More landlords positively geared – for the third year running - John McGrath

There’s a significant new trend in property investment: for the past three years, a majority of Australian investors have been positively or neutrally geared.

That means their rental income has met or exceeded their expenses, including loan repayments. As a result, they’ve been pocketing extra income each year on top of any capital gains.

This is a significant shift given the previous 20-year trend of most investors being negatively geared.

The trend is revealed in FY23 tax data released by the Australian Taxation Office (ATO) last month.

Based on all our tax returns, the ATO reports there were 2,261,080 Australians with an interest – either sole ownership or joint or part-ownership – in one or more rental properties in FY23.  Among them, 51% – or 1,143,905 – reported net positive or neutral rental income.

This is the third consecutive year in which more investors came out ahead after expenses. In FY22, 58% of investors reported positive or neutral net rental income. In FY21, it was 53%. This follows a two-decade history prior to FY21 when the majority of investors were negatively geared each year.

The fact that interest rates were at record lows in FY21 and FY22 is the most obvious reason why more investors were positively geared in those years. But what about FY23?

The Reserve Bank of Australia raised interest rates 10 times (albeit from a low base) in FY23. The cash rate rose rapidly from 0.85% to 4.1% between July 2022 and June 2023, and yet most property investors remained positively geared. How is that so?  

I think several factors are contributing to what I hope might become a lasting trend. The biggest one is a huge surge in weekly rents that began in FY21 and continued into FY22 and FY23.

Cotality data shows annual rental growth of about 7% in FY21, 9% in FY22, and another 9% in FY23. Additional rental income would have certainly offset the impact of rising interest rates in FY23. (The pace of rental growth has since slowed but remains above inflation, with annual increases of about 8% in FY24 and 3.4% in FY25.)

Another contributing factor is the ageing profile of property investors. According to the data, the largest cohort of Australian investors are aged 60 years or older. The FY23 data shows more than one in four investors, or 27%, are in this age group.

This is relevant because older people typically have more wealth, after a lifetime of work and decades of owning their homes, and therefore have more scope to pay down investment debt. Retirement would also provide a new motivation to pay off debt, as would turning 60, since that’s when many Australians can access their superannuation in a lump sum under certain conditions.

Additionally, a rising number of baby boomers have been downsizing in recent years, which is freeing up funds to pay off loans or fund the purchase of a new property investment with cash.

Owning property mortgage-free virtually guarantees strong positive cash flow, since loan repayments are by far the biggest cost for most landlords.

I'm also mindful that since the pandemic, we have seen a significant trend in investors choosing to buy cheaper properties with higher rental yields in regional areas or investing in capital cities in states or territories that are more affordable than Sydney and Melbourne. This may also be contributing to the trend in more property investors being positively geared.

Affordability is a key driver of this trend, but the pandemic also facilitated it. Lockdowns led to rapid changes in the industry, including enhanced online marketing tools and the provision of private inspections via video. Documentation like loans and property sale contracts went digital, making the financing and conveyancing processes more streamlined, and reducing the barrier of distance.

I also think more investors are employing buyers' agents to do all the legwork for them, and this helps people access other states and territories to diversify their portfolios. Buyers' agents are readily available across the country, so investors can buy in the best-performing markets with confidence. 

For example, there is plenty of anecdotal evidence that East Coast investors have been buying in both the capital cities and regional areas of Western Australia and Queensland over the past few years. These states have been among the top performers in terms of home value growth for several years now.

The best thing about more property investors being positively or neutrally geared is that it makes it easier for them to hold on to their investments for the long term.

The real wealth from property investment comes from capital gains, and we know that the longer you hold your investment, the higher your capital growth is likely to be.