Aussie John: Negative Gearing’s killing FHBs

ScreenHunter_752 Jan. 13 08.49

By Leith van Onselen

Late last year, a group of business leaders lambasted negative gearing on the ABC’s Q&A program, acknowledging that the system was inherently flawed and acted to push-up property values by unfairly subsidising wealthier investors at the expense of poorer taxpayers.

Amongst this group of business panelists was Aussie Home Loans founder, John Symonds, who also came out swinging over the weekend in the AFR, claiming that negative gearing is killing the first home buyer market:

Aussie Home Loan founder John Symond told AFR Weekend the tax break [negative gearing] favoured investors and was ­distorting the property market.

“Negative gearing is a great tax break, but it needs a total overhaul to make it fairer. First home buyers have no hope of getting into home ownership these days unless they’re helped by their families,” Mr Symond said…

John Symond reckons putting a cap on the value of property which can be negatively geared is another way to give first home buyers a better shot of ­competing with investors.

But if the cap is too low, it could see investor demand becoming even more concentrated in the parts of the market targeted by first home buyers, he said.

“It’s been great for my business, but the government really needs to look at capping it a level,” he said.

The number of first home buyers going through Aussie Home Loans for finance has dropped by 50 to 60 per cent in the past four years.

“They’re walking away from what used to be the great Australian dream,” he said. “But with interest rates at their lowest point in history, and house prices only just coming off the bottom, if first home buyers can’t afford property now, they never will,” he said. “I’m very pessimistic on the outlook for them.”

Greens Senator, Dr Richard Di Natale, has also today requested the Coalition’s Commission of Audit address the negative gearing “sacred cow”, which he claims costs the Budget billions in foregone revenue and worsens fairness and efficiency:

Senator Di Natale said he was concerned that some savings options, such as negative gearing and the private health insurance rebate – which cost $5.5 billion in 2012-13 – were being spared from consideration for ”ideological reasons”.

”This is a case where the government’s ideology is trumping not just fairness but efficiency”…

We live in hope…

unconventionaleconomist@hotmail.com

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77 Responses to “ “Aussie John: Negative Gearing’s killing FHBs”

  1. Labrynth says:

    The easiest way to tweak negative gearing that has any chance of getting past the current government is to simply limit negative gearing to 3 years on existing buildings and 8 years on new builds. It is a compromise but it can be done without upsetting the boomers.

    After the limit expires you can only deduct expenses against the asset and not other income.

    • netti says:

      Some merit as a first step.
      Would add: once a property has been subject of NG claim, it then becomes excluded from pool of building that can have NG claims applied.

      The idea that successive “investors”, of the same property, can claim extra costs imposed on themselves, by themselves, through the ability to engage in larger mortgages is bordering on the comic.
      How it ever became legislation is a mystery.

    • Stitches says:

      Not a bad idea although quarantining deductions to the property rather than allowing losses to offset other taxable could provide an incentive for investors to increase rents to maximise the deductibility of borrowings

      Removing the capital gains tax concession should be fairly painless politically although to the average Australian property investor I’m not sure it would have a huge impact. If investors did factor CGT in (you will never see it covered in a spruiker’s calculations) they would be far less likely to back property over shares.

      Even with taxation tweaks, I think the fundamental problem is still our “love affair” with property – the average punter believes it is the only path to wealth and doesn’t trust super or shares.

  2. Kliff_Fiscal says:

    …. waits for the Terry Ryder smackdown.

    • Ino says:

      Oh yeah – I wonder what Sensei Terry is going to call John? “Debt peddler” perhaps? Or “Aussie Sellout” maybe?

      Come on Terry – don’t let us down, use your masterful “ad hominem” and annihilate John! Get him! DO IT! DO IT!

      (grabs popcorn) It’s like watching mud-wrestling … only with pigs. And it’s not mud.

  3. Mining Bogan says:

    House prices coming off the bottom? All Symonds is doing is having a new years spruik and disguising it as being caring.

    He’s full of it.

    • PhilBest says:

      No-one really cares for FHB’s unless they are talking about abolishing the utopian urban planning that has really caused the problem. Either they are insincere or incompetent.

      Listen to this prick in the NZ Herald yesterday (print edition, they haven’t had the gall to put it online yet). He actually knows supply is the problem and he is gloating about what a great thing the house price inflation is for Auckland – from HIS point of view…….

