Share on Facebook Share on Twitter Share on Reddit + - Tax stats unmask negative gearing By Unconventional Economist in Australian Propertyat 1:18 pm on April 30, 2012 | 153 comments Login to access MacroBusiness Members special reports. If you are not a member, sign up here. Please fill in the following form to login Username: Password: or Please fill in the following form to subscribe * Username * Email * Password Share on Facebook Share on Twitter Share on Reddit + - YOU MAY ALSO BE INTERESTED IN McGrath ninepins follow float shockerFrom the AFR today comes John McGrath as he HIA: dwelling construction to fall for next 3 yearsThe Housing Industry Association (HIA) has NZ moves on dirty money. Australia ignores itBy Leith van Onselen New Zealand's policy Perth rental vacancy hits another record highBy Leith van Onselen SQM Research has released Comments persnickety April 30, 2012 at 1:27 pm I used to hear ads on the radio promoting how easy it was to own an investment property even with an income of $50k, so not surprising JPK April 30, 2012 at 3:02 pm It’s easy but costly Revert2Mean April 30, 2012 at 7:37 pm Today I had a workman in to apply some shadefilm on a window in the house I’m renting. He’s a 46 yr old father of 2 young kids. No education to speak of, has been applying window film for 27 years. His wife is a stay at home Mom. Now I started talking about house prices. Get this. HE HAS THREE (3) INVESTMENT HOUSES. All 4x2s. No plans to sell them. He said the secret is to borrow as much as you can, and then ask the bank for more. I said what if there is a big downturn in prices, say 30 or 40%? How will he be able to cope? He looked at me as if this had never occurred to him and said “That’s not likely to happen, is it.” (Not a question, a declaration). Said he still wouldn’t sell them because they are almost positively geared (paying over $500/week). I persisted, pointing out the possible capital losses could wipe out his investment and that the rent is chickenfeed in comparison, and that he should sell now, but I could see he was getting angry. He changed the topic. Now here we have a blue collar, single-income couple, where the breadwinner has no education, is an unskilled worker, who own a total of FOUR HOUSES. He was absolutely unstressed about it, confident, even slightly boastful. Tarric April 30, 2012 at 8:30 pm Welcome to Australia my friend, where tradesman are grossly overpaid and housing investments are almost a national past time. Jason April 30, 2012 at 8:43 pm Interesting… has the IMF given the same warning to the US? Jason April 30, 2012 at 8:44 pm Errr that comment was supposed to be underneath Mitch’s below. V April 30, 2012 at 11:53 pm Don’t worry 50bps will do it … :-/ Mitch April 30, 2012 at 5:43 pm Western countries are hitting the panic buttons on tax collecting, the IMF has warned the Dutch that the tax deduction it gives property owners on the interest on their own home loans has to go. THe Dutch Government is about to end the practice. It’s not a question of upsetting people its a a question of plugging the revenue lost to those with deeper pockets. see ya later NG it’s only a matter of time! L May 1, 2012 at 5:30 pm Those ads are still around. Heard one on the radio today spruiking that you could afford a home with only a $3000 deposit, and another advertising repayments at cheaper than the cost of a lunch. poid April 30, 2012 at 1:30 pm IMO negative gearing is our subprime. Not because the borrowers are of poor credit quality, but because they rely on rising house prices just as subprime borrowers did. The subprime strategy was to refinance once honeymoon rates rolled off, which required rising prices…stalled or falling prices smashed prevented refinancing. In our case, rising prices are required to offset the realised losses that are being made. So how long do you hold on to a loss-making investment? If you are on a shoter-term interest only loan will the bank allow you to roll it over? For me, the slow melt is compromised by the possibility of a critical mass of negatively geared investors heading for the door “before prices fall further”. Unconventional Economist April 30, 2012 at 1:34 pm That is the risk, yes. Remember, too, that the majority of property investors are Baby Boomers approaching retirement and they soon will lose their tax breaks (you can’t negatively gear when you stop earning a salary). bv2726 April 30, 2012 at 1:46 pm Hey UE – do you have figures for that statement? (Regarding the majority of property investors being baby boomers). Wasted Opportunities April 30, 2012 at 2:08 pm + 1. I remember UE at one stage showing some stats similar to those above showing the breakdown of people declaring rental income (negatively and positively geared) by age demographic. I went trawling through the ABS site looking for this info to support an argument but I couldn’t find it. I’d love it if someone can dig this up. Mav April 30, 2012 at 2:16 pm You’ll probably find that info in the detailed statistics table 11. But how to find them for year 2009-10, is a mystery wrapped in an enigma. According to the FAQ: Q4 Where can I find the detailed statistical tables within Taxation statistics? The detailed statistical tables from Taxation statistics 1999-2000 onwards can be accessed via our website: http://www.ato.gov.au. To view or download a copy, go to Our statistics centre (in the About us drop down menu up the top), and then click Taxation statistics. Select the Taxation statistics publication, then click the Detailed tables and description on the right hand side, then select the topic of interest. To access the detailed statistical tables for earlier years, you’ll need to click on View previous years’ pages from the Statistics centre, and then follow the same steps. See also question 3. The detailed statistical tables are also located on the CD-ROM provided with the printed publication. Anyone else has any luck with this? I am more interested in Table 13 – Selected items, by occupation code (and sex) Unconventional Economist April 30, 2012 at 2:45 pm bv2726. You can find that info in ABS Cat 6554.0. Karan April 30, 2012 at 2:52 pm and it’s been covered here in Macrobusiness before – we’re coming up to a huge shift in demographics… bv2726 April 30, 2012 at 4:52 pm Great – thanks for the info UE. Steve R April 30, 2012 at 1:37 pm +1 What happens when the people on short term interest only loans need to re-finance? From memory I think the proportion of interest only loans both investor and owner occupier is north of 25%. One wonders if this dynamic has played a role in the Gold Coast bust. Jumping jack flash April 30, 2012 at 2:16 pm My thoughts exactly. When I was going through the pre-approval process late last year at my friendly neighbourhood mortgage broker, the product of choice was an Option ARM that reset after 5 years with the view to refinance at a lower rate after the honeymoon period. Aren’t those the things that