As negative gearing hits the national agenda once more, leading property managers warn that abolishing the tax break would see rent rolls shrink dramatically.
The final report of the Financial System Inquiry, released on Sunday, said negative gearing and capital gains tax “distort the allocation of funding and risk in the economy”.
“The tax treatment of investor housing, in particular, tends to encourage leveraged and speculative investment,” the report said.
“Since the Wallis Inquiry [in 1997], higher housing debt has been accompanied by lenders having a greater exposure to mortgages. Housing is a potential source of systemic risk for the financial system and the economy.”
Leading Property Managers of Australia executive director Bob Walters said when former Prime Minister Paul Keating removed negative gearing back in the '80s, it had the initial effect of flooding the real estate market with properties.
“A lot of investors decided to get out of their property investments because they were not getting any tax benefits,” Mr Walters told Residential Property Manager. “So there was an immediate increase in stock on the real estate sales market, which obviously has the ability of flattening prices.
“But because there were fewer investment properties left, what happened is, the rental market tightened and rents increased rapidly. Usually, the people hurt the most from the abolition of negative gearing are going to be tenants,” he said.
“As to how it will affect the PM industry ... [if] investors no longer hold their property investments, they will get sold, and chances are a lot of them will be purchased by owner-occupiers. So, the size of rent rolls will be affected."
Realmark corporate director of property management Sara Young agreed, saying negative gearing encourages investment, and its removal is likely to result in a shortage of rental properties – a situation witnessed in Perth in recent years.
“If negative gearing is abolished, I believe it would drive investors away from rental properties,” she told Residential Property Manager. “In turn, this could lead to a shortage of rental properties, pushing rents upwards and potentially leading to housing affordability issues.
“Whilst I cannot speak for all of the property management industry, many of us in Perth have seen, in recent years, the issues faced with a shortage of rental properties. The abolition of negative gearing could lead to a similar undersupply.”