      ‘Golden time’ forecast for city house market: by Alanah Eriksen

      The $39 million sale of the Hotchin house on Paritai Drive in Orakei was the country’s most expensive residential home sale. Real estate agent Graham Wall, who handled the transaction, spoke to Herald property reporter Alanah Eriksen about his predictions
      Every house in Auckland will be more valuable The city’s property prices have hit a record high, skyrocketing to an average of $ 700,387, according to new figures. Graham Wall thinks it will continue.
      Mr Wall, who specialises in highend property sales, said he didn’t believe the city was simply going through a boom, as seen before the recession in 2007.
      ‘‘A boom is the wrong word, it implies it will end. We’re just at the beginning of a golden time’’.
      This was because of a combination of a lack of supply and building space, as well as more immigrants coming to the city.
      ‘‘ We didn’t really go into a recession, the rest of the world did.’’
      Waterview will take off Buyers looking to make an investment should house- shop in the central-west suburb of Waterview, Mr Wall says.
      ‘‘ It happened to Pt Chevalier, which is right next door, about five years ago, and the same happened to Sandringham and Kingsland.’’
      The area is likely to attract several first- home buyers before it booms and the area is a handyman’s dream.
      ‘‘State houses scattered throughout can be turned into brilliant houses. Large parts of it look out over the water, it’s quite pretty.’’
      The area was just crying out for good eateries and cafes, Mr Wall said. ‘‘If you buy there, take a barista with you and prices will skyrocket . . . people always follow the coffee.’’
      Parnell will be the new ‘‘hip’’ place In the 1990s, Parnell was ‘‘the hottest place to live in Auckland’’.
      But the fashion changed as the suburb became dated.
      ‘‘Prices sat a bit flat while Herne Bay, Ponsonby, Freemans Bay have gone mad, mainly because they have great coffee and good restaurants. Parnell had a bit of a nana reputation.’’
      The Real Estate Institute obviously knew what prime real estate its Parnell Rise headquarters was sitting on when it sold for $6.2 million last year.
      The Geyser Building on the same rise — designed by the award-winning Pattersons architecture firm — had lifted the aesthetics of the area, Mr Wall said. The eco-friendly building has 24 offices, six retail/ hospitality spaces and technology which enables the building to heat itself by trapping warm air in the walls. There will be an influx of overseas property buyers And they won’t be just investors, but buyers wanting to live here. Mr Wall says the city is able to compete on an international level when it comes to real estate.
      ‘‘ People are discovering Auckland. We have better beaches than Rio, and better restaurants than Sydney.
      ‘‘ The world is starting to realise we’ve got everything. We have all the advantages of a truly international city, but compact.’’ More first-home buyers will move out of Auckland With prices going up in all corners of Auckland, Mr Wall says he wouldn’t be surprised if the number of young house-hunters buying out of the city grows immensely.
      ‘‘ It’s hard to tell someone they might have to move to Hamilton, but people are going to have to.
      ‘‘They might start to think, ‘I want a family, why don’t I move to Mangawhai where we can have a beautiful home and beautiful lifestyle for a lot less money.’’’ There will be more apartment sales For the first-home buyers who don’t want to escape the hustle and bustle of the city, apartments will become a viable option, Mr Wall says.
      More than 1600 new units are planned throughout suburban Auckland.
      New projects include Urba in Freemans Bay, starting at $ 385,000, Queens Residences in Queen St, starting at $ 285,000, and 29 King Edward on the old Masonic Tavern site on Devonport’s King Edward Parade. In Vinegar Lane, Ponsonby, 120 residences could be built on the site of the failed Soho Square development.
      The central city’s population of 26,307 is expected to rise by 82 per cent to 47,850 people by 2031, so new apartment buildings are crucial.
      ‘‘ People everywhere else in the world have got used to living in apartments.’’

      • Pfh007 says:

        ‘Golden Time’. ?

        perhaps ‘Gilded Time’ would be more accurate.

        Negative gearing is simply too hard politically (taking into account the shallow marketing focus of the average political insider) even if it was introduced in a softly softly manner by grandfathering existing investments and restricting it to new builds or carrying the losses against future income from the investment.

        Negative gearing will fade as a strategy quite naturally if sufficient supply was permitted to hose down the ‘unnatural’ rate of capital appreciation.

        Expand supply with the development costs financed by higher ongoing rates LVT on the developed blocks rather than an upfront charge.

        It is our only hope Obi-wan.

      • DrBob127 says:

        TL;DR

  4. adoxographer says:

    As “Aussie John” alluded to, capping negative gearing eligibility to properties below a certain value would surely have the potential skew the market further against FHBs, since investors would pile into the lower end of the market.

    • JohnsonM says:

      Yeah his plan didn’t make any sense to me either. Labrynths’ post above is the only way you could reasonably do it in my opinion (phase out over time).

      Still don’t think it will happen.

    • jimbo says:

      Definitely. If eating some of their young wasn’t enough they now want all of them.

    • The Patrician says:

      That’s why it has to be NG for new-builds only.
      No crowding out the FHBs, in fact space for them created in the existing-home market as the investors exit and a flood of new dwellings. The boost to housing supply would be unprecedented.

      This must be explained to DiNatale

      • Bubbley says:

        Totally and utterly agree.

        Investors can’t bitch about it being removed and it will increase the amount of stock on the market.

        It will also save the government a fortune.

      • The Patrician says:

        …and boost state govt coffers with increased land sales
        …and boost local govt coffers with increased rates revenue
        …and boost construction employment
        …and take the heat out of the existing house market without the RBA having to increase rates

      • Bubbley says:

        So many benefits, yet the government/s can’t see it.

        Sometimes I despair of our country’s policies and politicians.

  5. outsidetrader says:

    Abolishing negative gearing is too hard – I expect the Govt will choose the path of least resistance and reintroduce the FHOG instead…

    • swizzy says:

      I agree.

      Looking at this Objectively – Australia offers tax breaks for leverage. Negative gearing is by far the best way to reduce your tax and obtain wealth, but it is destroying the budget.

      What does that tell you?

      It tells you the banks are an extraordinary powerful lobby group in this country.

      So powerful they are an invisible hand in Canberra decision making.

      What Aussie John is proposing is laughable, but I would suggest that’s the idea.

      If Aussie John were seriously against negative gearing, he would find himself on the outside of the financial industry.

  6. netti says:

    How many times can one flog a dead horse?
    It has been cited so many times that allowing negative gearing deductions to be claimed against costs associated with existing dwellings is counter-productive in every respect.
    What if Labor or Libs suddenly saw the light and disallowed claims for 2nd hand RE?
    A massive meltdown in prices and riots in the streets from Investor Clubs or more foreign buyers simply fill ing the void? Who knows?
    Labor & Libs have proven themselves incapable taking the initiative to make the system fair.
    Only a small portion of the population understands that ng is a regressive and unfair policy.
    When Joe & Jane Public burr up, and say they’ve had enough of subsidizing investors, then, perhaps -

  7. willy_nilly says:

    NG is a dead issue. With approx 600,000 boomers with an NG IP, how many will want that when they retire?
    They will vote it out as they did free higher education ( after they all finished Uni)…. and deat duties when they wanted the full slice of the pie…

    • Andy! says:

      Any coincidence that SMSF leverage rules were changed followed by massive growth in SMSF property investments?