continued the massacre in the US after the NINJA did their damage? The broker said they were very popular for young FHB… rob barratt April 30, 2012 at 1:33 pm All of which unfortunately means that no Australian government will be willing to grab the nettle & do something about getting Australia off the property “investment” needle. Political suicide – even a gradual reduction approach will have them screaming in the aisles. bv2726 April 30, 2012 at 2:05 pm Agree here – any academic talk of how negative gearing should be altered etc etc may be all correct, but it will not be enacted by any government as it would be political suicide. SteveB April 30, 2012 at 3:21 pm And as luck would have it, the Govt that has already commited political suicide isn’t interested either. bv2726 April 30, 2012 at 4:53 pm Yes, this is a very good point. [email protected] April 30, 2012 at 11:07 pm That’s why they’re on the big bucks mate. Carn you politician pansies , have a go at that nettle. dam April 30, 2012 at 1:33 pm I have no tears for the speculators who “invest” in existing dwelling (96% of investor purchases are existing properties) and push the accommodation price up while rotting the tax system. they just displace home with owner Occupier to Home for rent, no additional supply. Time to stop this madness. Unconventional Economist April 30, 2012 at 1:35 pm Agreed 100%. They do not add to supply so provide very little social benefit. Peter Fraser April 30, 2012 at 1:51 pm Contributors to this website tell me daily that rental returns in Victoria in particular are crap, so are those landlords not contributing to the socal benefit of all by providing low cost housing. Would they bother without NG? Exactly what do states provide in public housing. I don’t see any major housing projects for the needy in the pipeline. Is this not a transfer of public housing costs from the states to the Commonwealth via an ATO commitment? Would a return to the old ways necessarily provide a better outcome for all? dam April 30, 2012 at 1:58 pm You know it perfectly PF, the returns are crap only because of the purchase price of the “investment”.You can not expect to pay 200%-300% more for than 10-15 years ago with a rental that increase inline with income and get an improved return. If prices were 50% returns would be adequate.speculators are responsible for this, they cannot complain now. AB April 30, 2012 at 2:08 pm “Contributors to this website tell me daily that rental returns in Victoria in particular are crap, so are those landlords not contributing to the socal benefit of all by providing low cost housing. Would they bother without NG?” You mean would they bother to bid up house prices so high that the rent doesn’t cover the holding costs? Probably not…which is the whole point. “Would a return to the old ways necessarily provide a better outcome for all?” No, the 1 in 11 negative gearers would be worse off. The rest of society would probably survive. Karan April 30, 2012 at 2:56 pm No, that’s 1 in 11 taxpayers – or 9% of the tax base. It’d have a decent sized impact to others as behaviour shifts (whether through forced sales, less spending or higher rents, who knows…) Mav April 30, 2012 at 2:33 pm PF, talk about making a virtue out of selfishness. Nobody forced these landlords to over borrow and over pay for their investment properties. Peter Fraser April 30, 2012 at 2:51 pm Mav – I didn’t say that anyone did. I asked a valid question – which is the greater cost to the community. I made no assumptions at all – If you have the answer, I’d like to hear it? Governments get roundly criticised here when they cate to an increasing share of community needs, and yet on this issue the reverse appears to be the case. Frankly I don’t particularly care, but it would be nice to know the real cost benefits of both methods to allow analysis of both. The comments here indicate that many consider that it has been investors that have bid up the cost of housing, but as investors are only one section of the market, that might be an oversimplification of events. If you have constructive thoughts, I invite you to outline them.. Mav April 30, 2012 at 4:00 pm PF, I am not against investors participating in the housing market – I have been one in the past (not in Aus though). Just that NG is a flawed policy that perpetuates and encourages ponzi finance investment as envisaged by Hyman Minsky. It is clearly not sustainable and will blow up eventually – whether it reverts to mean slowly or fast is the only 2 possible outcomes. There are other ways of tackling public housing needs – perhaps abolish FHOG on buying existing houses (since they are not impacted by GST after all) and use the funds or as a part of a construction stimulus package during a downturn or as part of a work-for-the-dole program. Deo April 30, 2012 at 2:40 pm I think I prefer the government to take care social / public housing issue rather than subcontracting it to private investors. At least by removing the NG, prudent savers are not punished by over-priced home and this encourages better financial decision in society compared to debt-fueled bubble we currently have. Unconventional Economist April 30, 2012 at 2:51 pm Peter. Over 90% of investment properties are pre-existing dwellings. Hence, the overwhelming majority of investors do not add to housing supply, and simply substitute a home for sale for a home for let. So where exactly is the social benefit in the Government losing $5 billion in tax revenue, home prices being bid-up, and little (if any) additional housing supply? Please explain to us simpletons? Peter Fraser April 30, 2012 at 3:06 pm Simpletons? That’s a bit unfair, I didn’t use any derogatory terms like that to anyone… I certainly apologise to anyone who took that reference, although I don’t see how… ********************** Ask yourself what section of the market do investors buy into? They usually buy lower priced homes where they get maximum return for their dollar. The people they buy from upgrade into bigger better homes, and in the normal course some of those upgraders will buy new homes or engage in construction themselves. Investors also buy “off the plan” apartments as well, although I can’t justify that model as a clever investment on the majority of occasions. It would be the same if we all went out and bought secondhand cars. The people who just got out of those cars have either bought a better S/H car or a new one. In a growing population, any other result is not possible mathematically unless we saw a change of the occupancy ratio per dwelling, and we aren’t as yet. coolnik April 30, 2012 at 3:14 pm PF, You still have not answered Leith’s question. 