Negative gearing is very common among Australian investors. In most years, the majority of investors spend more on their investment properties than they earn in rent: that is, they lose money on their investment, which makes them what we call “negatively geared”.
The share of investors who are negatively geared moves around a bit, largely driven by changes in interest rates. But generally, (except for in 2020/21 and 2021/22 when interest rates were at record lows) more than half of investors have been negatively geared for at least three decades. While we don’t have data for the past two years yet, the share is likely back to well above half, given the extremely sharp rise in mortgage rates since 2021/22.[1]
Why is this? And what are the expenses that investors incur?
The biggest expense, by far, is interest.
In 2021/22, the most recent year we have data for, interest expenses for all investors were equivalent to around a third of gross rent investors earned, making interest the largest expense by far.
But 2021/22 was unusual; mortgage rates were at record lows at that time, which meant interest costs for investors were much lower than has been typical. About a decade ago in 2012/13, interest expenses across all investors were equivalent to more than 60% of rent earned.
Other categories of expenses are much more stable from year to year.
The second largest category of expenses is depreciation – which is a deduction that can be claimed to reflect the declining value of assets such as buildings and appliances as they age. Deductions for depreciation are equivalent to around 13% of reported rents.
The next largest categories of expenses are repairs & maintenance (6.4%, with an additional 1.5% for cleaning, gardening, pest control, etc); council rates (7.9%); agent fees (6.7%); and strata fees (6.3%). Of course, not all investors will have agent fees or strata fees, for example if they self manage, or are not part of a strata, but this data is averaged across all investors.
Not all investors are negatively geared. If we split investors by whether they are positively or negatively geared (whether they earn a net profit or loss on their investment), we can see how expenses differ among these investors.
Unsurprisingly, investors who are positively geared earn more rent and have smaller expenses on average.
The difference in expenses is mostly driven by lower interest costs, presumably because these investors have smaller – or in some cases no – mortgages. But depreciation and maintenance expenses are also lower on average. Other expenses are pretty similar; strata fees are a little higher, which probably reflects a higher prevalence of apartments owned by positively geared investors (and which would also partly reduce average maintenance costs).
With interest rates for investors jumping from below 3% in 2021/22 to 6.5% today, interest costs for investors will have increased significantly. That means we’re likely to see the share of investors who are negatively geared increase to a level closer to what was typical pre-pandemic.
[1] These data all come from tax returns, and so are reported by the ATO with a lag (because tax returns need to be lodged, which can be sometime after the end of the tax year, and to allow the ATO time to collate the stats from the tax returns).