    • StatSailor says:

      If the supply of FHBs dries up, boomers won’t have anyone to sell their IPs to, but if prices go down so does the value of their investment. So NG is a bit of a Catch 22 for boomers.Hence it could go either way.
      In contrast, free higher education was pretty much a free lunch for them, and it was easy to vote for not funding the next generation’s free lunch.
      Next we’ll be seeing changes to Medicare that penalise low income earners (e.g. the original intended recipients) in order to maintain benefits for over 60s, regardless of income or wealth.

      • drsmithy says:

        Next we’ll be seeing changes to Medicare that penalise low income earners (e.g. the original intended recipients) in order to maintain benefits for over 60s, regardless of income or wealth.
        Yep. It’s already starting.

      • Schillers says:

        Boomers are not selling to FHBs already. That bird has flown. They will off load their IPs to existing property owners, both upgraders and downsizers, as well as foreign buyers ( the supply of which is unlimited).

    • aj. says:

      Haha Have to reckon you are right here WN – the next generation can expect neg gearing to go the way of fringe benefits, capital gains, hobby farms etc etc once the boomers have milked this baby dry.

  8. General Disarray says:

    A cap is a bit of a joke. Anyone serious will admit it needs to be an option for new builds only. You want a tax break then you need to make a supply difference and take on some risk.

    Slowly but surely.

  9. Sweeper says:

    The government should just bite the bullet on this. The electoral backlash would be no where near as bad as some people pretend.

    • Slambo says:

      You’re dead right on this. I know a bunch of people who benefit from NG yet are aware it is an out and out rort. They are just making hay while the sun shines, knowing all the while it is too good to last.

    • Slambo says:

      You’re dead right on this. I know a bunch of people who benefit from NG yet are aware it is an out and out rort. They are just making hay while the sun shines, knowing all the while it is too good to last.

  10. squirell says:

    grandfathering it in would be easy enough to do. Simply bring it in over a number of years eg year one can claim 80& of losses, year two 60% of losses.

    It provides those up to their ears in loss making properties some time to sort out what they will do and send an immediate message to existing investor purchasers that they will need to focus more on rental returns not capital growth.

  11. krazy.galah says:

    “We live in hope…”

    There are two hopes and one of them is Bob.

  12. Jacks Money says:

    Why not look at a reverse cap arrangement …
    say you don’t get a deduction on debt of $0 to $250,000 then say 25% of expense on next $250,000 and a continuation of the 25% increase for every $250,000 up until a $1m then a full deduction (this may work

    I think this would make people seriously avoid investing in the low end properties

    as far as existing senario goes, why not have a 10% perannum detrioation to bring the current in line with a new scenario …

    the biggest concern is the unequality of one sector for investing being treated differently
    Cheers

    • drsmithy says:

      Why not look at a reverse cap arrangement …
      say you don’t get a deduction on debt of $0 to $250,000 then say 25% of expense on next $250,000 and a continuation of the 25% increase for every $250,000 up until a $1m then a full deduction (this may work

      Sounds like a great tax dodge for the rich.

  13. FactOrFiction says:

    Pity there is so little understanding of how NG really works… from both sides of the debate. Removal of NG is a good attention grabbing headline but if it happens, it will not change anything… get real.

    This article summarises the issues:
    http://www.propertyobserver.com.au/news/let-s-get-the-facts-straight-negative-gearing-benefits-less-well-off-investors-more-than-it-does-the-rich/2013111266324

    • The Patrician says:

      Fiction

    • Sweeper says:

      Facts 2 & 3 are fiction.

      Fact 1 seems like fiction. I can’t be bothered thinking about it, and in any case is irrelevant.

      Seriously how is fact 1 an argument in favour of negative gearing? So the government is encouraging people with the least capacity to absorb losses to take the risks? And that’s a good thing? Brilliant.

      • drsmithy says:

        Fact 1 seems like fiction. I can’t be bothered thinking about it, and in any case is irrelevant.

        It seems to me you don’t really need to get far to see the broken premise upon which it is built:

        “In particular, it is often overlooked that a property investor has to have a capacity to carry real cash losses for several years.”

        So, basically, if you start from a broken system where your investment strategy is to lose money, negative gearing helps you lose less (well, lose less to the taxman – you still pay it to the bank).

      • andrewc80 says:

        Fact 1 is also fiction. Imagine it was a government subsidy to buy burgers, based on your marginal tax rate. Poor person gets $1 and rich person gets $10. The argument here is that since the poor person needed $1 more than the rich person needed $10 (since the rich person could already afford the burger) that subsidy is “fair”. In reality there should be no “unnecessary” subsidy to the rich person…

        Fact 2 assumes a 100% increase in rental income, and implies that people who negatively gear are only negatively geared for 1 year. I’m not 100% sure of the solid stats, but can confidently say that is not true.

        Simple answer: ask people why they use NG and see how many say because they save on tax. That “saving” does not come from nowhere. Otherwise I can stop paying my taxes and claim it has no impact.

    • flyingfox says:

      Fact or Fiction, none of the points actually provide any support for keeping NG.