90% of existing properties are preexisting and they dont change a whit the supply of rental housing. Since the negative gearing has no effect on rental supply, how is it subsidizing low rents? Your logic will be true if NG only applied to new constructions. So, PF, answer please! Peter Fraser April 30, 2012 at 3:25 pm Coolnick – yes I did. There must be a flow on effect. It’s unavoidable, although difficult to measure. Look if your point is that only new homes should qualify for NG I’m ok with that. I don’t even care if they scrap NG altogether, although I would like to fully understand the effects of that before we do. A dollar spent in earning income is a dollar that is tax deductible – nothing can change that. The only thing that can be done is to quarantine those losses, it doesn’t mean that they won’t be claimed at a later date. Are you aware of that? Mav April 30, 2012 at 4:05 pm PF, nobody (not even David Collyer, I think) is suggesting that NG should be removed all of a sudden in one FY. There should grandfathering mechanism for exisiting investors. Peter Fraser April 30, 2012 at 4:26 pm Mav – retrospective changes to tax laws are the worst possible nightmare for the ATO and the government. If they do change the NG rules it won’t affect current IP’s but it will affect new IP’s. I really meant it when I said that I don’t mind whether the NG rules change or not. I doubt that you will find any post of mine on any forum in passionate support of the current NG rules. I am concerned about what affect that would have on available housing and rental properties, and the long term effect on rental costs. Velociraptor April 30, 2012 at 7:55 pm +1 Does nothing to increase supply. NG for new builds only. myne May 1, 2012 at 7:15 am The simplest way to kill and replace NG with something that would actually help the overall stock of housing is thus: 1) Announce cancellation of NG in 3 years. 2) Reduce the lifespan of a ‘dwelling’ in the ATO’s definition from 40 years to 20. That’s a 5% tax (of purchase price) deduction every year for 20 years. Not bad. 3) Ensure that all claims for depreciation are proven to be occupied for at least 9 of every 12 months. The mere announcement would be enough to trigger the selling of properties. I ultimately think it must be removed, but perhaps the bulk of the problems would sort themselves out before it was actually removed. It would encourage existing stock to be sold to owner occupiers or redevelopment by genuine developers, ensuring that the quality of our housing stock improves over time. It would encourage competition in the market when the stock of housing becomes too high. If there are too many houses, many would cop a drop in rent simply to make up their 9 months. Thus yeilds would drop rapidly across the board in response to oversupply, perhaps dampening new supply. I wrote a more detailed writeup on Steve Keen’s blog a year or so ago. drsmithy April 30, 2012 at 3:43 pm Contributors to this website tell me daily that rental returns in Victoria in particular are crap, so are those landlords not contributing to the socal benefit of all by providing low cost housing. Would they bother without NG? They do in all those other countries that don’t have negative gearing. Of course, in Australia it would need to be preceded by a fairly dramatic drop in house prices. bskerr2 April 30, 2012 at 3:58 pm Maybe you can ask all the people at food halls and soup kitchens, ask the churches do they think the current system works. Considering there has been an increase of some %40 of people needing food handouts, shouter etc… This property market is going to cause a total crash in Australia, not just property but many other things. But that is how it should be, for example, commercial realestate crashes, then things become cheap to buy again as there is not to much over head. The government and the wealthy have created a system that is flawed. Its only a matter of time now because it crashes. I am putting all beats on the EU increasing the speed at which this happens. Charles Ponzi April 30, 2012 at 7:12 pm Negative Gearing only pushes house prices up so that people are forced to choose between renting or paying bubble prices for a home. Get rid of negative gearing and there will be fewer property investors and renters. The_Mainlander April 30, 2012 at 9:27 pm I have chosen renting. 🙂 We have no issues with bills saving and will no stress so were happy. +1 Charles. 🙂 [email protected] April 30, 2012 at 11:10 pm Cut it out Peter FGS crap yields are from BS prices The Peak Oil Poet April 30, 2012 at 1:53 pm maybe, maybe not by holding those properties as long as their confidence in the future holds up they buffer price changes in the market and keep prices from falling if they had not bought when they did property prices would have not moved upwards so rapidly and there would have been less investment in new property development – we would have had a stagnant market and as long as their confidence holds out it keeps the market from crashing – and keeps the various government agencies which might react to falling prices from stepping in and making gross errors also, as they can not afford to develop these properties it means we maintain a lot of nice old look-n-feel areas that have not rapidly turned to ticky-tacky new styles of development with the commensurate blow-out in ugly mall expansion i hope they all keep them and underwrite them ’til they die 🙂 pop dumb_non_economist April 30, 2012 at 8:02 pm Not sure that the majority of NGer’s are rorting that much from the system! 80k pa gets you taxed at 22%, so for every dollar you waste on interest gets you 22c. Talk about relying on CGs as you’re not getting much help from the taxman, and not getting good financial advice either. dumb_non_economist April 30, 2012 at 8:40 pm Well, got that wrong! You may have paid 22%, but your marginal tax rate is 30%, so you’ll get a third back, still peanuts. rob barratt April 30, 2012 at 1:49 pm “Time to stop this madness” HOW? I believe Ken Henry said that when the words Negative Gearing were mentioned before the tax summit the Premier’s office was blocked by incoming phone calls. The media amplifier will have people in hysterics at the mere mention of the subject, whether relating to existing or new properties. I can’t see Tony Abbott proposing something so dangerous that Wayne Swan would pale at the mention of it… Forrest Gump May 1, 2012 at 2:31 pm +1 Peter Fraser April 30, 2012 at 1:42 pm If interest rates fall by 0.50% or more, many will have to be more creative to maintain their negative geared status. bv2726 April 30, 2012 at 1:54 pm Drop the rent??? 