Yes, believe it or not.
Teachers represent the largest component of Australians claiming negative gearing, followed by mid-ranking public servants according to a new report by the Property Council of Australia. Taxi drivers also rank highly in the list. The next time you get property investment advice from your driver, you could be talking to someone who's been there, done that.
Around two-thirds (58%) of those benefitting from negative gearing earn a taxable income of less than $80,000. Put another way, a large majority of low to middle-income earners have substantial exposure to swings in the residential property market, and could be negatively affected by any sudden shocks to the system. That could be from rising interest rates, tumbling property values and prices or rising unemployment.
Another way property prices could fall is thanks to booming new building approvals. As more supply comes on stream, in theory, prices should moderate. Building approvals in NSW have hit record levels recently, jumping 10% in the 12 months to 2015, so this process is already underway and expected to have a major impact on Sydney house prices.
Fears have been rising that Sydney and Melbourne, in particular, are seeing unsustainable rises in prices, thanks to record-low interest rates and the Fear of Missing out (FOMO), driving investors to buy anything and everything, as we've highlighted previously.
Australian Tax Office (ATO) data from 2013 showed that nearly 2 million Australians own a rental property, with 1.26 million claiming rental losses (negative gearing) amounting to almost $12 billion in 2012-2013.
Negative gearing is a tax deduction for investments in a variety of assets, not restricted to property alone, but can also include shares and business ventures. Investors can positively or negatively gear their investments although tax deductions are only available if expenses outweigh the income, such as rent – hence the term 'negative gearing'. That means the net rental losses of around $9,500 per individual on average can be claimed against other taxable income.
What is also concerning is the numbers reveal that property buyers aged 29 and under overwhelmingly rely on negative gearing to get into the property market. By the end of this year, more first-home buyers are expected to be investors rather than owner-occupiers, according to separate research from Digital Finance Analytics.
Foolish takeaway
It's a major concern when 67% of taxpayers earning up to $80,000 own 80% of the negatively geared properties. That's a hefty segment of the market who would be unlikely to cope with a major upheaval in the property market. It also remains to be seen what would happen if many of those investors faced having negative equity – on other words – owing more to the banks that their properties are worth. Those buying now could get badly burnt.