      If all the points are valid, then it will be better to get rid of it than keep it. Lead to much simpler tax system

      • flyingfox says:

        Edit: Oh the property bulls are out in force in the comments section …

        and great comment by Alan the accountant :

        Shame it is misleading regarding the tax – the conversion of income to capital is where negative gearing stops being “neutral”.

      • FactOrFiction says:

        That is exactly the point flyingfox – there is very little tangible benefit in NG for investors but, by the same token, very little will be gained by others if it is removed. So, those who imply that by removing NG “prices will fall” and “taxpayers will save billions” simply don’t understand how it all works. We need some balance in the debate…

        As to “conversion of income to capital” – it is a misnomer. Again, there is nothing special about but there is more to it than the term implies. It is partly explained here:

        http://www.propertyobserver.com.au/negative-gearing/putting-property-investment-losses-into-perspective

        Regarding your other point, some may argue that removal of NG will make tax system more complex because you will have to account separately for income and losses from property and do it over time. Conceptually, summing up person’s all incomes and deductions/losses for tax purposes as they occur is simpler…

      • drsmithy says:

        Edit: Oh the property bulls are out in force in the comments section

        Looks like someone is in there impersonating Macro Business as well.

        They’re using the Macro Business logo as well – might be worth a complaint ?

      • flyingfox says:

        @FoF On the contrary. There is much to be gained mainly by removing distortions caused by negative gearing.

        Residential housing would stop being an investment for many because neg gearing will remove the boundary cases as well as the “conversion from income to (tax free/reduced) capital”. NG encourages capital appreciation over rental returns. That is fact not fiction.

        Perhaps the removal of NG will make the tax system more complex but we already have many special cases. This will just be another one.

      • The Patrician says:

        mmmm Saul Eslake or Arek Drozda?

        Fact or Fiction?

      • TheJoneses says:

        If i run my own side business in addition to my salaried job, I cant offset business losses against PAYE income.

        So whats different?

      • FactOrFiction says:

        @Flyingfox re: “There is much to be gained mainly by removing distortions caused by negative gearing.”

        That is why it is so difficult to have any objective discussion on this topic at present – because “everybody just knows” that there will be so “much good” from removal of NG but without actually giving any though to the facts… Have you actually done any financial analysis of the figures and can you quantify the benefit? I am genuinely interested is seeing the results.

        @The Patrician: unfortunately, everything I’ve seen so far from Saul Eslake falls into opinion category rather than analysis. I am sure many on this forum will find it very interesting if you can point anything from him in the second category.

        It is not about defending NG, neither about demonising it. Rather, about understanding the mechanics to be in a position to predict consequences of the decision of either to retain it or remove it.

        The facts so far are that there is actually very little distortion that is the result of NG (as that linked article points out). So, the removal of NG will not bring all those widely anticipated benefits. If one makes a decision to support the removal of NG at least he/she should be aware of the likely consequences to avoid any disappointments.

        Whether we like it or not, property will always be considered an investment by owner occupiers and investors. :-)

      • DrBob127 says:

        @FoF

        It’s not really fair to quote FF’s first paragraph and then completely ignore his second one where he explains:

        Residential housing would stop being an investment for many because neg gearing will remove the boundary cases as well as the “conversion from income to (tax free/reduced) capital”. NG encourages capital appreciation over rental returns. That is fact not fiction.

        How about you address these points rather than just saying

        ““everybody just knows” that there will be so “much good” from removal of NG but without actually giving any though to the facts”

        You seems to be up for a rational discussion of the issues, but when someone starts the discussion, you don’t pick up and run with it, you just ignore it.

      • FactOrFiction says:

        DrBob127 I hope you agree with me that it is difficult to respond to every comment and every point in the discussion on a forum like this. But I will try to take the challenge and respond to your points. :-)

        Re: Residential housing would stop being an investment for many because neg gearing will remove the boundary cases as well as the “conversion from income to (tax free/reduced) capital”. NG encourages capital appreciation over rental returns. That is fact not fiction.

        This is actually not a response that would substantiate Flyingfox’s earlier comment I queried. But in any case, I addressed the issue in my earlier reply when referring to this external article:

        http://www.propertyobserver.com.au/negative-gearing/putting-property-investment-losses-into-perspective

        I also added that property will always be considered an investment. That is, removal of NG will not change it (see both external links quoted above for the explanation as to why – ie because NG delivers negligible benefits to investors).

        I will turn the table and ask: can you demonstrate how removal of NG will eliminate… …“conversion from income to (tax free/reduced) capital”. NG encourages capital appreciation over rental returns.”

        As it stands, the above comment is just an opinion and a very genralised one (any link to external analysis of this issue would be sufficient – otherwise how can one be certain that the author understands the concept quoted?) You see, the opinion of an opinion of an opinion is not making it a fact. And I didn’t feel obliged to respond to it.

        Re: You seems to be up for a rational discussion of the issues, but when someone starts the discussion, you don’t pick up and run with it, you just ignore it

        Well, I pointed an external article with several concepts as a food for thought. In turn I only got responses along the lines “it is all fiction”. How to debate it? If your criticism to be fair you should mention those respondents as well.

        As to taking up the discussion, again, I genuinely requested references to analysis that would substantiate points made by Flyingfox and The Patrician. I am still awaiting their reply. I will be happy to continue if you would like to make the response on their behalf.

      • Sweeper says:

        Per the article you’ve linked to, can you explain in simple accounting English, how losses are actually “additional capital injections”?

        Looks like NG is now distorting accounting aswell.

      • FactOrFiction says:

        Don’t mix accounting for tax purposes with an explanation of how making “losses” makes sense for investors. These are two different concepts – the first one is how investors reconcile with the Tax Office and the other is an example of cash based accounting that explains what the investor is left at the end after paying off all the expenses and liabilities.

