Cameron Kusher extends the following argument in favor of negative gearing:
Many in favour of removing negative gearing from property say that it should occur due to the fact that housing is an unproductive asset class. My argument is that given that housing provides shelter, if investors don’t purchase these assets, it would then be the responsibility of the Government to provide this shelter. Ultimately, that would mean that anyone that pays taxes would be funding housing for those who can’t afford it themselves.
What happened to individuals being responsible for their own housing? A large part of rental demand is due to poor housing affordability. If we made housing more affordable, the rental market would shrink.
Kusher highlights that in September 1985 the government quarantined negative gearing interest expenses on new transactions.
The reason why negative gearing was reinstated in September 1987 was that it was proclaimed that rents rose sharply on the back of a fall in housing market investment.
The following chart shows that rental growth accelerated between September 1985 and September 1987:
But no explanation is given for the earlier peak in rental growth rates — 13% in 1982 — prior to restrictions on negative gearing.
And what is not mentioned is that interest rates were rising. Standard variable bank mortgage rates peaked at 15.5% in 1986/1987. That would account for any decline in new housing investment, even though this is not evident from investor finance commitments.