🙂 Peter Fraser April 30, 2012 at 1:57 pm Lol – that’s a great reply. Dan April 30, 2012 at 2:10 pm Yes, good one :). But going forward, they may just have to… [email protected] April 30, 2012 at 11:14 pm Well you’re certainly negative geared if your property is vacant Aaron April 30, 2012 at 11:40 pm +1 nice call Stormy Waters April 30, 2012 at 2:48 pm So then the investors will just be hoping for capital growth, rather than paying a dividend to their property in the hope of capital growth? Greconomics April 30, 2012 at 1:45 pm “74% (825,284) of negatively geared investors earned less than $80,000 in 2009-10” This observation is misleading. I expect that many negatively geared properties are owned jointly by a couple not an inidvidual – this means that household income would be around $160k (not $80k) per investment property. Peter Fraser April 30, 2012 at 1:55 pm Good point Greco. Actually the NG model (which I’m not enamoured with) has more benefits for the big earners than the low income earners, so I’m surprised to see such a high proportion of low income earners in that table. That also has a clue as to which age cohort is the biggest holder of NG properties, although it’s hardly definitive. tjhoban April 30, 2012 at 3:23 pm I suspect that most high-income people can think of better investments… flawse April 30, 2012 at 11:46 pm tjhoban I’m not attacking your opinion (as I suspect we’d agree given a lengthy discussion)but what the hell else in Aus is there to invest in? At the risk of being repetitive 1. Manufacturing…you have to be kidding. FWA, WHS and stupid Union responses make manufacturing a really bad investment…never mind the dollar for a sec. That’s why even the foreigners aren’t buying anymore although maybe they already own it all. They’re shifting offshore. 2 Farming…not unless you are both foolish and brave 3. Mining the govt has signalled it is going to put an end to that boom. What’s left? Yeah yeah alright there’s coffee shops!! That’s what the whole problem is. There is no return in any productive investment (unless you are Chinese and do not care if you get a return as long as you can get rid of the useless bits of paper you hold) Cheers drsmithy April 30, 2012 at 3:49 pm Actually the NG model (which I’m not enamoured with) has more benefits for the big earners than the low income earners, so I’m surprised to see such a high proportion of low income earners in that table. That’s their _taxable_ income, not their gross income. No way to tell what their income is before all that negative gearing happens. Velociraptor April 30, 2012 at 7:59 pm “Actually the NG model (which I’m not enamoured with) has more benefits for the big earners than the low income earners, so I’m surprised to see such a high proportion of low income earners in that table.” I’m a high earner and won’t touch a losing investment sector. Losing $50K a year on the underlying value of my $500K investment is daft. Keep pedalling debt pedlar. bv2726 April 30, 2012 at 1:56 pm Why? If both partners are working full time then yes. But the above figures in the article imply (in my mind) that many of the property investors are doing this to get a tax deduction…then they know to put that in the name of the highest earner. (Even my non financially savvy friends know this…) Unconventional Economist April 30, 2012 at 1:56 pm I have merely reported the facts as presented by the ATO. How is this “misleading”? Moreover, around 450,000 investors hold an interest in more than one property, so their exposure could be even worse than shown in the tables above. The Peak Oil Poet April 30, 2012 at 2:10 pm and from the anecdotal evidence i have (ie my friends who bought “investment” properties near the top) they none of them are on high incomes – even the two income families are earning quite low incomes having established themselves in the late 70’s and early 80’s in initial properties that are now “worth” 10 times what they paid for them – they are frightened to sell the home, hopefully hold on to their investment properties and survive simply because their children are of an age that they are moving out on their own (sometimes pushed) and their rooms are being rented out to boarders (mostly students though increasingly also single contractors in their first year here) i hope for my friend’s sake that things don’t turn ugly p Deo April 30, 2012 at 2:29 pm True, in my observation of my Gen-X “investor class friends” ..most of them do not have high incomes. Usually they’re average income-earners with both husband-wife working. Some even try to have more than one investment properties when both don’t have regular income, e.g. husband drive cabby and wife only has temp jobs. The scariest thing is in most cases, the household prob has around $100-120k gross salaries p.a but managed to buy 3-4 negatively-geared properties in the last 5 years to amass more than $1 mil interest-only mortgage. AB April 30, 2012 at 2:09 pm “This observation is misleading.” It’s quoting a fact. How is it more misleading than a sentence that starts with “I expect…”? coolnik April 30, 2012 at 3:02 pm How is that misleading Greco? Greconomics May 2, 2012 at 1:43 pm I didn’t say it was a lie, I said it was misleading. By that I mean to say that, regardless of whether the statement is a fact or otherwise, the conclusion which is drawn by the reader may not be consistent with the fact that is being stated. In hindsight, I probably should have used the term “ambiguous” rather than “misleading”. lachlan April 30, 2012 at 1:49 pm I am an economics amateur, so bear with me with these questions. Why the anger in borrowing to invest in real-estate, but no similar angst against margin lending to buy shares for example? You could borrow, buy shares in a real-estate trust and claim interest payments. Maybe a difference in tax breaks – I am not sure. But why is neg gearing any more of a tax rort than other approaches that involve claiming borrowing costs and capital deduction? If the lack of housing supply is the issue, how will cracking down on neg gearing make a difference? Maybe a more nuanced approach to tax benefits? A capital gains tax structure that is skewed towards encouraging new homes/units? Jono April 30, 2012 at 2:08 pm I half agree with you Lachlan. There shouldn’t be ‘anger’ against property investors. They made money during the good times, and now they are set up to lose a fortune. And getting rid of negative gearing won’t really have an effect on property construction. dam April 30, 2012 at 2:13 pm you cannot get 95% margin and speculation on shares have very little societal impact. Pushing price up, stressing homebuyers, forcing double income with all the stress than come with caring for kids. no comparison. Speculators (and there are in this business in large part thanks for NG and need Capital Gains) by pushing prices up in reality are pushing the land component price up and therefore make supply/construction much more challenging to finance.Construction prices did not increase much the last 15 years it has been the land purchase cost that has skyrocketed make it now uneconomical to get much supply going. Just craziness at all level. Yatima April 30, 2012 at 2:21 pm +1 re the impact on land price appreciation. Washo April 30, 2012 at 2:18 pm The difference, perhaps is the level of gearing available for direct RE investors. If IPs were subject to the same thin capitalisation rules that other assets are then residential real estate would be more likely to be priced on its income producing