        In other words, since Tax Office is not interested in you after tax losses, these are not shown in tax accounts but as an individual investor, you have to have actual cash (from savings) to cover that loss. That cash is not eligible to be claimed again as an expense and if you borrow it, interest rate expense cannot be claimed from tax (ie. double dipping is not allowed for tax purposes). Also, that cash is not eligible to be included in capital gains calculations (ie. is off the tax accounts)

        It all can be shown using conventional accounting principles but it would make a complex reading…

      • Sweeper says:

        There’s a challenge!

        Ok using conventional accounting principles please show me how losses in property investment are really just “additional capital injections”.

        From the investors position, a capital injection is a transfer of wealth from one asset to another (with no change in position), whereas a loss is a loss of wealth (a deterioration in position). If you can bring these to account using conventional accounting principles the same way I will be impressed.

        The problem with NG defenses like yours, is you treat income tax and capital gains tax as though they are interchangeable. They aren’t.

      • FactOrFiction says:

        Yes, @Sweeper, it is a challenge. Since I am not a practicing accountant I’d better decline. :-)

        Regarding your specific comment: From the investors position, a capital injection is a transfer of wealth from one asset to another (with no change in position), whereas a loss is a loss of wealth (a deterioration in position).

        No problems with this convention: for all practical purposes, an amount of money equal to anticipated after tax loss is “taken” from investor saving account (so, one asset class) and “put” into investor “property investment account” (another asset = capital) – it is only a book entry with no change in investor’s net position at this stage… then operating loss can be covered from that cash (ie this is when the loss of wealth happens).

        A loss cannot exist in isolation, somebody has to cover it. By analogy to corporations, in case of a single entity that does not have enough money to cover operating expenses, the money has to come from either investors (as additional cash injection= capital) or creditors (eg as a loan), otherwise the enterprise is insolvent and cannot continue. There is a book entry on that corporation accounts equal to that cash but it would be naïve to assume this is what the corporation is worth…

        If investor borrows 100%+ cost for the property her/his net cash position is 0 after settling. Money transferred to “property investment account” to pay off operating losses is therefore the only real “capital” invested (not the purchase price). Conventional accounting demands that all those transactions are booked in different accounts (ie. loan, property value, cost of buying, rent income, operating expenses etc). That is why cash based accounting makes it easier to track what is really happening.

        As a side note, is it not so unusual for a corporation to have two or more sets of accounts – one for tax purposes and other for example to monitor financial performance etc.

      • flyingfox says:

        @FoF

        Lets see:

        but as an individual investor, you have to have actual cash (from savings) to cover that loss.

        Whether you call it a capital injection or loss, you need external cash to be liquid right?

        In the base case where the property is always or can always be negatively geared, the investor needs periodic “capitial injections”. To make a profit in this case, he/she needs to sell at a higher price than they bought plus cost of said capital injections.

        Now if the injections are coming from PAYE income, the investor has converted income (arguably from a higher tax bracket) to capital gains.

        Not only is the conversion of income to cg logical but it is the basis of all get rich quick schemes involving property and clearly advertised. I don’t know on basis you are challenging this.
        What would change without NG? The ability of the investor to sustain said capital injections and the difference in tax between CG and PAYE income. NG is helping sustain bad investment choices.

        Now if there were no CG concessions. It makes no difference. While we have the CG discount, it is distorting the markets.

        BTW this is the base case and it will be different depending on circumstances but the jist of it remains.

      • Sweeper says:

        FoF,

        You are confusing 2 different things there. A loss is a loss. A loss can lead to another capital injection, but the loss itself is not a capital injection. That’s why saying “losses are just additional capital injections” is so misleading.

        A would be investor reading that would probably think that by making a loss they are injecting more capital. No, by making a loss they are *depleting* their capital (have worsened their position). Whether this depletion forces them to replenish capital is a separate issue. A loss emphatically is not a capital injection in anything other than the most voodoo of Accounting.

      • FactOrFiction says:

        Sweeper, we can argue semantics til dawn but it doesn’t change the facts that the investor has to have the capacity to provide capital equal to after tax losses to fund the property investment until that investment starts to generate positive cash (not necessarily profit). Whether this cash is set aside specifically at the beginning of the investment or supplied over time from investor saving account is immaterial. That is why one has to use cash based accounting to work out the real flows. P&L and BS are only appropriate when accounting for taxation but these statements do not reflect true net cash position of an investor.

        Flyingfox re: if the injections are coming from PAYE income… Yes, could be coming from income but this is after tax income so again, irrelevant for taxation purposes.

        There is this notion that NG somehow makes it possible to engineer the arrangement where, instead of paying tax on income, the revenue stream can be converted to capital and tax will be paid only at half the taxpayer marginal rate (ie. as a capital gain tax rather than income tax). But real examples of how it suppose to work are hard to find. Can you show how it works? I am genuinely interested to see the logic.

        As I mentioned earlier, the losses are from after tax money, interest cannot be claimed on it neither that amount can be added to purchase price to account for capital gains. There is no double dipping…

        If, on the other hand, what you have in mind is the concept of “capitalising losses” via special loan facility where annual operating losses are added to the borrowed principal, I will just say that these sorts of arrangements are very rare and besides, Tax Office is keen to investigate any such cases to assess there are genuine reasons for them. All in all, anyone considering it should clear this first with Tax Office to avoid penalties as in overwhelming majority of cases these are deem as tax avoidance schemes and therefore illegal.

