Joe Hockey flat out lies on negative gearing

By Leith van Onselen

Despite being schooled last month on Q&A by the Grattan Institute’s John Daley, Treasurer Joe Hockey has once again come out in defense of negative gearing, repeating the lie that rents would increase significantly if negative gearing was unwound. From The AFR:

“If you change negative gearing then there are significant flow-on consequences from people that rent homes and that needs to be properly considered”…

“A lot of Australians have invested their hard earned money in real estate, and in doing so, they have offset the losses of that real estate against their primary income, in order to give themselves and their children some financial security”.

“At the same time, there is a very strong argument that if you were to abolish negative gearing, you would see a significant increase in rents.”

Let’s once again show why Joe Hockey is dead wrong and rents would not rise in the event that negative gearing was restricted (or abolished).

First, the evidence shows overwhelmingly that negative gearing does little to boost housing supply, with investors piling into established homes rather than new construction (see below charts).

ScreenHunter_6587 Mar. 17 08.31 ScreenHunter_6588 Mar. 17 08.31

Therefore, in the event that negative gearing was once again quarantined so that losses could no longer be claimed against wage or salary income (as occurred between 1985 and 1987) and a proportion of investment properties were sold, who does Hockey think they would sell to? That’s right, renters (or other investors). In turn, those renters would be turned into owner-occupiers, thereby reducing the demand for rental properties, leaving the rental supply-demand balance (and rents) unchanged.

And guess what? This is exactly what happened between 1985 and 1987 when negative gearing was temporarily restricted by the Hawke/Keating Government. Rental growth between this period (shown in red) did not rise nationally, with periods of higher rental growth recorded both prior and subsequently:

ScreenHunter_3791 Aug. 15 11.02

What about at the individual capital city level? Sure, there was stronger growth in Sydney:

ScreenHunter_3798 Aug. 15 11.12

And Perth:

ScreenHunter_3802 Aug. 15 11.14

However, this was due to the fact that rental vacancy rates were very low at the time in these two cities – as shown in the 1987 Cabinet Submission on negative gearing (see below table) – not because of negative gearing’s temporary ‘abolition’.

ScreenHunter_7192 Apr. 24 07.47

In the other capital cities, where vacancy rates were higher, there was zero impact on rents, which even fell in some jurisdictions (see below charts).

ScreenHunter_3799 Aug. 15 11.12
ScreenHunter_3800 Aug. 15 11.12
ScreenHunter_3801 Aug. 15 11.12
ScreenHunter_3803 Aug. 15 11.15
ScreenHunter_3804 Aug. 15 11.15

Indeed, the 1987 Cabinet Submission on negative gearing noted this exact phenomenon:

“Data for individual capital cities suggest that, as might be expected, rents have risen more rapidly in those cities where vacancy rates have been tightest. In the twelve months to March quarter 1987, rent increases in six of the eight capitals lagged the CPI“.

Now, if there was any truth whatsoever in Hockey’s claim that there would be a “significant increase in rents”, then wouldn’t rents have risen Australia-wide, rather than in only Sydney and Perth?

Blind Freddy can see that negative gearing does nothing to improve rental affordability or availability, precisely because it does nothing to boost housing supply. In effect, all it is doing is using taxpayer subsidies to push-up house prices (see next chart) and turn would-be home owners into renters – hardly a desirable outcome from a budgetary or social perspective.

ScreenHunter_6797 Mar. 31 08.09

All of which makes Hockey’s claim that negative gearing gives ordinary Australians and their children “some financial security” more galling. What about the financial security of young Australians who are being locked-out of the housing market due to the orgy of investor participation (see next chart), or are being forced to pay-off some of the world’s biggest mortgages, in part due to negative gearing? Do these people not matter?

ScreenHunter_7080 Apr. 17 08.06

If negative gearing was unwound, there would be less pressure on house prices and younger Australians would not need to devote as much of their lifetime’s earnings to pay-off a home.

Home ownership rates, which have collapsed, would also be higher, particularly amongst younger cohorts:

ScreenHunter_5349 Dec. 09 14.34

Abolishing negative gearing is a policy no-brainer which, sadly, Hockey seems intent to defend despite the overwhelming evidence that negative gearing is doing harm.

I guess this is what you get when you own multiple investment properties – unadulterated self-interest with little regard for the common good.

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Comments

      • You think? Maybe you’re over-estimating him.

        My take is that he really be that stupid.

      • ceteris paribus

        Hockey played fast and loose in his words rejecting the research of the tax Justice Network on the tax paid by top ASX companies. At best it could be said that he is skilled in throwaway, diversionary and obfuscatory lines. At worst, it could be said………

      • MB. C’mon. You don’t get to be treasurer by being stupid. You get there with rat cunning and a contempt for facts that don’t suit your narrative. He’s just repeating the mantra that everyone who negatively gears desperately wants to believe in. ‘Abolishing NG is bad…mmmkay’. (mr Garrison)

      • Nope, there’s bigger forces at work here. The likes of Abbott and Hockey have been protected their entire lives. They really aren’t that bright. They wouldn’t recognise the true situation.

        It’s their backers who are the smart ones.

