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Negative Gearing: The Impact on Homebuyers and the Housing Market

Are you thinking about buying a property? Or are you already a homeowner? If so, then you need to be aware of negative gearing.

Negative gearing is a strategy used by investors to minimise their taxable income. It involves borrowing money to buy an investment property. Then, claiming the interest on the loan as tax deductions.

Some property investors view it as a way to increase their chances of making a profit on their investment. Others see it as a risky strategy that could leave them out of pocket if the rental market shifts.

Let's take a closer look.

What is Negative Gearing?

There have been many talks lately about this. So, what is the impact of negative gearing?

Some say that it's the reason why prices increase, while others say that it's hurting first-time buyers. A property investor's ultimate goal is to enjoy the rental income, known as positive gearing. When the cost of owning an investment property exceeds the return you earn from rental revenue, this is known as negative gearing.

In a nutshell, this gearing is a known investment strategy in Australia. But it can significantly impact individuals. This can result in the investor making a loss on their investment. But they may be able to offset this against another personal income tax.

The goal is to make the rental income from the property cover the interest payments on the loan. This is while any profit goes towards offsetting other taxable income.

How Negative Gearing Affects the Buyers and Property Market

While there may be some potential benefits for homeowners, on the whole, this is giving disadvantage. The impact of it on both the housing market and homebuyers is twofold.

Drives up Property Prices

It's competing with investors who have more money to put down and can afford to buy in negative gearing. This puts the average homebuyer at a disadvantage and drives up prices as demand continues to outstrip supply.

Besides that, it creates an artificial market where people are buying investment properties. It's not because of their potential rental return but because of the capital gains they expect to make when they sell. This could lead to another housing bubble if things don't change soon.

Reduces the Affordability of Purchasing a Home

It makes buying a home less affordable for those who are not in a position to invest. This is especially true in markets like Sydney and Melbourne. It's where prices have skyrocketed due to an influx of foreign investment and negatively geared property.

Moreover, the increased demand and decreasing supply have driven up prices. This is while the availability makes it more affordable for property investors to buy. This puts people who want to buy their first home at a disadvantage. They have to compete with other buyers and investors who can afford it because of the tax benefits and breaks.

If you're looking to buy a property investment, it's essential to know how it can affect the market. You can ask for advice from your property advisor if you think you need a second thought.

The Drawbacks

Negative gearing, like any other investment strategy, has risks. Lending money to finance investment is risky in and of itself. And you should thoroughly understand this before pursuing buying or getting a rental property.

Before you engage in a plan, consider the following risks:

  • What if the tax regulations change and negative gearing is no longer a feasible option for your business?
  • What if you're in a cash-flow shortage?
  • What if the real estate market dives, and you cannot get the capital gain you desire?
  • What happens if you can't locate a tenant and the property sits empty for a long time?
  • What happens if you are unable to repay your investment loan?

However, there are ways you can minimise the drawbacks. An expert in the field can help in the decision-making process.

Bonus Tip: Protect Yourself and Your Investment

So what does this mean for homebuyers?

It means that when you're looking to buy a house, it's essential to do your research. This is to understand how the current market conditions will impact your purchase. Keep an eye on whether or not the property you want is negatively geared. If it is, you may be able to negotiate a better price.

Aside from that, manage your income to minimise the risk. When managing a property, there are instances when you set aside more money for maintenance, property management fees and so on. So, before you decide, make sure you get enough income to cover the costs that come with owning a home.

And if you're thinking of selling soon, remember that negatively geared investment property can work in your favour too. So, speak to your real estate advisor about how best to market your property in today's market.