      • flyingfox says:

        @FoF They are not after tax losses in the sense you think they are. The loss has already been deducted from income and therefore a reduced amount of tax needs to be paid by said investor. The investor does not whether the full loss from after tax income.

        You are not eliminating tax but definitely reducing tax. Property tax/accounting 101 mate and no questions from ATO.

        Edit: Look at Willy2 and Neville Gearless’s convo below for an example with numbers.

      • FactOrFiction says:

        Flyinfox, thanks for continuing on this topic and my apologies for a delayed reply.

        The example by Neville Gearless you refer is not quite what I had in mind since it concerns another aspect of NG. But let’s explore it instead, very briefly…

        I agree, the case looks pretty straightforward at first (and makes NG look like a very attractive proposition for a prospective investors)… until you do the sums that is. You see, this is only half of the story. When you factor in overall profitability investors are punished financially if they bid the price excessively.

        In particular, this example shows how much more investors are potentially be willing to pay for the property if NG is in place. There is another implied assumption as well, ie. that this pushes prices up for everybody AND that owner occupiers are worse off. The missing bit is what happens after year one…

        I used the same figures, but I added fixed ongoing costs ($5,000 p.a. for council rates, taxes and water) and changed only one assumption – ie. that rental income is the same in both cases (the logic is that the property price should not affect materially what the renters are willing and able to pay).

        All in all, I agree that there appear to be incentive to bid prices up under NG scenario but the magnitude is not as high as implied in the other example (ie. it is in the range 2-3% not 30%). By the same token, removal of NG will not have much impact on the prices. That is, the other scenario makes assumption that investors will not be willing to incur larger loses when NG is removed – would hold true only if all investors are maxed out now. Interestingly, owner occupiers are not worse off financially than investors in the most negative for them scenario.

        I admit it will be difficult to argue the above conclusions due to complexity of factors involved (the other case is so deceivingly simple!). As the saying goes, the devil is in the detail. So, let me finish with a proposition that the real issue is leverage and not NG – as this article demonstrates:

        http://www.propertyobserver.com.au/negative-gearing/putting-property-investment-losses-into-perspective

      • flyingfox says:

        @FoF Agree leverage or rather the easy availability of cheap money is the real issue.

        Also agree about doing the sums etc and it is not in the investors best interest to bid up prices. But have you every tried talking to a a so called property investor. Reasoning and intellect are sorely missing. Because this has allowed to perpetuate, the only reason a current investor can make money is for someone else to bid up the price and the cycle continues.

        I however disagree on your assumption that the magnitude of bids will not be as high. We are talking bout serviceability of mortgage here not the cost of the property. The ingrained assumption that property always rises means that “investors” will bid up and the margin they get is close to the mean tax rate on their loses so much closer to 30% than 2-3%. Easily provable. Remember ongoing costs are just part of the loss. They can be written off in the same way etc etc.

      • Neville Gearless says:

        FactorFiction, I have a question for you:

        Are you it?

        Because of the recent increased negative publicity of negative gearing I figure you’re a henchman sent in by the subsidised speculators over at “propertyforum.. (?)” or the “property bulls”…
        Realising dragging out the long debunked Keating/NG quarantined myth doesnt work, now you guys are attempting to push NG is too complicated for mere economists to understand? And really that NG derives negligible benefit?

        Try telling that to 1.1million Australians who have dived into NG with gusto. If what you argue is true, then NG can be abolished without impact to any of those investors. Good luck with that mate.

        You’re wrong, it really is simple, Australia subsidises its property speculators. Nothing more, nothing less, but quite unbelievable.

        I think you and your subsidised brethren are packing shit that the government may actually cave in to pressure and abolish it. Because NG is the biggest cash cow you guys have, and abolishing would be an absolute disaster for you (and at the same time, save the nation).

      • Neville Gearless says:

        Imagine if speculators were subsidised in food industry.. sorry, I’m gonna have fun with this… the subsidy could take the form of warehousing, so the speculators can hoard grain.. (just like 100,000′s of houses are bought and left vacant – because renters are so much trouble)

        Then we can look forward to food prices soaring, the Food Industry body congratulate themselves on a “Golden” time for food production till someone taps them on the shoulder “ummm.. 25% of the population are now suffering malnutrition”.
        Imagine a food speculator amid claims expensive food makes the nation wealthy, saying “lazy oafs, they should work harder so they can save to buy enough food” or “if they scrimped and saved like my parents did…”

        Then there’s talk about abolishing subsidies of speculators (or negative gearing as the speculators prefer to call it) , so they make the claim “if it wasnt for us, no farmer would grow food” or as FoF claims “its very complicated, no one understands it, the non subsidise world is unknown blah blah blah..”. So thank us for our speculating (and hoarding).

        cheers

      • Rusty Penny says:

        If this was a boxing match, the ref would stop the fight.

      • flyingfox says:

        @RP Some are just suckers for punishment…

      • FactOrFiction says:

        Neville, let’s agree to disagree. For the record – no, I have no vested interest in defending NG. But I do like to have a deeper understanding of mechanics of how things work, not just to follow populist opinions, so I can make up my own mind. I took your example on a face value, analysed it according to my logic and derived my own conclusions. I shared the essence with others. That is all.

        From what I know now, removal of NG will not make any difference because the attractiveness of property investment is in leverage and not NG.

        You are free to disagree with my conclusions, I respect your position on this issue, but I hope you do realise the irony of the situation that the way you present NG plays exactly into the hands of people you so much despise?

