Scrapping negative gearing will not solve the housing crisis

Topic: Ahead of next week’s Economic Reform Roundtable, the question of whether to scrap or heavily reform negative gearing has been raised by politicians, academics, the media and unions. Would this tax approach help tackle Australia’s housing affordability crisis, or would it avoid its structural problems and risk making them worse?
Question: Should we scrap negative gearing?
Debaters: RMIT Professor and IPA adjunct research fellow Sinclair Davidson is arguing the negative. The Australia Institute’s chief political analyst Amy Remeikis is arguing the affirmative.

The following is Sinclair Davidson’s view. Read Amy Remeikis’ here.

Every few years, the idea of abolishing negative gearing reemerges as if it were a bold reform. In truth, it is a political distraction. It represents a persistent unwillingness to confront the real causes of Australia’s housing affordability crisis: artificial restrictions on supply, poor planning decisions, and a growing regulatory burden that makes it harder and more expensive to build housing.

Negative gearing is not a tax loophole.

It is not a subsidy.

It is not a special privilege.

It is a basic application of one of the most fundamental principles of income taxation: that costs incurred in earning assessable income are deductible against that income. If I operate a business and make a loss, I can deduct that loss from my other income. If I invest in property, borrow to finance that investment, and the expenses (interest, maintenance, rates, etc.) exceed the rental income in a given year, I can deduct the loss. This is how income taxation works and is supposed to work.

Abolishing negative gearing would mean treating some taxpayers differently, not because they are doing something illegitimate but because of political sentiment. In tax policy, consistency matters. If we want investors to pay tax on their capital gains, we must also allow them to deduct their losses. Anything else is cherry-picking.

The common line is that negative gearing pushes up house prices. That claim is rarely supported with credible evidence; at best, the effect on prices is marginal. The real determinant of house prices is supply. When more people want to live in an area than there are houses available, prices rise. This is true whether those buyers are investors or owner-occupiers. Blaming investors misses this point. Investors do not control zoning laws, development approvals, or land release decisions; state governments do.

In fact, if negative gearing were abolished, the likely result would be a contraction in rental housing supply. That is what happened when the Hawke government briefly quarantined negative gearing in the mid-1980s. Within two years, rents had spiked in Sydney and Perth, and the policy was quietly reversed. Critics have attempted to rewrite that history, but the then Labor government knew and understood what was happening on the ground.

We are often told that negative gearing benefits only the wealthy. Again, this is simply false. Many people who negatively gear are on middle incomes, such as teachers, nurses, police officers and small-business owners. They are not speculating on mansions in Toorak — they are buying modest properties in outer suburbs in the hope those assets will one day help fund their retirement. They are little different from Australians who invest in shares or who start a small business. They take risks — sometimes those risks pay off, sometimes they do not. The tax system should treat them all consistently.

Abolishing negative gearing is often paired with increasing the capital gains tax. This is presented as a fairness measure, but it is neither fair nor efficient. It punishes risk-taking and investment, and it would do so precisely when Australia faces a shortage of private investment in housing and infrastructure. Taxing nominal gains more heavily also ignores the effects of inflation, which distorts the true economic return on an asset. If government wishes to encourage long-term investment, it should reduce — not increase — the penalty on capital accumulation.

It is also worth pointing out that any budgetary “savings” from abolishing negative gearing would be modest and largely illusory. Losses that cannot be deducted today will be carried forward and deducted in the future, either against rental profits or against capital gains. Shifting the timing of deductions does not create new revenue. It creates greater complexity, uncertainty and worse incentives.

If governments are serious about housing affordability, they should stop trying to engineer outcomes through tax tinkering and start addressing the real constraints. That means reforming land-use planning, reducing red tape on new developments, and allowing cities to grow both outward and upward. It does not mean vilifying landlords or rewriting the tax code to score rhetorical points.

It also means recognising that Australia faces a fiscal moral hazard problem: state governments, which control most of the housing supply levers, benefit from high property prices through increased stamp duty, land tax and rates revenue. They have no fiscal incentive to reduce housing prices.

“Reforming” negative gearing will not build a single home, nor will it help a single renter. It will, however, make life harder for small investors, reduce the private rental stock, and introduce further complexity into an already fragile housing market. That may satisfy ideological urges, but it will do nothing to solve the housing problem.