveraging tax policies like negative gearing and the capital gains tax discount for an edge. Changing negative gearing settings could drive investors to lower-priced suburbs where investments can be neutrally or positively geared, often the same areas targeted by first homebuyers. This shift might inadvertently increase competition between the two groups, exacerbating market challenges rather than alleviating them.
The Essential Role of Private Investors
Investors are frequently criticized, yet they play a crucial role in providing rental housing. In Western Australia, private investors supply about 86.5 per cent of rental properties. ATO data reveals that 74.9 per cent of WA investors own one property, with 17.1 per cent owning two, highlighting that most are small-scale operators. Until state and federal governments develop alternative solutions to meet rental demand, balanced and stable policy settings are necessary to support existing investors and encourage new investment.
At the federal level, political parties must carefully evaluate tax changes to avoid worsening already-constrained rental markets nationwide. The optics of tinkering with investor tax settings may appeal, but the real-world effects on housing affordability and supply require thorough consideration to ensure policies benefit the broader market without unintended harm.
