With negative gearing back in the headlines, Damien and Jeremy use this episode to explain the mechanics of negative gearing, and share their views on who benefits from it and what tends to happen when governments propose changing it.
What Is Negative Gearing?
Jeremy explains negative gearing simply means an investment is running at a cash flow loss, using an example of $30,000 in rental income against $35,000 in total holding costs, a $5,000 annual shortfall, or roughly $100 a week that needs to be funded from the investor's own income. He notes this has become harder to sustain in the current higher interest rate environment (with interest-only investment loans currently around 6.5–6.7%) compared to when rates sat closer to 3%.
Both hosts stress that negative gearing isn't unique to property, it's a general tax principle that applies to any income-producing asset or business, allowing losses and expenses to be claimed against other income. Jeremy notes the policy was introduced in 1936, and was briefly removed between 1985 and 1987 due to concerns about its impact on the rental market (particularly in Sydney and Perth at the time), before being reinstated. Damien recalls that even the mere suggestion of abolishing negative gearing ahead of a federal election noticeably reduced buyer inquiries at the buyers agency he worked for at the time.
How the Tax Benefit Actually Works
Using a worked example, Jeremy shows that a $5,000 annual loss doesn't come back to an investor as $5,000 in cash. Assuming a 30% marginal tax rate (relevant for incomes roughly between $45,000 and $135,000), a $100,000 income reduced to a $95,000 taxable income after the loss produces a tax saving of around $1,500, still leaving the investor $3,500 worse off overall for the year, before any capital growth is factored in. Jeremy cautions against marketing that frames a negatively geared property as effectively "costing nothing," since the underlying loss is real, and if a property isn't achieving capital growth, that same money might be better placed in a high-interest savings account instead.
Both note that unclaimed losses can be carried forward if a proposed change (as previously floated) grandfathered existing properties but changed treatment for new purchases going forward; accumulated losses would simply offset future taxable rental profit once a property eventually becomes cash flow positive, rather than being lost altogether.
Who Actually Benefits?
Jeremy pushes back on the narrative that property investors are the primary driver of unaffordability for first-home buyers. He argues owner-occupiers outnumber investors roughly two to one, and that historical data shows owner-occupied properties tend to outperform otherwise-similar investor-owned properties in the same suburb in capital growth terms, since owner-occupiers often buy for lifestyle reasons (sometimes paying above an investor's assessment of fair value) and tend to over-capitalise on renovations. He also notes that markets with a higher proportion of rental (landlord-owned) properties tend to show poorer capital growth, reinforcing his view that owner-occupier demand, not investor demand, is the larger driver of price growth.
Jeremy also pushes back on media narratives highlighting individuals who own an unusually large number of properties (citing examples like "30 properties" or "50 properties"), noting this is genuinely rare (he cites investor statistics showing around 70–72% of investors own only one investment property) and that headline-grabbing large portfolios are typically funded by a separate, highly profitable business, rather than accumulated through negative gearing alone. His view is that the tax benefit is most meaningfully used by investors within the 45,000–135,000 middle income bracket, while higher-income earners (above roughly $190,000) receive a larger proportional benefit, though he cautions that reducing tax shouldn't be an investor's primary motivation for buying property in the first place, positioning financial independence and reduced reliance on an employer as a better long-term goal.
Is Australian Property Genuinely Unaffordable?
Jeremy offers a deliberately provocative take: he argues that if property were truly unaffordable, prices simply wouldn't have risen consistently for over 40 years, since a genuinely unaffordable market would see transaction volumes and prices stagnate or fall, not continue climbing. He points to Australia's strong showing in the Global Liveability Index (discussed further in Episode 21) as evidence that Australian property may in fact be undervalued relative to other highly liveable global cities. He acknowledges affordability is a genuine struggle for those without family financial support, but maintains that the broader claim of nationwide unaffordability isn't well supported by the historical data on prices and transaction volumes.
What Happens When Negative Gearing Changes? A Look at New Zealand
Damien and Jeremy examine New Zealand's experience after negative gearing style interest deductibility was phased out from 2019 to address housing affordability, noting rents continued rising regardless, and that the policy is now being progressively reinstated (moving from a partial interest deduction back toward a full deduction). Jeremy's interpretation: removing the benefit reduces investor demand, which in turn leads developers to pull back on new supply, and with population growth continuing regardless, the eventual result is tighter rental supply and higher rents, which in turn draws investors back into the market once properties naturally become cash flow positive again, restoring the original equilibrium, just with a temporary rent spike in between.
Jeremy compares this to a politician capitalising on a topical issue, referencing a news story about a rescued young beaver in Massachusetts whose release into the wild has become a public talking point, to illustrate his broader point that politicians often respond to what's publicly topical (in this case, the rental crisis) with visible action rather than necessarily effective action. His view is that similar interest-deductibility changes have been trialled and wound back in other countries too (citing Canada, Germany, France, and the US as examples), suggesting this is a recurring, internationally common policy debate rather than one unique to Australia.
The Investor's Perspective on Policy Uncertainty
Both hosts agree the historical sample size for analysing negative gearing changes in Australia specifically is far too small to draw firm conclusions from (essentially one brief removal and reinstatement between 1985 and 1987), and caution against treating any single historical episode as a reliable predictor. Jeremy's overall advice to investors is to avoid getting caught up in policy noise or timing decisions around potential legislative change, and instead focus on individual financial strategy and long-term goals.
Personal Motivations for Investing
Damien and Jeremy each share their personal motivation for getting into property investing in the first place: Jeremy citing a desire for financial independence and frustration with underwhelming superannuation fund performance, and Damien citing a similar desire to reduce reliance on employment income, alongside a broader dissatisfaction with his earlier accounting career. Both stress that reducing tax through negative gearing shouldn't be a primary motivation for property investment, viewing it instead as a secondary, temporary feature of the accumulation phase rather than the underlying goal.
Pros and Cons
Summarising the debate, the hosts note negative gearing's main argument in favour is that it helps stimulate rental property supply by making investment more attractive; its main argument against is the perception that it disproportionately benefits wealthier investors, tax benefits scale with income, while the majority of investors hold only a single property. Both reiterate that they personally don't see the policy as a major factor either way in their own long-term investment decisions, since they view capital growth, not the tax treatment of holding costs, as the primary driver of wealth creation from property.
Closing Thoughts
Jeremy's summary view is that whether negative gearing is retained or abolished doesn't meaningfully change Australia's fundamental attractiveness or affordability as a place to invest, capital growth remains the primary driver of returns regardless, and any changes would likely just convert currently negatively geared properties into cash flow positive ones over time, alongside a temporary rise in rents in the interim. Both close by encouraging listeners to like, comment, subscribe, and leave a review on their platform of choice.