Negative gearing: Stopping the abuse

by Miklos Bolza04 Apr 2017
While negative gearing can benefit all Australian property owners, efforts should be made to limit its abuse and quell pressure on rapidly growing prices.

Richard Wellsmore, manager at financial consultancy and mortgage brokerage Futurity, is pushing for a balanced, rationalised strategy that still permits negative gearing while imposing some limits on the practice.

“I actually feel that negative gearing is a legitimate and effective means through which people of average income can acquire wealth for later in life,” he told Australian Broker.

However, the current negative gearing structure leaves it open for abuse, he said, with certain investors now owning an excessive number of homes.

Rather than doing nothing like the Liberals or wanting to abolish negative gearing completely like Labor, it should be rationalised, Wellsmore said.

“Rationalised relates to ensuring it is open to all rather than the wealthy few. Rationalised means that it is not abused where greed comes into play. It is this greed that is a prime driver in the increase in property prices.”

He suggested that negative gearing be limited to a maximum of five investment properties per person. This will have a more moderate rate effect on the housing market by adding rental properties and enabling ordinary Australians to accumulate wealth.

“There is a need for somebody to fund the property market and provide rental properties for those who are not yet ready to buy their own home,” he said.

Instead of an intermittent tap on property investment, a more moderate constant initiative would be far more productive, Wellsmore noted.

“The reality is that political parties need to look long term and act on a bipartisan level if the economy is really going to be managed on a permanent basis. This would benefit everyone.”

Current approaches such as the Australian Prudential Regulation Authority’s (APRA’s) crackdown on interest-only loans were tackling the problem in the wrong manner, he added. Instead, people should be educated on how to effectively borrow and repay money.

“We, mortgage brokers, if we are worth our salt, are an integral part of this process.”

“The reality is constructive long-term planning and education will control the property market far more effectively than these knee jerk reactions that have little effect other than to widen the economic and social gap that already exists in our country.”

With APRA’s current focus on interest-only lending, the ability to invest properly would be taken away from ordinary Australians but not from the very wealthy who could continue to abuse these negative gearing tax benefits.

“Rather they will continue to use what I would call a greed approach to fuel the property market. If APRA wants to control things more, at least make it a level playing field.”

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COMMENTS

  • by Joe Siragusa 4/04/2017 9:19:14 AM

    The proposal has merit but still fails to address how borrowers structure their loans to be on the Negative Gearing drip forever. An alternative which I have constantly argued for is to have an annual reduction of negative gearing allowance over specified period. For example each year the negative gearing allowance is reduced by say 20% so that in 5 years no further negative gearing is allowed for that particular property. The idea being is that eventually the property is positively geared and contributing to the taxable income that benefit all Australians.

    The proposal to limit negative gearing to a certain number of properties is basically telling investors how much they can invest in certain assets and in doing so has the potential to distort the market. We need more investors who can add supply to the housing market and in turn contribute to the taxation revenue over time.

  • by Intended consequences 4/04/2017 12:36:25 PM

    "Rather than doing nothing like the Liberals or wanting to abolish negative gearing completely like Labor..."

    Labor is not abolishing negative gearing. It wants it for new builds only. People can still negative gear to their hearts content under labor's plan, while adding more and more housing stock.

    It does seem the taxman is distorting housing pretty badly though.

    Even the Libs admit this if they say 'changes will crash the market' (Christopher Pyne, Malcolm Turnbull)

  • by Peter 5/04/2017 12:49:48 PM

    The Libs are philosophically opposed to changes to Negative Gearing as it is almost totally supported by their demographic. However there is no doubt that changes are needed to assist bring the budget back from deficit. There is no doubt the biggest beneficiaries of Negative Gearing over the past couple of years. Try buying a property in China if you are not a Chinese National. One Chinese client commented she could not believe the government was so generous - it doesn't happen anywhere else.

    There is no doubt it is what drives property investment in Australia. It is also an extremely strong lobby as Paul Keating found out so politicians are wary of changing it (and everything else). Somebody is going to have to bite the bullet one day though as the current Negative Gearing rules do favour the rich, seriously hurt first home buyers and do nothing for the deficit.