Why Negative Gearing Still Works

The regulators and banks have made life tougher for property investors. But all the uncertainty makes it a good time to consider this powerful way to create long-term wealth

- Bryce Holdaway

Is negative gearing a strategy that still works? It’s a timely question. Let’s face it, property yields are low, capital growth is in question, the regulators want to slap limits on investor lending and the banks have responded with higher interest rates. Throw in the changes to depreciation perks and the removal of the travel allowances and it’s enough to make the 1 million or so Aussies who run a property investment at a loss – and those thinking of going down that route – to ask the big question.

I would argue yes, because ultimately negative gearing is not a strategy; put simply, it’s a tax outcome that represents a moment in time. Like a business owner who makes a loss in the start-up phase to ultimately make profits and build value over the medium to long term, so too does a property investor consider making a loss for only as long as it takes to build a big enough wealth base so that they too can move into positive-gearing territory, which will provide them with the self-funded retirement outcome they desire. Negative gearing is a means to an end, not a permanent way of life.

So, in my view, the real question here is whether residential property still remains a good investment because the taxation benefits you receive through negative gearing are temporary but, if done correctly, the impact of the capital growth and rental income from building your portfolio will be lasting.

But before we ponder that question, let’s look at exactly what headwinds property investors face.

Winter has come

The Australian Prudential Regulation Authority (APRA) this year introduced restrictions that have impacted lending for investment purposes. APRA is the prudential regulator of the Australian financial services industry, overseeing banks, credit unions and building societies to protect the financial wellbeing of the community.