Negative gearing’s big return as interest rate rises impact investors

Negative gearing is back in a big way as interest rate rises hit hard, but the ultimate aim of investors should be something else.

Many of Australia’s 2.2 million real estate investors are set for a sharp rise in their tax refunds this year.

However, it won’t be a welcome increase, as soaring mortgage interest rates push people back into negative gearing – where their investment costs exceed their income.

Rising rents will offset some of the extra loan repayment costs that have ballooned by $1100 a month since May 2022 for a $500,000 loan and $1700 monthly for a $750,000 a loan.

Negative gearing was in the spotlight again this week amid reports Labor was considering new rules, but Prime Minister Anthony Albanese quickly ruled out changes.

Negative gearing is never far from the national housing debate. Picture: iStock

The latest Australian Taxation Office figures show 1.2 million property investors claimed net rental losses for 2019-2020, including $21 billion in interest deductions – a dollar figure that had barely moved in six years because of falling interest rates. Accountants and property specialists expect that number to rise sharply this tax time.

Author, investor and university lecturer Peter Koulizos said investors on a marginal tax rate of 30 per cent were only getting 30 per cent of their interest costs back and “are still losing 70 per cent”.

“If you spend $10,000 you only get $3000,” he said.

“In the end investors need to be positively geared, otherwise they cannot use the excess rent to live off.

“Before Covid we had lots of people negatively geared. During Covid it was almost impossible to be negatively geared because interest rates were so low. But now that interest rates are going back to a long-term average, we go back to lots of investors negatively geared.”

Mr Koulizos said most investors were unlikely to suffer from the looming mortgage cliff that young buyers with big home loans faced this year as low fixed rates reverted to much higher variable rates.

“Loans were on special,” Mr Koulizos said.

“Interest rates are higher than before Covid, but wages are a little bit higher and rents are a lot higher. For investors as a whole, I do not see a cliff coming, although there will be some people in trouble.”

Mr Taxman founder Adrian Raftery said he did not see a dangerous mortgage cliff “quite yet, as the rates are still lower than what they were in April 2012”.

“There may be some who will feel the pinch with cash flow – especially those who bought at market highs – and be forced to sell, but for the vast majority I expect, or maybe hope, that they still have a bit of a buffer to absorb these rate rises,” he said.

Dr Raftery said this year would see a substantial increase in interest paid, the largest expense for a property investor.

“In theory we should expect an increase in negative gearing losses or a shift from positive to negative gearing, however I keep seeing stories about rental shortages, and economics 101 says that when demand exceeds supply, prices rise,” he said.

Dr Raftery said an investor on the top marginal tax rate with an income loss of $10,000 would only get $4700 back, and falling property values compounded their losses.

“There are some bank balances copping a hammering out there,” he said.

Originally published as Negative gearing’s big return as interest rate rises impact investors