fundamentals. Making the cost of debt above (say) 75% of the asset’s valuation non-deductible might dissuade the capital growth forever faithful from their dangerous speculation and put plenty of $ back in Wayne’s budget. Yatima April 30, 2012 at 2:20 pm I think it is essentially because of the negative impact of speculation-driven property price rises on the broader standard of living, and the reduced ability of many people to buy somewhere to live. It is unfortuante that where people live, which is very psychologically and socially important, is treated as a financial asset. But maybe it is necessary to encourage investment in the build environment, that is a question for another day. But it is galling that he government should intervene and make the speculation more extreme by throwing $10 billion of tax deductions onto the speculative fire every year, which is unavailable to owner occupiers and puts them at an economic disadvantage vs investors before they begin. (The CGT exemption for owner occupiers doesn’t let them borrow more for the house in the first place.) And that is $10 billion that comes in part from the very people that don’t see houses as purely financial assets and just want somewhere to live, but can’t afford. So – basically because lots of people disagree that houses should be viewed as a financial asset like shares. Yatima April 30, 2012 at 2:23 pm Eek – sorry for all of the typos! Wasted Opportunities April 30, 2012 at 2:26 pm Speaking for myself, the anger (more frustration) arises because NG for housing encourages speculation in an asset that is a basic human need (shelter), unlike investment in shares. It’s like encouraging people to buy tons of bananas and then stick them in a warehouse, hoping prices will rise. If they go uneaten (or the house goes unlived in), no biggie, at least you get a juicy tax deduction. My other issue is the systemic problem with average people being deceived into thinking that leveraged speculation is somehow a safer bet with houses than other assets. Most average people wouldn’t go near margin lending to buy shares, but they will happily get involved with investment property. I am reminded of my recent (failed) attempt to prevent a 25 year-old in-law from buying an apartment in Sydney, almost completely funded by $100k deposit assistance from the parents. I tried to explain the opportunity cost of not investing that money in other areas (cash, bonds, stocks). She looked at me quizically and said “but I don’t invest my money! And anyway, I can always rent it out if things change…” The irony of putting all her savings and her parents capital in a single asset with an 80% LVR loan was completely lost. Mav April 30, 2012 at 2:48 pm Because NG is predominantly used for investment properties. NG losses should be quarantined for all asset classes, including shares. AB April 30, 2012 at 3:19 pm “NG losses should be quarantined for all asset classes, including shares.” Agree completely. A tax deduction should only be able to be deducted from income from the same asset class. flawse April 30, 2012 at 11:53 pm Question So if I have a factory the costs of the building could not be offset against the production process? Complicated I’d think. Sool May 1, 2012 at 1:06 am Small business & start ups would collapse if finance costs could only be offset against the same asset class. We already have the most complicated and unreasonable “Non-Commercial Losses” tests anyway. Curiously only applies to business losses not shares or property losses. Thats a good way to encourage business – go into property! drsmithy May 1, 2012 at 12:44 pm The “normal” situation is that losses can only be offset against the income generated incurring those losses. Ie: the costs of your factory building can be offset against the income you generate from whatever it is you do with the factory, but not against the income you generate from your other job. Mav May 2, 2012 at 1:51 pm I am talking about personal income and tax structure. Toil and Trouble May 1, 2012 at 12:02 am +1! Al April 30, 2012 at 3:07 pm Also negative impact on the community. You just get to know your neighbour and they have to move as landlord is selling the property. SteveB April 30, 2012 at 3:35 pm Why the anger in borrowing to invest in real-estate, but no similar angst against margin lending to buy shares for example? Giving advice on the share market is now regulated to manage “conflict of interest” scenarios. Realestate was an investment class specificaly exempt because taking away the right to bullsh!t leaves nothing else behind. 8mill April 30, 2012 at 5:37 pm My Thinking is the issue is the depreciation allowance allowed. They should club this as the higher your tax rate the likely better off you are. You can Gain the allowance at a 100% deduction, then only pay 50% cgt tax on the discount when you sell. Even this up mr swan,…………, sorry mt Turmbull Charles Ponzi April 30, 2012 at 7:29 pm Unlike shares, shelter is a necessity. The problem with negative gearing for investment properties is that it pushes up the price of real estate for everyone else. High house prices are not good for the long term health of the economy. StevieRay April 30, 2012 at 7:43 pm “Why the anger in borrowing to invest in real-estate, but no similar angst against margin lending to buy shares for example?” For me, deliberately making losses in any area for the sake of minimising tax is wrong. I agree with the suggestion of quarantining the offset of the loss to the same asset class. Mav April 30, 2012 at 1:55 pm One more stat from the pdf: Of individuals declaring net rental income, 80.2% claimed rental interest deductions. So 80% of the individual landlords paid over the odds prices for their IPs :p Mav April 30, 2012 at 1:57 pm oops.. it means they still have a mortgage and don’t own outright. Not that they NG. bv2726 April 30, 2012 at 2:02 pm In my mind, the above figures go to show that property investing is something that the low – mid income people do. I.e. “Rich people” don’t invest in property, the “average” people do. That is proven in my mind when you fill out a form for Family Tax Benefits – you need to declare if you have a rental property and get rental income. (There is a specific question for it). You don’t have a separate question for dividends. That is just rolled up into the total income question. Micheal April 30, 2012 at 3:13 pm Rich people do invest in real estate. Rich people do not have mortgages on them. runalltheway April 30, 2012 at 3:34 pm bv2726, Wealthier people are more likely to own investments in Trust structures rather than their personal names. I notice that the ATO table above only appears to address individuals. Sool May 1, 2012 at 1:16 am Negative gearing in a trust structure is really dumb. Much better to negative gear as an individual as you can offset against any of your personal income. If a trust has no other income it is a tax loss carried forward & only offset if