Negative gearing hasn't been far from the headlines over the past few months, as property market experts debate whether it has any function in the investment landscape.
Its future is being considered at the highest level, with groups including the Reserve Bank of Australia (RBA) offering its opinion on how the market should proceed. So what exactly is negative gearing, and does it have a role to play in the Australian property market?
Negative gearing: an overview
When a property is negatively geared, its owner has taken out a loan to purchase it, with the intention of the interest paid on the loan being greater than the income that's achieved. Essentially this means that you will be making a loss, but the future potential of the investment is what really matters.
The idea is that the value of the property you've purchased will increase over time. The capital growth will expand year on year, eventually meaning that you start to generate a profit.
Why are some groups against negative gearing?
There is a widespread belief that negative gearing enables high-net worth individuals to enter the market with a view to making considerable future profits. As a result, concerns are raised that other investors become priced out, leading to imbalance across the industry.
Research was recently carried out by the Real Estate Institute of Australia (REIA) in conjunction with the Property Council of Australia. Its aim was to dispel some of the misconceptions that have arisen and show what impact negative gearing has really had on the market.
Findings show that two-thirds of investors who use negative gearing have a taxable income of under $80,000 a year. In fact, individuals who fall into this salary bracket claimed 58 per cent of total losses back in 2012-13.
The future of negative gearing
At present, a Senate inquiry is being held into negative gearing, which has attracted several different views on the issue. The RBA put forward its ideas and suggested that landlords with negatively geared properties generally accept a lower rental yield. This is currently helping more tenants to find the real estate they want.
However, concerns were raised over the impact of negative gearing on certain areas of the taxation system. Ashley Homes is among those objecting to the practice, saying that it drives up prices and lowers rental supply. The University of Sydney Business School argued that it will instead have a positive impact on prices.
The future of negative gearing is therefore uncertain. Some major players have still to be convinced of how important it is to the success of the wider property market and until this happens, it could continue to give a less-than-favourable impression.
For assistance with your property portfolio – negatively geared or not – make sure you speak to The REIN Group. We'll help you understand the market and make the most of your investment.