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Debunking the myths of negative gearing



As the debate on negative gearing progresses forward, what do the experts think? Gareth Woodham, Buyers’ Advisor from WBP Property Group and Katie Pickering, Director of Hodges Real Estate gives us their thoughts.

 

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“Don’t listen to the hype- abolishing negative gearing isn’t the solution”
– Gareth Woodham, WBP Property Group

Woodham thinks the property market is one that can be saturated with mixed information. “It seems that everywhere you go these days, everyone has an opinion on property. Next time you’re sitting in a café enjoying an avocado smash, or freezing on the sidelines at your child’s soccer match, it won’t be long until you overhear someone with an opinion about the state of the current property market, how it has become unaffordable, and what this means for their children. All of this hand wringing is often punctuated with a few uninformed generalisations: ‘it’s the Chinese driving up the market’ or ‘we’re in a bubble.’”

“Looking more closely at the facts, there has been a significant increase in property investment by Chinese investors, however, the proportion of the total number of transactions is very small. Indeed prices have risen strongly in Sydney (and to a lesser extent in Melbourne), albeit from a period of stagnant growth immediately preceding,” he says.

Woodham continues, “The one fact that appears to be agreed upon by most is that it is investors that are leading the charge. This has been fuelled by the record low interest rates, which steers all types of investors to seek out returns that exceed more passive investments, which in a market of relatively constrained supply, leads to increases in asset prices. This has previously been seen in US shares, Australian bonds/AUD and now property.

In an attempt to oversimplify the argument to wrap it up before your macchiato arrives, a quick solution that is often offered is to abolish negative gearing. It is perceived that this will reduce the scourge of property speculators from the market, allowing the forsaken first homebuyers to finally consummate their birthright and acquire a home of their own.

“Unfortunately, although well intentioned and magnificently simple, this solution may not deliver the desired outcome. Negative gearing allows for the losses (income less outgoings) of a property to be used to offset the income from other sources (wages), reducing the taxpayer’s overall tax liability. However in the current market property investors can obtain finance at a comparison rate of less than 5%. With the yield on a reasonable quality investment property in a well located suburb of Sydney being in the range of 3-4%, the difference is hardly worth all the effort.”

This ease on tax burden of course still remains as an important factor for investors.

 

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For people entering the investment market, negative gearing enables buyers to pay off their assets quicker and set the building blocks in creating future wealth. The majority of my clients are building their portfolio and negative gearing plays its part in their financial security. Whilst also retaining investment properties, negative gearing is also used by investors to facilitate their own home purchase.”

However, let’s point out that the state of negative gearing should not dictate investment decisions. “Serious property investors do not let negative gearing drive their investment choice,” he states. “This is a distraction from the main criteria of quality property selection – Capital Growth.”

“Changes to negative gearing will spell doom for marketers of “high yield with guaranteed rental return” rubbish, but the real force pushing up property prices, which is the race to acquire a piece of well located property within a reasonable distance of work/school/shops will not change. High school economics covers supply and demand, so there’s no need to go over that again, other than to state that with a finite supply of land, a consistent increase in demand from population growth will continue to drive demand for property from both investors and homebuyers.”

“Changing negative gearing would not have the desired impact of reducing property prices in the current market. Now if they really wanted to change investor behaviour, we could have a long hard look at Capital Gains Tax concessions – but that’s a discussion for another day.”

Expert contributors:

katie pickeringKatie Pickering, Director of Hodges Real Estate Sandringham
Katie Pickering has built an outstanding reputation throughout Bayside as a dedicated property professional. Holding a Director’s position at Hodges Sandringham, her diligent, no-nonsense approach with clients leads her to be continuously recommended within the industry.

 

Profile Pic - Gareth WoodhamGareth Woodham Property Advisor at WBP Property Group
With a broad range of commercial experience, including portfolio management platforms, building efficiency and recruitment, Gareth has developed a customer focused personality. When combined with his years’ of experience and passion for property, Gareth now brings WBP’s successful Property Advisory service to Sydney, providing clients with the highest level of independent property advice when purchasing real estate in the dynamic and highly competitive Sydney property market. Gareth is a registered Buyer’s Agent and Certified Practising Valuer in NSW, and an associate member of the Australian Property Institute.