This was published 6 months ago
Melbourne suburbs where negative gearing is going through the roof
Melbourne property investors would be hundreds of dollars a week worse off if they bought a property now compared to the start of the pandemic.
Despite the rental crisis, rents have not risen enough to cover the increase in mortgage repayments in any corner of the city, CoreLogic modelling shows.
The biggest gaps were in affluent spots such as Bayside and Boroondara council areas, where the difference between mortgage increases and rent increases is between $500 and $700 a week.
And the widening gap could leave investors claiming larger tax deductions on negatively geared properties, experts said, increasing the amount of forgone revenue in the federal budget.
In Greater Melbourne, weekly rents have risen $101 from March 2020 to January 2024, but the typical investor mortgage repayment has risen $341 a week, CoreLogic found.
The highest increases by council region were in Bayside ($699), Boroondara ($531), Manningham ($510) and Monash ($452), while the lowest was Melbourne City Council ($113).
CoreLogic research director Tim Lawless said it was “a little bit of a myth” that rents have gone up more than mortgage repayments.
Home loan repayments have risen due to the fastest cycle of interest rate rises in a generation, from near zero to 4.35 per cent, but the cost of rent depends on the supply and demand of rental properties, he said.
There are few rental homes vacant but demand increased due to international migration and the increase in household formation in the lockdown years as people moved out of shared houses into their own space.
He said it was fair to assume that more investors would be negatively geared compared to when interest rates were at rock bottom, given how much the cost of debt has increased.
Mortgage costs have soared faster than rents.Credit: Jason South
“The larger that gap between rental income and mortgage costs, the more they would be relying on a negative gearing outcome,” he said.
“It does mean there will be a larger negative gearing liability for the government, if there’s more investors utilising a negative gearing strategy.”
But he did not think the prospect of larger tax breaks would induce more investors to buy, since they would still be out of pocket. Negative gearing rules allow investors who pay more interest on a loan than they receive in net rental income to deduct their loss from their salary income to reduce their taxable income.
“I don’t think it’s an attraction – even if you can negatively gear your losses you still need to have the cashflow to service your mortgage,” he said. “The main motivation for investors tends to be capital growth.
“As long as investors can service their mortgage they’ll weather the storm and hope for a windfall.”
He said the typical Melbourne house had increased in value by $76,000 between March 2020 and January this year, and the Victorian capital had underperformed compared to other cities.
Investors in the Melbourne council area had some of the lowest increases in mortgages compared to rents, which Lawless attributed to the high-density nature of the dwelling stock. By contrast, buyers of family homes in Bayside or Boroondara may not be highly leveraged as they may be using equity from the sale of a previous home, he said.
Independent economist Saul Eslake has been a long-time advocate of winding back tax breaks for negatively geared investment properties but does not expect the federal government to make an imminent change.
“Unintentionally or intentionally, a lot more landlords are going to be negatively geared. I think they became unintentionally positively geared when interest rates fell,” he said.
“There will be a significant increase in the number of landlords negatively gearing and there will be a significant increase in the loss of revenue because of that.”
But he said whether investors try to buy homes to take advantage of the bigger tax breaks would depend on whether they are confident they would make a capital gain in future.
“If they’re still confident they will make a capital gain at the end, they’ll wear that if they have sufficient cash flow from other sources to do it,” he said.
Grattan Institute economic policy program director Brendan Coates said rents have not been affected by the fast tightening cycle in interest rates, but the rise in rents reflects an increase in demand from households seeking space to work from home, and the rise in immigration.
“It may not mean more investors overall – but a greater proportion of those investors will be negatively geared because people who were positively geared four years ago when the cash rate was 0.1 per cent are negatively geared now, because their mortgage repayment has gone up more than their rental income has,” he said.
“It certainly increases the cost of negative gearing to the federal government … the typical investor who is negatively geared will be offsetting much larger rental losses against their wage and salary income than they were when the cash rate was 0.1 per cent.”