It simply means borrowing money to buy an asset such as an investment property, in other words taking a loan to purchase property.
It generally means that the interest you are paying on the loan and all the other associated costs with the property is more than the income you earn resulting in a loss.
Originally negative gearing was pitched as a way to increase the number of houses being built, which would push down rent prices and make it easier for people to save for their deposit.
But then “negative gearing became a tax rebate for investors and for wealthier older people. So housing prices were driven up by investors rather than actual home buyers.”
Labor’s Negative gearing policy which is in controversy these days is to reform negative gearing and capital tax discount effective from 1 July, 2017.
It is a policy that could help the middle class and working class families realise their dream of home ownership. It will allow individual investors to negatively gear investments in newly built residential real estate.
As per the Negative gearing policy investors are subsidised to buy housing they are losing money on, it makes housing a really attractive investment option which pushes up prices. Which makes it harder and harder for younger people to get into the market and you end up renting for longer.
However the implementation of this policy could affect thousands of small businesses despite its unintended target of affecting business assets.
The policy could curb the practice of margin lending in the share market and will affect private investors in unlisted small businesses.
93% of home-loans in Australia go towards existing properties.
Labor says by restricting negative gearing to brand new properties, it will drive investors to build more housing stock and reduce competition amongst existing housing. Because, if you’re an investor trying to reduce the amount of tax you pay, then investing in new housing will be your only option to access negative gearing according to the Australian Bureau of Statistics.
Tax changes will clearly reduce the after tax benefits for property investors.
The key question is whether the market responds by reducing the price of housing, or by increasing rents, or by absorbing a reduction in returns.