there is future taxable income. If a trust has other taxable income then negative gearing can work like an individual. Wealthy people have very expensive houses which in the main are tax free as they are principle place of residence. MicroMaker April 30, 2012 at 4:14 pm Property investing is aspirational. Having an investment property on an average income says something about you to society. In a society with so many material things the stakes have to be raised to get that message across. The_Mainlander April 30, 2012 at 9:41 pm +1 if you are silly enough to live on Jones’s St. GB April 30, 2012 at 10:24 pm In my mind, the above figures go to show that property investing is something that the low – mid income people do.” correct! at the top of the cycle its always the “dumb money” thats prevalant. Jono April 30, 2012 at 2:02 pm This statistic was mindblowing. That there are 825,000 negatively geared investors who have incomes below $80k, is a ticking time bomb. These people are only in the game because they expect property prices to continue to rise, and they don’t have the kind of income to handle an economic shock. They will bail out like rats fleeing a sinking ship. bv2726 April 30, 2012 at 2:25 pm What about just holding out? Many of my “property investor” friends think that the prices will go up again, so they are planning on just waiting. They are currently losing money (negative gearing), and justifying it by saying “its a good tax deduction”. So then just hold and don’t sell. (Negative equity is not a loss unless realised). AB April 30, 2012 at 2:43 pm “What about just holding out?” It hasn’t worked in other countries but it may work here until (if) we see unemployment rise. I do wonder how long people will hold on for in the face of continual holding losses and minimal capital gains (or continued capital losses). “(Negative equity is not a loss unless realised).” Agreed. But it’s still a loss if/when you go to the bank looking to use the existing property as security for a new property. Aristophrenia April 30, 2012 at 3:22 pm This is Japan 101. Your friends bought into the market because they believed prices would always go up blah blah – but eventually they will realize this is not the case – for Melbourne investors this is already becoming very apparent. So in ten years their house has increased by 1% – on a $500K dollar investment that is an incredibly bad return – seriously bad. The reality is that we will / are seeing unemployment rise – the wider economy is all that matters, when things go pear shaped prices will fall more precipitously. The market is reflecting this exact scenario right now, no one is selling unless they have to, prices are falling slowly – the only people buying are those who have no idea of the market. As the economy worsens over the next 12 months more people will understand that the RE market is falling and withdraw from purchasing, while the unemployment and forced sales continue to rise in the opposite direction to buyers – until the equilibrium point is reached and the crash engages. However like Japan, there was a long slow melt due to massive unimaginalbe injections of government capital – however UNLIKE Japan it has a nation of savers to draw upon – Australia does not. We will see a crash. ruprecht April 30, 2012 at 3:23 pm That’s a good point. Property ownership is a national obsession. Are most of these folk savvy investors? I’d wager not. Think of it like a falling share price. Would this same people sell on the way down, or have a belief that the share price will one day recover to previous highs? Usually the latter, the same mum and dad investors who are left holding the bag when companies collapse. They refuse to take a loss. It’s very hard to change the optimistic Australian belief system. We are still in for a slow melt, but without rising unemployment or a hike in interest rates i cant see investors rushing for the exits until they are forced to or it is well and truly too late. AB April 30, 2012 at 4:18 pm “Would this same people sell on the way down, or have a belief that the share price will one day recover to previous highs? Usually the latter, the same mum and dad investors who are left holding the bag when companies collapse.” I disagree. Everything I’ve read indicates that most “amateur” investors buy high in exuberant times and sell low during panics. ruprecht April 30, 2012 at 4:43 pm AB as a general rule, correct. Smart investors will exit on the downtrend or as a price breaks through key supports. The point is that there are enough investors who will wait to capture their entry price or the peak price. Refusing to take a loss all the way down while watching their loss get bigger. It’s worse with property than shares – much more emotions at play in my opinion. I dont believe we are yet at panic stations. Investors are still out there with belief though diminishing. The stampede may yet emerge but only when the Australian confidence in property has well and truly been crushed. And that could well be the time to buy. flawse April 30, 2012 at 11:57 pm bv…Good question. We are showing we are determined to lower interest rates to a level to make ALL property speculation successful. We don’t care at all about the cost to the economy or financial repression of others. It’s just a matter of time. bad April 30, 2012 at 2:30 pm Bring on the Minsky moment The_Mainlander April 30, 2012 at 9:45 pm +100 Waynes Black Swan April 30, 2012 at 6:19 pm Problem is this wealth is paper value only and bailing out will prove somewhat problematic. Property can not be easily disposed of and if you need to drawn on any equity, you’re essentially paying for you own money via interest rates. What will the cornered heard do? The Long Run April 30, 2012 at 2:36 pm Forgive me if I’m wrong, but does the average rental loss of $10,755 for a low income earners exceed his or her maximum possible income of $6,000? And if so, how are these people even surviving? (I have calculated this as Rental losses ($1,096,000,000) divided by number of taxpayers (101,910) equals $10,755 net rental loss per person.) PeteG April 30, 2012 at 3:28 pm My reading is that the $6000 is taxable income, so that’s what is left after they’ve deducted their $10,755 rental loss. Still, it isn’t a lot to survive on. drsmithy April 30, 2012 at 3:57 pm It’s highly likely most of these individuals are spouses or children with little to no income, who are dependants of someone else that has used them to take advantage of the various FHB bribes. The Long Run May 1, 2012 at 12:06 pm Thanks for the clarification PeteG and Rumplestatskin. At any rate, it seems completely crazy to hold on to something making such a huge loss in order to save on such a tiny amount of tax! Rumplestatskin April 30, 2012 at 3:37 pm I would say that those income measures are of ‘taxable income’, which would be after deductions. Thus the, <$6000 group making an average loss of $10,000pa are actually