The negative gearing debate in 2024

Negative gearing has been in the spotlight recently, as media reports emerged that Treasury was once again reviewing the merits of this tax policy. It is widely understood that having a policy to end negative gearing was a major contributor to Labor losing two recent Federal elections.

The commentary focuses mainly on two things:

• Is it good policy politically?
• How will eliminating or reducing this concession impact on:
  • Dwelling supply?
  • Housing affordability?
  • Rental affordability?

Nearly all reputable economists have concluded that the impact on the above is likely to be very modest – in the range of 2-4% impact on houses prices over a few years.

I have a different take on the debate, mainly from the perspective of property investors.

Many property investors don’t realise that negative gearing is a tax strategy that doesn’t line up with a solid investment strategy. They buy poor quality assets that don’t generate much capital growth, if any. It’s driven by the desire to maximise the negative gearing tax benefit, but it makes no financial sense once total returns are calculated.

Longview’s analysis shows that almost three quarters of investment properties underperform the property market for capital growth.^# Most people make much stronger investment returns on their family homes than they do on their investment properties because of this.

No amount of negative gearing benefit will compensate for a poor upfront investment decision. Therefore, if Government cuts back on negative gearing it may actually be doing people a favour by not incentivising them to make poor decisions.

The big losers from any negative gearing curtailment would most likely be property developers, who often market new build apartments by pointing to the alleged tax benefits of negative gearing combined with deductible depreciation. These apartments often have poor capital growth, taking many years to return to their purchase price, as liveability is generally a secondary consideration in their design.

Unfortunately for Government, the problem with reductions to negative gearing will be the further discouragement of new housing supply by making what is already a poor investment with compromised liveability, even less attractive.

Really, the negative gearing debate is a distraction – we’re not advocating for or against it. What property investors need to do is buy good assets that drive strong capital growth.

How they finance the investment and the tax impacts should be considered, but these factors should be secondary. Many who invest in property through their SMSF can also get attractive tax outcomes but, again, they should do that only into high growth properties.

Capital growth is in LongView’s DNA. That’s why we built a technology and analytics platform to identify which properties will and won’t be likely to generate strong returns.

NOTE: This article is general in nature and does not constitute financial advice. It does not take your personal objectives, financial or taxation situation or other needs into account. Before acting, you should consult a qualified and independent finance professional.

^#For residential properties in metro Melbourne, Sydney and Brisbane that had been sold in 2024 (at the time of writing), 72.6% of all investment properties under $1m had poorer capital growth than the Market Weighted Average CAGR of all owner occupied homes.