Here's What You Need To Know About How Negative Gearing Affects Your Rent

The Coalition says Labor's negative gearing policy will push up rents. Labor says it won't.

The government is warning young people that if Labor wins this year's election they will end up paying more rent.

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Treasurer Josh Frydenberg has repeatedly argued that Labor's housing policy – including winding back negative gearing and changing how the capital gains tax works – would increase rents.

Last week, senator Dean Smith argued that Coalition strategists should target marginal electorates with high numbers of young renters, with a campaign against Labor's negative gearing plan.

Labor says it's all a "scare campaign".

I'm gonna take the next 30 seconds to remind you what negative gearing is. Hold tight.

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Negative gearing is a tax break designed to encourage people to buy investment properties and rent them out.

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If the income investors get from renting out the property isn't enough to cover the interest they have to pay on their mortgage, then they're out of pocket.

Negative gearing lets them claim that amount as a loss and reduce their taxable income for the year.

Effectively, it's a subsidy to facilitate people's wealth creation and encourage people to buy rental properties.

It could mean they end up paying less tax than other people who earn the same salary as them.

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Labor is promising to partially get rid of negative gearing.

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Labor says negative gearing is unfair because it gives a subsidy to property buyers who usually already own their own home, but not to first-home buyers and others looking to buy a place to live in themselves.

That makes it harder for them to get into the property market because they're competing against others who get a leg-up.

Labor also argues that negative gearing means wealthier Australians get to use subsidies to reduce the income tax they pay, increasing the burden on others.

If someone already owns an investment property, it won't be affected by Labor's policy.

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They can keep negative gearing (that's called "grandfathering" the policy).

As well, investors will still be able to negatively gear newly built properties. It's investors who buy existing properties to rent out who won't get the attractive tax break.

Got it?

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This is not you.

We asked three experts whether Labor's negative gearing policy would actually increase your rent.

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The TL;DR is that two of them thought rents would probably eventually increase and one thought they wouldn't.

And here's why.

Economists have a confusing habit of disagreeing with each other, but most agree on one thing when it comes to rents: the price you pay largely depends on supply and demand.

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That's why rents in Sydney are falling at the moment, for example. A bunch of new developments have been finished and put on the market, so increased supply is bringing prices down.

So what the Coalition is saying about Labor's policy is that it will decrease supply by discouraging people from buying investment properties to rent out.

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Senator Dean Smith called it a "rental famine" in an interview with The Australian.

"By discouraging property investors not to buy established houses, Labor’s negative gearing changes will reduce the supply of rental homes in Perth at a time of falling vacancy rates and result in an explosion in rents," the West Australian senator said.

They also say that investors who negatively gear tend to charge less rent because they're expecting a long-term capital gain.

The experts we spoke to agreed that the policy could mean fewer people buy investment properties.

Lawrence Uren, a senior lecturer at the University of Melbourne who has done modelling on what would happen if negative gearing were eliminated completely, described negative gearing as a policy that "encourages investment in housing".

"If Labor removed this policy there would typically be a reduction in people seeking to invest in housing, and that would typically reduce the supply and increase the rental price," he explained.

Decreased supply will probably increase your rent...

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"I think they'll be paying more, that's possible in the long run," said Uren. "I would say it's likely the price of renting relative to purchasing a house would typically rise under Labor's policy."

Matt Grudnoff, senior economist at The Australia Institute, told BuzzFeed News rents wouldn't rise – because while supply would fall, so would demand.

"It's quite possible that withdrawing negative gearing will reduce the number of rental properties," Grudnoff said.

But "every rental property that leaves the market then becomes an owner-occupied property," he said. That means the number of renters will decrease, so demand will lower with supply.

...but not by that much, and the increase would happen over time.

Uren said the policy would "take some time" to filter through to rents. The grandfathering part of the policy means current investors could continue to negatively gear.

Labor's policy could also potentially change the typical landlord.

Frank Gelber, director of BIS Oxford Economics, told BuzzFeed News that mum-and-dad investors have been investing at yields (i.e. rents) which are "much lower than commercial rates of return".

Negative gearing, and a capital gains tax discount for rental properties, which Labor also wants to wind back, make buying rental properties an attractive option for these individual investors.

So Labor's policy could "frighten off the small investor", Gelber said. That could mean commercial investors step in and demand higher rents. But again, this wouldn't happen quickly because there is currently a lot of supply, and the policy would be grandfathered.

Another important impact of the policy would be to stop house prices rising too quickly – which means current renters might be able to buy a house.

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"It should make housing a little bit less expensive," said Uren of Labor's policy. It won't have a "huge effect" on prices, though, because the subsidy the government provides is relatively small.

Grudnoff says that house prices are likely to flatline, instead of falling. But that means that they won't increase at the rates they have over the last decade. As a result, those renters who are getting close to being able to afford a property might be able to buy.

"If we didn't do the policy and housing prices correct and continue to go up, they'll be locked in the rental market," he said.

As well, investors might start investing in new properties instead of existing ones – increasing supply.

At the moment, Grudnoff said, investors "tend not to buy new properties." But because negative gearing will be limited to new properties, investors might switch to new properties.

"This might create more supply of housing," said Grudnoff. "If they build more housing that absolutely will have an impact on rental properties and that will push rents down."

Uren agreed that Labor's policy of only removing negative gearing on existing properties "might even be helpful", he said, because it could lead investors to invest in new housing, thus increasing supply.

In a separate policy, Labor is also planning to increase the supply of new affordable rental properties by spending $6.6 billion over a decade incentivising investors to build new properties and offer them for rent at below market rate.

But – bear with me – the negative gearing debate is not just about the cost of housing and renting. It's about our overall approach to the distribution of wealth.

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"To eliminate negative gearing will typically increase the amount of tax that a Labor government generates," explained Uren. "Negative gearing typically favours relatively well-off individuals in society."

The policy would take tax from those people and either reduce tax from other people, or fund expenditure in other areas.

So, Uren said, even if renters end up paying slightly more under the Labor policy, they could get a better deal in other ways, like increased spending on health or education. It depends what Labor decides to do with the extra tax.

"Generally, I think the Labor package is pretty sensible from an equity point of view," said Uren.

In a way, everyone is right!

"The government says it will make renting more expensive and it will be bad for housing investment and that's true," said Uren.

"Labor says it's going to reduce house prices and typically allows them to raise revenue from people who are already doing well in society and that's also true."

Thank you very much for reading this article about tax. Have a good day.

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