An end to negative gearing?


THE Propell group of valuers are warning that the tax treatment of negatively geared investment properties could be a victim of the Abbott Government’s cost cutting.

Propell offer five reasons the scheme might be axed now:

    1. When it was introduced, mortgages were 15% while rental income was 5%. Back then it was needed to encourage investment. Now, mortgage rates are around 5% while gross rental income is around 5%. If you are ever going to remove negative gearing, the time to do it is when the mortgage rate is at its lowest. Put simply, it is not needed anymore.

    2. House prices have been going up in the last year, rapidly in the case of Sydney and Melbourne. Removal of negative gearing may cause house prices to fall a few percent in the short term, but in the context of an average price increase of 10.7% in the past year, the market would be able to absorb such a short term loss.

    3. If house prices fall as a result of the removal of negative gearing, then the Reserve Bank may feel that it can reduce interest rates further, which would offset some of the impact and have the added bonus of reducing the Australian dollar exchange rate, which would be seen as a win-win situation.

    4. A reduction in house prices, combined with lower mortgage rates would be popular with first home buyers who have been increasingly squeezed out of the market by existing price levels.

    5. The proportion of investors buying in the market has increased dramatically in the past year, and it would be of benefit to owner occupiers and first-time homebuyers to reverse this trend and restore more normal proportions of buyers.

They note that in the last ten years the cost of the scheme to taxpayers has risen from $600 million to over $4 billion.

Here in Canberra the impact could be enormous, with almost all the ACT Government’s major projects reliant on investment property money to sell units on top of the developments; Northbourne Flats, the ABC Flats, City To The Lake not to mention the Brumbies’ property deal.

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