earning $16,000 or so before deductions. hzhousewife April 30, 2012 at 10:08 pm Now after 1 July 2012, no tax at all until $20,000 earned. Will this add fuel to the fire? Jack April 30, 2012 at 2:39 pm Given that our banking system, our government debt and revenue is all tied to the Negative Gearing, I still dont like the odds that Governments at all levels, the RBA, and the banks will all try to maintain the status Quo at all costs. Do we end up with another property cycle. Cash rate to 2%, immigration at 300k+, FHOGs, more NRIAS etc?,Extra special deals for foreign ownership. I have just heard that the super contributions tax is being increased in the budget to 30% for high income earners, which I suppose will encourage more negative gearing. Personally I think we should be looking at a government owned sharia trading bank, which I think has as much chance of coming into existence as the exstinction rid of Negative Gearing. Karan April 30, 2012 at 3:00 pm How is government debt and revenue tied to negative gearing? Unless you’re talking about stamp duty? Jack April 30, 2012 at 9:41 pm The government has an implied guarantee for private debt, if this thing falls over the private debt becomes public debt. Also CGT is tied to a healthy asset values, realising losses as this thing falls over means tax revenue from CGT will be non existent. flawse May 1, 2012 at 12:03 am Revenue is certainly tied to negative gearing…more construction equals more incomes equals more income tax. The net effect on govt debt would take a bit of calculating. Certainly Howard/Costello seemed to net benefit from the whole RE boom…as long as you don’t count the massive Foreign Debt they expanded in the process. Foreign debt, as we all know doesn’t matter so why not go the whole hog with teh negative gearing, neggative RAT rate, expensive RE model? What’s to lose? david collyer April 30, 2012 at 3:27 pm Hurrah! You have collectively arrived at the conclusion I outlined in May last year. http://www.prosper.org.au/2011/05/25/australia%E2%80%99s-fatal-flaw-negative-gearing/ I don’t think anything can or should be done about NG. The ability to offset losses against profits elsewhere is a principle important to business and investment migration. Plus the political fallout would be huge – these are middle-income earners who either had poor quality accountants or ignored their accountant’s advice on risk concentration. They will vote their self-interest. Wealthy (read smart) investors would never take these silly silly gambles. The ‘Gearer cohort will prove to be Australia’s sub-prime borrowers. One clear-eyed article in the MSM about now would break the camel’s back. Stand clear of the exits or be killed in the coming stampede. Don’t Buy Now! Peter Fraser April 30, 2012 at 3:43 pm Well David you raise two points. I agree that the small investors do represent a higher risk area than other market segments, although describing them as sub-prime may be a stretch. On your other point, I think we agree that NG doesn’t make that much difference (unless I have the wrong take on what you said. If so please advise) However if they removed that, would it take rental housing away from the current mum and dad cottage industry, and move us towards a more corporate style. In other countries companies own tenement buildings, flats etc that are a different ballgame altogether. It may be better, it may be worse, but I would like to know first rather than just charge into the unknown following a “good idea” david collyer April 30, 2012 at 4:05 pm NG will shred the balance sheets of many of those middle-income earners on even a modest further house price recede. Those loans are full recourse to an individual’s entire asset base, super excepted. Those who choose to stay will be skewered – a lifetime subsidizing someone else’s rent. As for the mum and dad-only cottage industry, I see this as evidence of the very poor investment metrics in residential RE. As an asset class, it sucks. The housing stock will be transferred into the hands of the banks and these OREO’s will be rented out. Rental supply unchanged. If I were government, I would let it fall then in ~5 years stride in and buy that desperately needed social housing on the open market. It will be a bargain. Peter Fraser April 30, 2012 at 4:11 pm HMMmmm – well I think that at this point our opinions part ways. Cheers… Tarric April 30, 2012 at 6:30 pm “I would let it fall then in ~5 years stride in and buy that desperately needed social housing on the open market. It will be a bargain.” If a crash does indeed happen that could definetly be a possible silver lining. Low income housing is needed very badly in this country, however that need will be offset by plummeting housing prices in the event of a crash. Also if rents decline which is possible we will see a whole generation of young Australians who will be far less for housing than their parents and have much more disposable income to drive other sectors of the economy like retail. [email protected] April 30, 2012 at 11:25 pm The gov’t won’t be there mate. Ever. NG came about so gov’t could bail out. McPaddy April 30, 2012 at 4:30 pm As a long time (and current) renter, as well as a reluctant landlord, I much prefer a professional landlord. They run it as a genuine business, have a reputation and brand to protect and don’t up and sell or take back the property to look after an aunt etc. Much better from the tenant’s perspective. Timmeh April 30, 2012 at 11:59 pm What, like places like NYC or cities in germany where renters actually live their whole lives in one apartment with actual renters rights, without getting booted out every six months so the landlord can sell the place or increase the rent 3 times above inflation? Yeah, that sounds terrible. drsmithy April 30, 2012 at 4:01 pm I don’t think anything can or should be done about NG. The ability to offset losses against profits elsewhere is a principle important to business and investment migration. In most locales, losses can only be offset against the income earned from that specific asset. The difference (and problem) with negative gearing is that losses can be offset against ALL income, regardless of source, hence its extensive use in Australia as a tax dodge. ceteris paribus April 30, 2012 at 6:25 pm Bingo! StevieRay April 30, 2012 at 7:58 pm Succinctly said, bravo! I don’t know what they do elsewhere, but I don’t think it is right to deliberately make a loss to save paying income tax. On the other hand, you can’t disallow deduction of genuine costs in making an income. Although of course that is exactly what happens for most PAYG income earners, who fork out plenty of costs in getting their income. Jason April 30, 2012 at 3:41 pm UE does this data separate out landlords who are owner-occupiers renting out a second or third bedroom? Mining Bogan April 30, 2012 at 3:53 pm They’re still pushing it hard in the west. At one of the camps I stay in every room was left a copy of how FIFO workers can avoid tax. Yep, encouraging my fellow bogans to lose money with NG. There is even a little spiel on the dangers of investing for yield. Seems rental return doesn’t factor in serious property investing. Apparently it’s all about capital growth and tax break structuring. The worst part is that my fellow bogans are waving this in my face, telling me my theories have been proved wrong by an expert. They know he’s an expert because it says so on the flyer. I’m going to stop arguing with them now. You can’t fight the system. It’s too powerful. 