Negative gearing has emerged as a hot topic of discussion in the lead up to the federal election.
It is a contentious issue with both sides of politic announcing plans to alter the rules around it should they win at the polls.
The Labor government has proposed abolishing negative gearing on homes bought after July 1 2017 and making it only available on newly constructed properties.
The federal government, on the other hand, plans to target investors by either capping the number of homes that can be negatively feared or limiting the annual tax deductions they can claim.
For those unfamiliar with negative gearing, it is essentially the ability for property investors to deduct losses on their investment properties against income other than rent.
The benefit of the concession is that it encourages investors to buy property which in turn provides rental homes for tenants.
If negative gearing is removed, investors have less incentive to own property but it will punish those who are using their investments to fund their retirement.
One of the claims about removing or restricting negative gearing is that it will lower prices.
There may be an adjustment as investors are pulled out of the market, but this will end up hurting tenants as rents will inevitably go up.
In the long term, the people that are going to be affected most will the first home buyers.
Before they’re able to buy their first home, most have to pay rent but if they’re spending their savings on high rents, it will take them longer to save for a deposit.
Changes should not be done in the extreme. It would be a mistake to reduce the number of investors from the market as they’re too important to the system.