Are We All Negatively Geared?

I couple of months ago I wrote a post about negatively geared properties and what it means. In recent weeks The Australian Tax Office (ATO) has released taxation statistics for the 2009/2010 financial year. 

A great summary of these statistics was written about here: RP data Research Blog.

Over the 2009/10 financial year there were 1,751,679 individuals that received rental income (owned investment property).  The number had increased by 3.5% from the previous financial year.  Of these 1,751,679 individuals, 1,110,922 individuals or 63% made a loss on their rental income; the remaining 37% of individuals turned a profit on their rental properties.

Of those 63% of investors that had made a loss on their rental income, the typical loss was $9,132 over the year or $176/week.  The most concerning sign is that individuals that earn less than $6,000 a year are carrying a loss of $207/week with only those on an annual salary of more than $180,000 carrying a greater loss each week ($399).  It is difficult to determine what this actually means however, you could assume that a portion of those on incomes of less than $6,000 p.a. are self funded retirees.  Of course a portion of these people are likely to not be self funded retirees either.  If the current housing market conditions persist and these people are essentially making no annual income having a negatively geared property is of limited benefit and they may in fact be looking to sell these homes in an already soft market.  Even for those that are self funded retirees, if they have no personal income there is no benefit to them having a negatively geared property asset.

Somewhat worrying is the fact that 825,284 investors making a loss on their rental income are earning $80,000 a year or less.  These owners are typically making a loss of $8,111/year ($156/week).  For most of those in the lower income brackets the need to negatively gear a property to offset their tax is typically lower than those on a higher income.  This leads me to believe that many have got into investment housing initially for the taxation benefits but obviously with a view to experiencing capital gains and the subsequent positive cash flow benefits in the future.  The statistics also show that 285,638 persons (26%) making a loss on their rental property are earning more than $80,000 a year.  These individuals recording a tax loss on their rental property are typically losing $12,082 a year or $232/week.

The news is much more positive for those investors that are achieving a profit from their rental property.  The typical owner with a net rental income of more than or equal to $0 is making $160/week from their property as opposed to the -$176/week loss many others are making.

The results highlight that most property investors are negatively geared.  Of course some will be quite happy to be negatively geared with the cost offsetting tax elsewhere while others, particularly those nearing retirement or at retirement, will be hoping the property starts to turn a profit in the near future.  Given the current economic and housing market conditions, it seems as if these investors will be reliant on a pick-up in rental growth to propel them to positive gearing rather than capital gains.  This is the reason why investors that are interested in purchasing in the current market must be careful and should focus on buying for long term capital gains while maximizing their rental return or even positive gearing rather than short-term capital gains.

So what are your thoughts? Do you have negatively geared properties and they are making you nervous? Do you think the market conditions are still supportive of this approach?

Article first published May 11th 2012 at RP Research Blog.