        Neither mine nor your opinion will change the policy. But there will be those who will seek to understand how things work to take advantage of whatever the future holds and those who are just always angry at everything and everyone…

        If you see youself in the first category, and I hope you do, as a follow up to this exchange you may wish to share your views on the following:

        Why NG didn’t play much of a role before 1990’s. After all, it is not the latest phenomenon…

        Why, on the other hand, property prices are rising continuously since late 1940’s?

        If NG indeed leads to hikes in prices why for a good part of the decade during 1990’s, when investors loaded on investment properties, prices were not increasing by much?

        And please forgive me for not responding to your food example, I don’t know much about that industry :-)

      • flyingfox says:

        @FoF You are right about leverage but wrong about NG not affecting the situation. NG allows one to leverage higher therefore it has a non-negligible impact. We have mathematically shown this.

        As for why prices were not going up? Different set of circumstances. Residential property investment was still a new concept. CG concessions was introduced ~2000 (I think). It was only after the later that the whole concept of NG made sense. Converting income into CG.

      • Neville Gearless says:

        FoF, before 1990 people generally didnt know about negative gearing, by the late 90′s how to get rich with property books were on the best sellers list in stores around Australia. So you can put it down to education. Sydney started the high price trend in the early 80′s true enough, the rest of Australia 2002 to 2004 (Perth property rocketed 25% in 2004 and 2005!). It seems Howard’s 50% rebate on CG was the trigger for this craziness. But Sydney was always the international city which attracted all the early attention, I remember the government of the day curtailed foreign investment in property by mid 80′s because of this.

        Of course, we have established that NG greatly increases the purchasing power of an investor. Highly paid professionals I know go into it purely to reduce their income tax bill. This is why property is so distorted. This is why Perth property went from median of $141k to $480k in the space of 7 years. Rents skyrocketed with it.

        If you want a deeper understanding, I suggest this website. I found just an understanding from high school economics is enough. The classic supply & demand curve explains everything. I think you have a problem with this. Basically it means if few people want a widget, it goes down in price. If more people want to buy, it becomes more expensive. If one group of people get a gov subsidy to buy the widget, this greatly increases the number who want to buy, and the price rises. Take away the subsidy and the price settles back down again.

        Yes I know, abolishing is not a 100% cure, supply needs to be taken care of too. But we are discussing NG no?

      • DrBob127 says:

        This is a very interesting thread.

        I commend both sides for their reasoned and polite discussion.

        Keep it going …

      • FactOrFiction says:

        Travel delayed my reply for which I have to apologise again.

        Yes, let’s continue although it would be unusual to have exchanges going for more than a day :-)

        True, we are talking about NG. To recap, I agree that NG “increases purchasing power of an investor” (as you put it Neville) or that it “allows one to leverage higher” (as per your comment Flyingfox), but what we disagree on is the magnitude.

        If we leave aside my analysis, as much as the example quoted by Neville appears straightforward and leaving nothing to debate, I am generally suspicious of obvious conclusions, especially when I can’t find corroborating evidence in real life. Bear with me while I try to explain …

        What got me thinking is that despite that exceptional attractiveness of NG there are a few inconsistencies. In particular:

        1. proportions of rental stock to all housing stock remains relatively constant over many decades (eg: http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/946A456AE7DA949DCA25773700169C7B) in 1966 was 28.6% , up to 31.2% in 1991 and down to 30.2% in 2006. One would expect that since investors have the capacity to pay so much in excess of everybody else why the proportion is not like 60-70% after so many decades?

        2. We had times of easy credit before, prices rose substantially but not numbers of investors (at least prior to 1990’s). Why, if easy credit and NG was available then as well, ie in 60’s and 70’s? Education alone cannot explain this phenomenon.

        3. Then there is a question why property investment is so much more widespread amongst average income earners and not the top earners (although it may be explained to some degree by the distribution of incomes)?

        4. If we accept that indeed investors can easily pay 30% extra on asking prices why property prices were stagnant for most of 1990’s when investor numbers started growing, then suddenly jumped by 300-400% in some places in a period of just 3 years. NG alone cannot explain this.

        I am flagging only a few inconsistencies but more could be added along the same lines. And, unfortunately, this is not something that can be solved with economics or accounting 101. I know, I know :-)

        What is certain though is that, as history shows, NG on its own is not very attractive – I am just trying to understand why. In my opinion it is the leverage that makes a difference and NG is just the icing on the cake. Take away leverage (eg. in the past banks demanded like 60% LVR for property investment – if I recall correctly, it only changed in the second half of the 1990’s) and property investment “becomes as boring” as investing in bonds. Take away NG and leave leverage and the attractiveness of property investment is not diminished by much.

        I like visiting this site for light reading and exploring generic concepts rather than details (although AFG stats analysis was excellent – pity this thread is no more, and there are occasional pieces offering excellent insight into specific concepts). And there are plenty of good comments from visitors in response to specific articles :- )

        I just wish it was all less one sided but I respect publisher’s objective to keep to a certain agenda…

      • flyingfox says:

        @FoF

        Ok, lets break it down:

        1) You need leverage to buy the place. No leverage, no “investment”.

        2) At current 5Y average net returns, you need NG to give you the boost in cash flow to keep the investment afloat. No NG and many of these investments are not feasible.

        3) You need the CG discount to get a decent profit when you sell otherwise the equation is not so rosy. Therefore without the CG discount, many would not invest as the returns may not be worth.

        It is difficult to curb leverage as it tends to be the most free market based policy. Therefore the distorting policies of NG and CD discount need to be removed. QED.

      • FactOrFiction says:

        Flyingfox, now we are getting somewhere!

        I totally agree that all 3 factors act in concert but each has a different weighting in the equation. And there is a surprising twist to this story!

