Every experienced property investor knows how important negative gearing can be to their investment strategy. Negative gearing helps investors recoup possible losses from maintenance costs and rental income by claiming those losses against their other income. Quite understandably, it is a hot topic in the discussion of housing affordability in this country.

According to Luci Ellis, the RBA’s head of financial stability, the combined effects of negative gearing and concessional capital gain tax is threatening to tip the balance towards investors, or more specifically, those households in the top 40 per cent of incomes. In the Senate economics inquiry into home ownership, she said that negative gearing is worthy of a “holistic review”. She didn’t make any specific recommendations however on tax changes.

This leaves many Mum-and-Dad investors wondering: What would happen if the government abolished or scaled back negative gearing? Here are some possible scenarios if it were scrapped:

Rents would skyrocket

Negative gearing does not just benefit investors. It could be argued that the ones who benefit from it the most are the tenants. If there was no negative gearing there would be fewer homes for rent and more demand for those available for rent. Landlords may increase their rent to compensate for the lack of negative gearing and because of the supply and demand argument, rents could skyrocket. This leaves tenants scrambling to find an affordable living space and landlords facing possible lengthy rental vacancy periods.

Increased demand for public housing

If tenants can’t find a home that will not leave a hole in their pockets, their only option may be to apply for public housing. But with the waiting list as long as it is, increased demand for a suitable social dwelling might only make the system more inefficient and usher in a public housing crisis.

Properties for sale would oversaturate the market

Properties with negative cash flow would only hurt the bottom line of many investors. This is why many landlords might be tempted to sell them off if negative gearing was abolished or scaled back. When properties for sale oversaturate the market, prices may plummet and bring an unprecedented property market bust.

Inflation would increase                                            

Without negative gearing in place, inflation could be expected to increase along with the higher cost of holding properties. This is because housing costs are a component of the inflation figures.

Derailed retirement planning

Ultimately, if negative gearing is scrapped, it would hurt Mum-and-Dad investors who are simply trying to build wealth for their retirement. According to the Australian Taxation Office statistics, those who made a loss on rental properties had a taxable income of $80,000 or less — about 66.5 per cent of investors. It would be harder for them to secure their financial future and could derail their retirement planning.

Negative gearing is important for the market to be balanced. Removing it might send the property market in a tailspin.

Serious investors should have a good understanding of how government policies like negative gearing can affect their wealth creation strategy. Our team of property investment experts can help you get up to speed with everything you need to know. Ring us today to learn more about our financial education events.