Labor Wants to Kill Negative Gearing. Here's Why It Won't Happen (Again).

The federal election cycle is ramping up, and right on cue, negative gearing is back in the headlines. Labor has been making noise about restricting or abolishing it. The Greens want it gone entirely. Property investors are refreshing their news feeds wondering if the sky is about to fall.

I'm going to save you some anxiety. It's not.

Not because the politics aren't real — they are. But because Australia already ran this experiment once, and the results were so catastrophic that no government has dared repeat it in nearly four decades.

What negative gearing actually is (in plain language)

Negative gearing is straightforward. If your investment property costs more to hold than it earns in rent, the difference — the loss — can be deducted from your personal income tax.

Say your property costs $47,000 per year to hold (interest, rates, insurance, management, maintenance) and it earns $28,000 in rent. You've got a $19,000 loss on paper. Under negative gearing, that $19,000 reduces your taxable income. If you're in the 37% tax bracket, the ATO hands you back roughly $7,000 at tax time 1.

The logic from the government's perspective: by incentivising private investors to provide rental housing, the government doesn't have to build as much public housing itself. Investors take on the risk and the capital outlay. The tax concession is the government's way of saying "thanks for providing rental stock."

It's been part of Australia's tax system since the 1930s, originally designed to address — wait for it — a housing crisis. That bit matters. Remember it.

The 1985 experiment: what happened when Australia abolished negative gearing

In 1985, the Hawke government abolished negative gearing for property investments. The reasoning sounded sensible at the time: wealthy investors were using the tax break to subsidise property speculation, and the revenue lost to Treasury was substantial.

What happened next is well-documented and consistently ignored by abolition advocates.

Developers, no longer able to offset rental losses against personal income, stopped investing in new rental stock. Within 18 months, rental supply contracted sharply. Vacancy rates in Sydney dropped below 1%. Melbourne wasn't far behind 2.

Rents surged. In Sydney, rents increased by 20% in real terms between 1985 and 1987. The rental crisis hit hardest in lower-income suburbs — exactly the people the policy was supposed to help. Tenants unions and welfare groups that had originally supported abolition reversed their position and demanded restoration 3.

In 1987, after just two years, the Hawke government quietly reinstated negative gearing. Nobody celebrated. It was an admission of policy failure.

The core problem hasn't changed: Australia's private rental market depends on private investors. Remove the incentive, and investors leave. When investors leave, supply shrinks. When supply shrinks, rents explode. And when rents explode, the political cost is immediate and severe.

"They tried removing negative gearing in 1985 and had to bring it back within two years," says Yan Zhu, Co-Founder & Chief Data Officer at PremiumRea. "A market that's been running on incentivised private investment for nearly a century can't be weaned off cold turkey. The political backlash from rising rents alone would sink any government that tried."

The 2025 context makes abolition even less likely

In 1985, Australia wasn't in a housing crisis. It drifted into one as a result of the policy change.

In 2025, Australia is already in a housing crisis. The National Housing Accord targets 1.2 million new homes by 2029 — a target that virtually every analyst considers unreachable 4. Net overseas migration ran at 518,000 in 2022-23, the highest figure in Australian history, and has moderated only slightly since 5. Melbourne alone needs roughly 50,000 new dwellings per year to keep pace with population growth, and actual completions are running at about 35,000 6.

Rental vacancy rates across Melbourne sit at roughly 1.5-2.0% in the suburbs we operate in. The national rate is about 1.2%. At these levels, removing investor incentive would be like draining the pool while people are swimming in it.

There's another factor the 1985 experiment didn't contend with: interest rates. When negative gearing was abolished in the mid-1980s, mortgage rates were north of 13%. The holding cost of investment properties was so high that the tax break was genuinely the only reason many investors stayed in the market.

In 2025, rates are lower (the RBA cash rate is 4.10% following the February cut), but holding costs are still painful for many investors. Our internal data shows the average Melbourne investment property on an 80% LVR IO loan at 6.5% has an annual shortfall of $15,000-$20,000 before negative gearing deductions 7. Remove the tax relief and a large tranche of investors would sell — further tightening an already desperate rental market.

The mathematics of it are almost embarrassingly simple. You cannot simultaneously:

• Remove investor tax incentives (reducing rental supply)
• Fail to meet housing construction targets (reducing total supply)
• Accept record immigration levels (increasing demand)

...and expect rents to stay stable. The three-body problem solves itself: rents go through the roof, and the government loses the next election.

What's more likely to happen

Politicians rarely do what they campaign on. What they actually implement tends to be a heavily watered-down version that satisfies nobody but offends nobody enough to revolt.

The most probable outcome, based on similar reform proposals in 2019 (when Labor under Shorten lost a supposedly "unlosable" election partly due to negative gearing fears), is one of these:

1. Grandfathering. Existing negatively geared properties keep their concessions. New purchases after a certain date don't qualify. This was the 2019 Labor proposal. It failed at the ballot box.

2. Capping deductions. Instead of unlimited deductions, you can only negatively gear against rental income (not salary income). This would effectively neutralise the benefit for most investors but could be sold politically as a "targeted reform."

3. Restricting to new builds only. This would redirect investment toward new construction — which the government desperately needs — while reducing the tax break for existing property purchases. The Property Council of Australia has floated versions of this 8.

4. Nothing at all. The most historically accurate prediction. After the 2019 election loss, Labor dropped negative gearing reform from its 2022 platform entirely. Prime Minister Albanese explicitly ruled it out pre-election. Bringing it back in 2025-26 would require either a mandate or a crisis.

I'll wager option 4 is where we end up. Again.

What investors should actually do

If you're holding or considering negative gearing as part of your investment strategy, here's my view.

First, don't panic about abolition rumours. The political and economic barriers to removing negative gearing are higher in 2025 than they were in 1985. Every housing indicator — vacancy rates, construction completions, population growth, rental affordability — points toward the government needing more private investment in housing, not less.

Second, don't structure your entire investment thesis around negative gearing existing forever. Use it while it's there, but aim for properties that can reach positive cash flow within 2-3 years through rental growth, rate cuts, or value-add strategies like granny flat additions. If negative gearing were ever restricted, properties that already cover their costs wouldn't be affected.

At PremiumRea, our standard approach is to buy with the assumption that negative gearing is a temporary bonus, not a permanent crutch. We target properties where: land value exceeds 80% of purchase price; the property can reach break-even cash flow within 3 years through renovation or granny flat addition; and the suburb has structural demand drivers (population growth, infrastructure, affordability) that support capital growth regardless of tax settings 7.

A $70K property throwing off $450/week in rent ($23,400/yr) with $47,000 in annual costs is $23,600 underwater. Negative gearing makes that palatable — the ATO effectively covers 37% of the gap. But add a granny flat ($110K + GST, renting at $370/week), and your combined rent jumps to $820/week ($42,640/yr). Now your gap is $4,360 — practically break-even. One rate cut and you're positive.

That's a portfolio that doesn't care whether negative gearing survives the next election.

"Any investment strategy built entirely on a tax concession is fragile," says Yan Zhu. "Build your portfolio so the tax break is a nice-to-have, not a load-bearing wall. Then if it goes away, your properties still work. And if it stays — which it almost certainly will — you're ahead of everyone who panicked."