Labor Tried Killing Negative Gearing Before. It Backfired Spectacularly.

Negative gearing is one of those topics where everyone has a strong opinion and almost nobody has done the homework.

Your uncle at Christmas dinner reckons it only benefits the rich. The property spruiker on YouTube says abolishing it will crash the market. A Labor backbencher calls it an unfair subsidy. A Liberal senator calls it the backbone of mum-and-dad investment.

They're all wrong. Or at least, they're all working from incomplete data.

Because we've actually run this experiment before. In 1985, the Hawke Labor government abolished negative gearing on rental properties. The policy lasted less than two years before they reversed it. And the data from that period tells a story that's inconvenient for pretty much everyone.

Let me walk you through what actually happened.

What negative gearing actually is (because half the debate gets this wrong)

Quick primer for anyone who needs it.

Negative gearing means your investment property costs more to hold than it earns in rent. The shortfall — including loan interest, rates, insurance, management fees, repairs — gets deducted from your taxable income.

So if you earn $120,000 and your investment property loses $15,000 a year after all costs, your taxable income drops to $105,000. At the 37% marginal rate, that saves you $5,550 in tax. You're still out of pocket $9,450, but the ATO picks up part of the tab 1.

This is not a property-specific rule. It applies to any investment — shares, businesses, anything that produces assessable income. The reason it's associated with property is that property is the only asset class where most Australians use significant leverage, which amplifies both the losses and the deductions.

At PremiumRea, we actually design portfolios to avoid negative gearing entirely. Our target is positive cash flow from the start — gross yields of 5% to 8% through renovation and multi-tenancy strategies. But we'd be naive to ignore the policy environment, because any change to negative gearing rules directly affects investor sentiment, property prices, and rental supply 2.

1985: The Hawke experiment

In July 1985, Treasurer Paul Keating announced that rental losses could no longer be offset against salary income. The policy applied to properties purchased after that date. Existing properties were grandfathered.

The stated goal was housing affordability. The argument was that negative gearing inflated property prices by subsidising investors who competed with first-home buyers.

Here's what the data shows happened over the next 18 months.

Sydney rents spiked. According to analysis by the Reserve Bank of Australia, Sydney rents increased by approximately 30% between 1985 and 1987. Perth also saw sharp increases. Melbourne's rent growth was more moderate but still above trend 3.

Investor activity collapsed. The number of new investment property loans dropped by roughly 20% nationally. In Sydney, the drop was steeper. Investors who had been adding rental supply to the market simply stopped buying.

Rental vacancy rates crashed. Sydney's vacancy rate fell below 1% by late 1986. The rental market, already tight, became genuinely unliveable for low-income tenants.

Property prices barely moved. This is the bit that catches people off guard. Despite removing the tax incentive, house prices in Sydney and Melbourne continued to rise throughout the period. The property market didn't crash. Investors pulled back, renters suffered, and prices went up anyway.

By September 1987, the government quietly reinstated negative gearing. Keating later described the experiment as a policy that hurt renters without improving affordability for buyers. He was right on both counts 4.

The lesson is stark: removing negative gearing doesn't make housing cheaper. It makes rental housing scarcer.

The 2024 landscape: same debate, different numbers

Fast forward nearly four decades. The argument sounds identical, but the numbers have changed dramatically.

In 1985, the median Sydney house was about $90,000. Today it's over $1.4 million. The price-to-income ratio has gone from roughly 4x to over 10x in most capital cities. The structural affordability problem is orders of magnitude worse.

And negative gearing usage has shifted. According to the most recent ATO statistics, about 2.2 million Australians declare rental income. Of those, roughly 1.1 million are negatively geared. The aggregate net rental loss claimed is approximately $7.8 billion per year 5.

Here's where it gets uncomfortable for the "it only benefits the rich" crowd. The ATO data shows that 60% of negatively geared investors have a taxable income below $80,000. These are not hedge fund managers. They're teachers, nurses, police officers, and tradies who bought an investment property hoping to build retirement wealth. They're exactly the demographic that gets hurt worst by policy changes 6.

The top 10% of income earners do capture a disproportionate share of the dollar value of negative gearing benefits — roughly 50-60% of the total deductions. That's because they own more expensive properties with larger loans. But the headcount tells a different story. Most negatively geared investors are middle-income Australians.

"The policy debate frames negative gearing as a gift to the wealthy," I've told clients. "The data shows it's actually a crutch for middle-income investors who bought the wrong property. The real question isn't whether to scrap it — it's whether we're helping people buy better properties that don't need it."

What abolition would actually look like in 2024

Let's game this out.

If a future government restricts negative gearing to new builds only (the most commonly proposed reform), here's what the modelling suggests.

Short term (0-2 years): Investor demand for established properties drops. Auction clearance rates fall. Some price softening in investor-heavy suburbs, particularly apartments and lower-priced houses. First-home buyers benefit marginally from reduced competition.

Medium term (2-5 years): Rental supply growth stalls as fewer investors add established stock. Rents increase — the Parliamentary Budget Office estimated 2-4% above trend in the first five years. New build activity might increase as investors redirect capital, but supply pipelines are 2-3 years long, so there's a painful gap 7.

Long term (5-10 years): The market adjusts. Investors who rely on tax deductions exit. Value investors who buy for cash flow (our clients) are largely unaffected because their properties aren't negatively geared in the first place. The rental market eventually rebalances, but only after years of pain for tenants.

The uncomfortable truth: negative gearing reform helps future buyers at the expense of current renters. And in a country where the rental vacancy rate in Melbourne sits at 1.1% and the national rate is the lowest in recorded history, that trade-off is politically radioactive 8.

This is exactly why every major party that campaigns on negative gearing reform either loses the election or quietly shelves the policy after winning. Labor took it to the 2016 and 2019 elections. Lost both times. The current government has been conspicuously silent on the topic since taking office.

What this means for your investment strategy

Here's my practical take, stripped of politics.

If you're currently negatively geared: You have policy risk. Not imminent risk — no government is going to abolish negative gearing before the next election — but structural risk over a 10-year horizon. The smartest move is to reduce your reliance on negative gearing by increasing your property's rental income. That might mean a renovation, a granny flat addition, or a rooming house conversion that lifts your yield from 3% to 5-6% 9.

If you're about to buy: Don't buy a property that only works because of negative gearing. If the investment case depends on the tax deduction, the investment case is weak. Buy for positive cash flow. If the government changes the rules, your property still works.

At PremiumRea, we model every client's purchase across three scenarios: current tax settings, restricted negative gearing (new builds only), and full abolition. If the property generates positive or neutral cash flow in all three scenarios, it passes. If it depends on negative gearing to survive, we walk away 10.

If you're a renter waiting for prices to drop: I'm sorry. But abolishing negative gearing won't make houses cheap. It didn't in 1985 and it won't now. The fundamental problem is supply — Australia needs 240,000 new dwellings per year and we're building about 170,000. Until that gap closes, prices will continue rising regardless of tax policy.

The data doesn't care about your politics. It tells the same story every time: buy land in areas with genuine demand, generate income that covers your costs, and hold through the policy cycles. Whatever the government does with negative gearing, that strategy survives.