Affluent Australians Reap Major Benefits from Negative Gearing: What it Means for Housing Affordability

Australia’s housing market is in the spotlight again as the debate over negative gearing heats up, particularly regarding who benefits most from this policy. Cait Kelly’s recent article in The Guardian sheds light on how Australia’s wealthiest individuals are disproportionately reaping the rewards of negative gearing, while the country’s housing affordability worsens.

According to data from the Australian Taxation Office, Australians earning more than $180,000 annually were able to lower their collective tax bills by a staggering $1.3 billion in 2021-2022 through negative gearing, despite making up only 5% of taxpayers. In contrast, Australians earning $1 million or more claimed the largest tax deductions, with each person claiming an average of $28,642. This paints a clear picture of how the highest earners are benefiting from a policy intended to encourage investment but also exacerbating housing inequality.

Negative gearing allows property investors to offset losses from their rental properties against their taxable income. While the policy was initially designed to encourage investment in the housing market, it has faced increasing scrutiny for its disproportionate impact. Critics argue that it inflates housing demand, contributing to higher prices, while advocates suggest it helps build rental supply. Prominent economist Saul Eslake explains, “Someone who’s in the top tax bracket is more than three times as likely to be a negatively geared property investor as someone who isn’t.”

Eslake also points to the temporary abolishment of negative gearing in the mid-1980s, when rents dropped nationwide, except in Sydney and Perth. This data indicates that removing negative gearing could potentially ease housing affordability, despite the property industry’s insistence otherwise. According to Eslake, even if investors were to sell rental properties to owner-occupiers, the effect on housing supply would be neutral, and rents wouldn’t rise as much as feared.

However, not all property investors agree. Michael Shears, a property owner with two negatively geared homes, argues, “The only thing that makes it attractive is the negative gearing.” Shears believes that by building new homes, he’s adding to the housing stock, unlike investors who simply purchase existing homes. He also suggests that a shift in regulations could help more first-time buyers get on the property ladder, including a potential rent-to-buy scheme.

With housing affordability at its lowest level since records began in 1995, the stakes are high. As Kelly notes, a median-income family earning around $112,000 can now afford only 14% of homes sold in the past financial year. This stark contrast between the benefits reaped by high-income earners and the struggles faced by everyday Australians underlines the need for meaningful policy reform.

In the coming months, the Albanese government’s approach to negative gearing will likely be a critical factor in addressing Australia’s housing crisis. While the debate continues, the growing calls for change suggest that this issue will remain a focal point for policymakers and Australians alike.

References:

https://www.theguardian.com/australia-news/2024/sep/27/how-the-most-affluent-australians-disproportionately-benefit-from-negative-gearing