Should negative gearing be abolished?

Negative gearing is back in the spotlight for several reasons.

First, it is clear that investor activity, particularly in Sydney, is having an unhelpful effect on the housing market.

Second, Australia has a medium-term fiscal problem that must eventually be addressed. Negative gearing costs the bottom line about $4 billion a year.

Third, the benefits of negative gearing accrue disproportionately to high earners - almost a quarter of those earning more than $200,000 use gearing, while less than 10% of those earning less than $80,000 do so.

The case against change is that negatively-geared property gives people a "start" in the market and that it facilitates the operation of the rental market. In particular, it is often asserted that the cessation of negative gearing in the mid-1980s led to rapid rent rises.

This is mainly "urban myth", and it's worthwhile pointing out that, unlike in the 1980s, about 93% of all borrowing by investors goes to purchase existing dwellings and does not add to supply.

In my view, it is not negative gearing per se that should be the issue but its interaction with the concessional treatment of capital gains. Investors get to write off all of the costs associated with an asset at 100% and then, on the sale of the asset, pay tax on just half of the capital gain.

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