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Should negative gearing be available for property investment?

Negative gearing is a subject that arises time and time again in the world of property investing, with its merits and downfalls the source of many debates.

What is negative gearing?

As with any type of investment, negative gearing involves borrowing money in order to buy an asset.

In the instance of negative gearing, the interest you are repaying on the loan is more than the income you are receiving on it, meaning you are making a loss.

Australia is one of just a few countries where this practice takes place – proponents believe it can provide immediate tax benefits, while giving the opportunity for long-term capital appreciation.

Negative gearing is therefore often preferred by those who face a heavy tax burden, or who take a forward-thinking approach to their real estate investment.

How negative gearing benefits the market

Although the process of negative gearing has its fair share of critics, there is also evidence to suggest it can be effective at attracting people to the property market.

A recent report published by Fairfax Media sources showed that an increasing number of young buyers are using negative gearing to get their feet onto the property ladder.

They are making their first steps as investors rather than owner-occupiers, giving them the chance to save up money and eventually purchase property of their own.

ME Bank chief executive Jamie McPhee told the news provider: "What we're seeing is that people who are buying an investment property are still living at home or renting with a group of people."

Opposition to negative gearing

The Grattan Institute also released a report late last year showing how negative gearing could be one of the most ineffective tools in stimulating the national property market.

It claimed that "housing policy in Australia is overdue for a major renovation", especially as levels of homeownership are largely in decline.

The group highlighted in its Renovating Housing Policy report that negative gearing costs the government around $2.4 billion a year to sustain, and the tax breaks are failing to produce new housing.

Estimates from the Grattan Institute suggest that each residential property investor receives around $4,500 a year as a result of the capital gains discount facilitated through negative gearing.

Private renters, on the other hand, are claimed to receive little support through the tax and welfare system, despite making up around a quarter of households.

Negative gearing is a topic that has divided opinion for many years – and is likely to continue to do so. At a time when the property market needs widespread support, there are going to be plenty of calls for it to stay in place for at least a while longer.