        In particular, first and foremost you need ability to leverage because with 80% LVR majority of investments would be positively geared from day one. In my opinion that is the main reason why property investment was not widespread before 1990’s because banks demanded a lot of money upfront.
        Since tax provisions for NG were already in place, once banking product innovation started, investors got two things working in concert, ie the ability to leverage to 100% (minimise starting capital) and ability to reduce losses by marginal tax rate (icing on the cake).

        But the clincher is that these concessions were still not enough to make property investment as attractive as it was for owner occupiers… Yes, this is what capital gains tax concession ultimately delivered – ability to compete with other market participants…

        Prior to 1990’s it made more financial sense to upgrade primary residence to more expensive one rather than to live in the same place and invest in another property. But after, it is equally attractive to either upgrade the primary residence or stay where you are and invest in another property – with minimal capital required.

        All in all, if we go back to Neville’s original example, it all makes sense (ie. there are no inconsistencies I mentioned above) only if the starting point is “590” price! That is, only if we conclude that, prices are driven by owner occupiers and that investors were finally able to participate because of leverage, NG and CG concessions.

        Thank you gentlemen, and ladies, for this exchange – it has been very stimulating intellectually!

      • flyingfox says:

        @FoF

        Exactly. This all encourages escalating prices over rental returns. Of course there is the supply side issues as well which are equally responsible.

        Thanks for keeping up the discussion and keeping it civil. One of, if not the best discussions I have participated in on MB.

      • FactOrFiction says:

        Flyingfox, good to hear we both enjoyed the conversation! Hopefully others got something out of it as well…

        True, increased competition (ie. more buyers because there is a level playing field for both owner occupiers and investors) can potentially drive prices up (economic 101). But there also have to be favourable conditions that make property investment attractive for owners and investors (this is where the complexity is).

        Shortage in supply of attractive stock you mentioned can be one contributing factor (although there are some who will vigorously dispute it exists). Poor performance of stock market or frequent big falls is another – as it tends to put people off such investments. At the same time, low interest rates affect returns on cash and since we have such a large number of cashed up people (due to a decade of strong income growth, etc.) there is lots of excess money searching for safe investments. And, as we all know, “there is nothing safer than houses” :-)

        Now, let’s get philosophical. The real question is – is it really so wrong how things are playing out in Australia? Is the system really broken and therefore needs urgent fixing or is it a temporary aberration that market forces will straighten up in due course? Do we need an intervention that can potentially skew the system in some other unpredictable way, as it frequently happens if decisions are made on populist rather than logical grounds?

        Actually, what is really the issue that needs addressing? High prices? By analogy, nobody complains when stock market goes up… “Affordability” (however defined)? Then specifically for which section of the community… Home ownership ratio? Do we really want 80% rather than 70% – what’s the benefit?… FHB unable to purchase? But ratio of home ownership remains stable over many decades, and regardless most will inevitably inherit property after their grandparents and/or parents… Cheaper rents? Then making property investment less attractive will work against it… Or maybe, just maybe, this has something to do with human nature – jealousy? “I can’t be bothered but I won’t let others to have it either”…

        You see, in my opinion, the real issue remains vague and mostly undefined. So jumping to “solving the problem” part without having a clear objective (outcome) in mind is doomed to end in a big disappointment…

        Of course, unless there is something else driving the agenda and NG is only a convenient scapegoat… To answer this question we would need to identify who will gain the most if investing in property by individuals, whether home owners or investors, is no longer viable… Something to ponder about over the rest of the weekend! :-)

  14. Willy2 says:

    Excellent point. Sellers of investment property take into account Negative Gearing (NG) and that means they can sell at a higher price. Investors are lured/suckered into the market with NG promises. They already count on that NG to juice investment returns. And that pushes up prices. And that makes real estate more expensive. And that’s why the first time home buyer is the victim of this NG.

    I would go even further:
    - EVERY taxbreak and subsidy does distort the market.
    - Don’t cap NG. Abolish NG completely.

    • Neville Gearless says:

      Its funny this factorfiction guy thinks opponents of NG haven’t done an analysis of the accounting.

      If I can afford to lose $9k/year, I could afford a $447,000 interest only loan without NG (assuming I could rent the house out for $300pw)

      With NG, I could afford a $590,000 loan (assuming renting it out for $350pw). Thats a $14,282 loss, but the tax payer is gifting me $5,282 in the guise of… negative gearing.

      Massive difference, I’ve just upped my bid by 31% because of Negative Gearing. Good luck to FHB’ers at auctions with me around…

      Of course, this is for someone in the 37c tax bracket, higher and the difference is far, far greater.

      If abolished, there’s going be a lot of desperate investors wanting to offload..

      • Willy2 says:

        I also considered to become an investor and take advantage of NG. But even with NG I still would make a loss. And isn’t the purpose of investing to make a profit, right ?

        Yes, the sums made by the folks who wanted me to sell an investment showed a positve return. I.e. when one divides a negative figure (e.g. – 200) by a negative figure (e.g. -10) then the result is a positive figure ( -200/-10 = + 20). But I still would make a loss. It would make sense if real estate was bound to rise in value in the coming years. But the australian economy isn’t in the “best of financial shapes”. Combined with a lot of baby boomers retiring and downsizing to smaller homes also doesn’t bode well for real estate.

        And one way or another that NG related loss will land on the plate of the taxpayer (me included). No thanks.

        Yes, it’s going to be “a tough ride” to get NG abolished. But when times are getting more tough the Abbott administration will be FORCED to slash or abolish the tax benefits of NG. Or decrease the rate at which investors benefit from NG. It’s coming, babe !!! Better prepare for it. Batten down the hatches !!!