HIA dances on negative gearing’s grave

The Housing Industry Association (HIA) has issued a media release cheering Labor’s decision to axe the negative gearing reforms taken to the prior two federal elections, claiming it will boost dwelling supply and affordability:

“[The] announcement by the Australian Labor Party to drop plans to increase taxes on housing through changes to negative gearing and capital gains tax will provide certainty for the housing industry and for Australians that are looking to invest or rent,” said HIA Managing Director, Graham Wolfe.

“Private rental housing plays a critical role in Australia’s housing supply continuum. Without a reliable pool of residential investors across Australia, hundreds and thousands of households would find it harder to put a roof over their heads.

“Australian’s need to have the ability to access affordable housing, whether as a renter or as an owner occupier.

“HIA looks forward to working with all political parties in the lead up to the next federal election to develop national policies that will promote housing supply, support home ownership and ensure those most in need of housing assistance are supported by government.”

I have never found the argument that negative gearing boosts supply as being credible. Logically, it boosts the supply of rental accommodation, but does so by crowding-out first home buyers and increasing the number of renters. So, the policy basically puts upward pressure on house prices and substitutes ‘homes for sale’ for ‘homes for let’

Regardless, with rates for new mortgages at their lowest ever level:

Mortgage rates

Cheap money.

And gross yields above 4% available across most Australian markets (i.e. except for Sydney and Melbourne), alongside fast growing rents:

Rental yields

Solid rental yields outside of Sydney and Melbourne.

Property investors are far less reliant on negative gearing tax breaks.

Thus, negative gearing has become ‘yesterday’s issue’ and has faded in importance from a housing policy perspective.

Unconventional Economist
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  1. For property investors, NG may be a thing of the past, but the CGT discount will continue to reap benefits for them into the future.

      • Yes it would. I reckon the LNP could do a sneaky reversion back to the old indexation rules because that probably front ends revenue in the current environment (if they had done it in early 2020, think of the share market gains that would be taxed at the moment).

        But then again, the LNP are too stupid to think like that.

    • CGT discount makes sense, sort of.

      At the very least, capital gains should be inflation adjusted. The 50% discount is very generous in comparison.

  2. The real problem isn’t NG. It’s the risk weightings applied to mortgages that incentivise (through cheaper credit) buying property over creating a business.

  3. Ironically, the ALP’s flawed policy did allow for negative gearing on newly built properties which meant that property developers were handed a windfall gain by the ALP. The ALP policy also grandfathered existing properties which meant existing investors were unlikely to sell them in a hurry which creates more incentive for newly developed properties.

    I suspect the HIA didn’t actually care too much about the negative gearing aspect but were worried about the CGT element.

    • kannigetMEMBER

      NG is supposed to promote construction of new dwellings, by making it only available on NEW dwellings it might actually help, otherwise all NG does is promote consolidation of established dwellings into the hands of the landlords, constraining supply and pushing up prices through competition.

      • “NG is supposed to promote construction of new dwellings, ”

        No it’s not. It has nothing to do with housing. It is a feature of our tax system where all your income is lumped into a big pool and all your deductions are lumped into a big pool and you pay tax on the net amount. You can just as (in fact more) easily negatively gear shares or units.

        • kannigetMEMBER

          I know what negative gearing is, I was referring to the political justification of its application to real estate.

          We are one of the Few economies / tax jurisdictions that allow losses from property ownership as an investment to be offset against income from other general income earning activities.

          I dont think NG itself is inherently bad, except that in the case of real estate it allows for some dodgy “creative” accounting to occur when partnered with the CGT discount. You effectively apply the CGT discount to past earnings via writing off large depreciation only to pay 50% of the effective tax later in the cycle.

          As for Stocks and Units, If I negative gear them, do I get to depreciate the “assets” owned by the companies I invest in off of my annual taxable income?

          On the shares I Own, I only have to factor in the dividends each year. When I sell I pay CGT on the total gain… Do I only pay 50% of the CGT?

          • On shares – yes the 50% applies to the gain on them as well.

            As for the creative accounting – that is harder to do these days with changes over the last few years.

          • kannigetMEMBER

            Yeah, but I dont get to depreciate the shares against other income to then get the discount later, which is what accountants are doing with NG properties, they depreciate the house, taking tax income from today to pay a discounted rate on it later. Its not that hard for them to do this…. This is why its a problem. Its not the writing off of losses that cause the problem, its the way they apply it to property that cant be to other investments, CGT discount just makes it so much worse.

          • The “building depreciation” is deducted from the cost base of the property for CGT calculations

          • kannigetMEMBER

            What exactly does this mean? Do you mean you deduct it from the original purchase price, which pushes the gains up, increasing the amount you pay 50% of your marginal tax rate…

            So, I reduce my tax while my marginal rate was high, and to pay a lower rate later when my marginal rate is low, and then also 50% discounted….

  4. Dance on the grave of NG now, but we will p i s s on the charred remains of your equity when you’re eventually wiped out by Mr Market.

    I may even dance a jig myself.

  5. The only way forward on these misdirected incentives (NG and CGT) is to get into power and then try to implement change without first securing a transparent mandate. Works for me!

    • The Travelling Phantom

      Seems Ermo’s plea for mig and how people came together, agreeing or disagreeing , yesterday lead to DLS and LVO cancelling macro afternoon…
      This is dictatorship if its true _ shake fist_

  6. Vic DynoMEMBER

    If interest costs become non deductible for investment housing, what happens with margin loans, commercial property loans, business loans, equipment and machinery loans? Would it be right that these would still be deductible loans? Surely residential investment is as legitimate as commercial property investment?

  7. Jumping jack flash

    “negative gearing has become ‘yesterday’s issue’ and has faded in importance from a housing policy perspective.”

    The real effect of this isn’t all that important, what is important is the signal that the ALP is committed to increasing the wealth of Australians through the mechanism of debt transfer.

    This is what the people want above all. They want their government and their leaders to make them all rich in the quickest amount of time and with the least amount of effort, and the proven method is from a pile of someone else’s debt plonked into their bank account.

    It isnt so much the actual effect it is the psychological effect.

    Plus the fact they must STILL be salty that they lost the election based in part from their negative gearing reform proposal.