Changes to negative gearing in Australia could have detrimental effects for both property investors and first home buyers.
Dr David Willis, an economist from the Queensland University of Technology Business School has warned policy makers to tread carefully if they are considering changes to the tax break.
Dr Willis’ comments come after a submission by the Reserve Bank to a federal Government enquiry into home ownership suggested negative gearing be reviewed
"The idea is that getting rid of negative gearing will stop house prices rising so rapidly and people borrowing beyond their means for investment properties," Dr Willis said.
"Negative gearing needs to considered widely on an economic, financial and social basis before it is cut back or abolished,” he said.
Dr Willis claims that while scrapping negative gearing could lead to a short term drop in house prices, it could have a flow on effect that would make it harder for first time buyers to crack the property market.
"If capital gain and negative gearing are pared back or cut altogether it may, in the short to medium term, create conditions of a housing glut as investors sell properties they can no longer afford," he said.
"This then affects the wider housing market and can create a situation of house price deflation.
"While this may create affordability in some cases, it could also cause a situation where lending significantly slows and the economy slows with it as banks will be less willing to lend for renovations and purchases given the falling prices."
Dr Willis said this could then be compounded as a reduction of the number of properties in the rental pool would see potential first home buyers hit with another obstacle.
"Higher rents would make renting while saving to buy a house more difficult so, while housing may be more affordable to buy, getting a start on the housing ladder could be just as hard," he said.
"Much less discussed, but equally concerning, is that this will create a widening gap between those looking to rent and houses that are available to rent at an affordable price.”
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