Negative gearing seems to me to be one of those crazy tax schemes that should not prevail the test of time. It makes about as much financial sense to me as investing in growing olives or hardwood timber plantations, which of course were deemed tax avoidance schemes and are illegal. It's part of a flawed tax system which successive governments are too scared to touch because of its ability to polarise voters. I suspect fifty years from today, a little bit like cigarette smoking, we'll look back at this piece of public policy and ask "did we really do that?" And I'll give you 5 reasons why we should dump it now. 

1. Negative gearing encourages over exposure to one asset class for investors. For most people, it would be the next major asset after the family home. How does this fit with their risk profile or asset spread? Why would anyone want to hold an asset with negative cash-flows in their portfolio anyway? Ah, that's right! Australian taxpayers subsidise the program to the tune of around $4 billion dollars per year. This money could be spent on other programs which actually created real wealth. Then there's also the lost opportunity cost, which if you tried to measure over time would amount to a staggeringly large amount of money. In essence we have non-investors subsidising investors.

2. The money invested into negatively geared property adds very little to GDP. Contrary to popular opinion, a large percentage of negatively geared properties are for existing dwellings and do not contribute significantly to residential construction. Changing the rules to apply only to new construction would change this pretty quickly. Perhaps someone should whisper in the treasurer's ear?

3. As investors inflate the price of residential property, it tends to push first home buyers and owner-occupiers out of the market. I have three teenage sons, I'm not quite sure how they'll be able to get into their first home and that really bothers me. 

4. Negative gearing encourages property speculation and contributes to market distortion, sometimes referred to as a "property bubble". When cheap credit and low-doc loans are added to the mix rising property prices becomes a self-fulfilling prophecy. We end up bidding prices up and up and up, ad infinitum. Think in terms of the U.S sub-prime mortgage collapse. But of course that could never happen here because our banking sector is so well regulated. Or is it? Remember when the GFC hit and Australian Taxpayers propped the banks up through the deposit and wholesale funding guarantees? If our banks were so well capitalised and their loan books so robust, surely this safety net wasn't needed? I’m not so sure. 

5. The tax deductions and financial benefit of negative gearing are generally accrued by people already on higher incomes with a greater net worth. This can potentially contribute to greater socio-economic divide, which has a negative effect on community and social cohesion. Is this the Australia we want to leave for the next generation?     

So in my view, negative gearing has got to go. I'm sure there'd be a lot of bankers, real estate agents, mortgage brokers, financial planners and advertising sales people who would beg to differ but that's what vested interests are all about. Negative gearing simply doesn't deliver enough value for all the taxpayers of Australia, so get rid of it. In years to come it will likely be a text book example of the reason governments should stop meddling in markets. And a warning for all to beware the law of unintended consequences. 

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