🙁 Jackson April 30, 2012 at 4:00 pm There is a particularly nasty bit of advertising out there in WA at the moment from one of the building companies, full page ads touting ‘how to profit from mining boom’. Basically build a house in Perth and rent it to a mining company providing FIFO’s. Dangerous. Ask your mates how their “tax minimisation” schemes in blue gum plantations are going. Mining Bogan April 30, 2012 at 4:09 pm As aj says below, a lot of them were stung by forestry schemes. The last time I saw this aggressive push up here was when the GFC hit us and slowed things down. I’m guessing the RE types are worried. Maybe I will keep up the fight. It does entertain me. dumb_non_economist April 30, 2012 at 9:04 pm MB, If you’re out Kal way, ask them (if they’re 45-50 yrs old) how Budplan went after the ATO rejected the deductions back in 99 and went back 7 yrs! aj. April 30, 2012 at 4:01 pm Miners do love a tax shelter (regardless of effectiveness). Look how many got cleaned up with the forestry schemes… oops here we go again… Hewell April 30, 2012 at 4:44 pm only some anecdotal evidence: Quite a few of my friends with IPs are renting them out “cash-in-hand” to students or professionals w/o agents involved. Some of the IPs in CBD area are even being rented out as individual rooms. They are declaring the rents to be much lower than they really are when doing tax returns. Therefore they are all NG, even tho they are basically tax evasions. Also, they buy new apartments (mostly around CBD) to take advantage of higher depreciations. Is this common practice? I’m not sure. Deo April 30, 2012 at 5:04 pm Yes, this is common practice in the Sydney suburbs with high Asian population (both students and migrants) e.g. Burwood, Hurstville, Ashfield, Chatswood, Marsville, Kensington and CBD. The landlord usually advertises the room(s) instead of whole apartment / unit with complete package i.e. furnished with bed, study desk, and the rent amount covers normal utility like telephone / internet and electricity. You can find the ad easily in the ethnic, local newspaper hence very hard to be detected by ATO due to language barrier but this is actually tax evasion / cash black economy. Deo April 30, 2012 at 5:06 pm Sorry, another addition. The landlord in this case usually does not even bother to report the “cash income” in their tax return. Their logic is it is their private business with no RE agent involved (no paperwork) and no cash trail due to “cash in hand” nature so why would report it as NG which can create audit / review risk by ATO. Hewell April 30, 2012 at 11:45 pm I see. Thanks Deo. Then I think my friends are doing it “wrong”. … The Claw April 30, 2012 at 5:04 pm I’d like to see some big changes to our tax system to discourage borrowing and encourage saving. 1) Interest expenses disallowed as a tax deduction. 2) Interest income exempt from tax if below some threshold. Perhaps someone will now post that these changes are unlikely to be made soon! StevieRay April 30, 2012 at 8:06 pm Sounds like a good way to stifle small business, or at least restrict it to those who already have money. I have no problem with interest costs being deductable, so long as the business is genuine. Negatively geared properties don’t strike me as a genuine business though. 8mill April 30, 2012 at 5:15 pm On the gain side Though, how much stamp duty is raked in by the states annually? I think I remember making an 80 grand donation somewhere? Annie Oakley April 30, 2012 at 5:34 pm Investors are still buying up properties around here (Adelaide western suburbs) like it’s going out of fashion, pushing up prices for genuine buyers. It’s amazing how many of the houses that have sold recently are up for rent straight away, even family homes that you would think had been bought by a genuine family. Older properties are bought up and rented out in an unimproved state, no attempt to make the property nice. Some rentals are falling to bits, eyesores in nice areas, with antiquated kitchen and bathrooms that you wouldn’t wish on your worst enemy. The system doesn’t seem to be doing much for the greater good – all it’s done is create a class of parasites. 3d1k April 30, 2012 at 8:07 pm Nice job Leith. And well done Fairfax. aj. April 30, 2012 at 10:25 pm That’s only 1 in 7? There’s still political mileage in quarantining NG and limiting it to new development etc to the rest of us (that would love to see houses off the financial asset list). Oh … That’s if our cosy duopoly of cronyistic, nepotistic political parties actualy gave two sh8ts about people and weren’t hopelessly corrupted by self interest and their corporate over-lords. Nudge May 1, 2012 at 10:44 am Wow – hotly contested topic…. Humans have an incredible capacity for denial & I don’t see why they wouldn’t hang onto their sponsored housing nest eggs till their fingernails rip out. Even if the sponsoring was removed, I could see them trying whatever stunts they could get away with not to let go. It’s been said that most foreclosures have had warning signs for a couple of years or more, & there’s much squirming before they have no choice but to hit the wall, or the wall hits them. Saul Eslake has an opinion on this Negative Gearing Racket FWIW…. http://www.theage.com.au/business/time-to-axe-negative-gearing-20110424-1dsxs.html trentr May 1, 2012 at 10:22 pm It would seem most people believe that removing negative gearing would lead to house prices reducing, therefore increasing affordability. Only problem there is the cheaper the house price, the more attractive for the cashed up and wealthy investor to purchase. This would no doubt lead to a increase in sale prices, as demand among the wealthy increases, and therefore pricing the new home buyer out of the market. As the wealthy become the majority of the house ownership in all coreners of Australia, rental costs would increase as they have cornered the market. Soon enough the 2 income working family cannot afford to purchase either a home to live in or an investment property, and the wealthy own the lot. If you think negative gearing caused prices to escalate you are clutching at straws, name anything product that has not increased in costs over time. Allan May 2, 2012 at 8:03 pm LOL the article has been deleted from the Domain site after 47 comments alot of them critical of The Age’s property business. What’re you afraid of?