      • +1 Mining Bogan. Take away Hockey’s briefing notes and he’ll be exposed. Certainly the least impressive Federal Treasurer in my living memory. The man comes across as a fool and his policies are terrible.

      • A Treasurer who does not understand basic economics. What hope do we have? I am not sure Chirs Bowen is any better – but at least he has a degree in Economics rather than being a Lawyer!

  1. 2 words…
    VESTED INTEREST.

    The guy has multiple Investment properties and his wife too.

    When he retires, he will sell off his properties then wouldnt give a damn about what happens to the negative gearing policy.

    Incompetent politician… he should of been a banker or a Real Estate agent instead.

    • LOL – Between he and his wife that is exactly what they are, but you knew that. 😉 Good people!

    • While Joe’s personal experience of growing his wealth through investment properties may have some influence on his thought processes, I believe the overriding concern of all politicians when considering changes to negative gearing is this:

      WE DON’T WANT THE BUBBLE BURSTING ON OUR WATCH

      A messy unravelling of the Australian Real Estate Bubble means one thing — a major economic downturn, and electoral obliteration for the party that oversees it. I am certain that all politicians from all sides are at the very least somewhat worried about current real estate valuations, especially in Sydney. They are not necessarily spruikers, or trying to feather their own nests, they are shit scared this thing will blow up on them, and they don’t want to be responsible any policy changes that spark a collapse, because their party wlll wear that for decades. They all saw what happened in the US, UK, Ireland and Spain and they will do everything in their power to stop that happening here.

      • You’re right. Non of the politicians want Australia to collapse under their watch.

        Even if it crashes, they’ll play it off as something minor.

      • ” a major economic downturn, and electoral obliteration for the party that oversees it”

        Watch for $10m visas. (Gillard announced $5m visas and no one flinched). This is not going to blow up. There’s literally billions of migrants that want to come here (millions of them filthy rich) and Labor and Greens are like bunnies in the headlights.

        You’ve been had Australia. It’s time to wake up and realise it’s Labor and Greens that have fed you to LNP and their corporate mates.

        Australia, YOU ARE getting what you deserve.

      • That is more or less the most accurate goal of all politicians – To be seen as the one bringin a shining light not the cause of a Dark Age. The equilibrium needs to occur and someone will wear the blame. No politician wants to stand up and be honest – We are stuck with the only light being this housing bubble, but it will just take a few cracks and before you know it the decision will be out of their hands, they just hope they have retired to that acreage so that they can pipe up in the future and blame someone else, when in reality it has been the compounding effect of doing nothing for years that is to blame.

        It is why I believe more and more people are indifferent to politics today. It is run by lawyers and not innovators or thinkers, it is run by those with a personal agenda not those who want the best for 99% of people. In the corporate world that would be akin to insider trader of one kind, bullshitting the world so that you can protect what’s yours until you out of the building to retire on your golden handshake.

      • Is the man? He’s a career politician that hung around long enough to be handed the gig.

        Can’t stand the bloke. He has the same effect on me as Gillard did. Fingernails on a chalkboard.

      • @Rich42 you misunderstood what I meant. I meant in that he’s is now “The Man” as in the establishment he was protesting against in the past. I’ve nothing nice to say about him.

  2. Are the first two charts a bit misleading? Does a newly constructed dwelling become an existing dwelling in the next ABS release?

      • UE can you explain those charts show that negative gearing doesn’t help boost new investment? That may well be the case but it doesn’t appear to me that it’s not explained by comparing the most recent quarter or month of new finance commitments in new construction to all new commitments in relation to all existing stock?

  3. With Hockey and the whole gvt there is no reason to expect any original thinking at all. They are just glove puppets for corporate rentiers.

    • Joe was at Ryan’s bar last night in Sydney, and some bloke yells to him, looking forward to your budget ya dickhead.
      Pretty funny at the time

  4. Meh – the MOST beneficial aspect to Australian housing is by FAR foreign investors who are keeping Australian house values low. According to the ANZ.

    Search domain news for following title – Macrobusiness.com.au have a crappy spam filter bought off the shelf as usual – sigh.

    australian-home-prices-would-be-higher-without-foreign-investors-anz-20150423-1mrtre.html

  5. Hockey’s a liar. He knows it. Libs will never see my vote again.
    I saw his interview on Q&A when his lies were debunked
    He reminds me of the typical real estate spruiker.

    NG and the 50% CGT concession results in HIGHER rents and a constricted rental market.
    Landlords are typically leaving their properties empty at the end of tenancies while they advertise (fish) for above-market rents. Have a look at whats happening in Perth for the past 12 months. Landlords are leaving their properties advertised for + 4 months while hanging out for a boom time rents. They can afford this because their losses are being funded by the tax payer via lower tax brackets and the 50% capital gains concession.

    This was highlighted in the AFR on April 16 right n in a story about a woman that is accepting losses “… because of the $700,000-odd capital gain she has made over the past decade…”

    Hockey must have some serious skin in the game that makes it worth his while to bullshit on this issue.

    • Hey Gump

      Please re-post your examination of the ‘mechanics’ of how the delay game is played wrt the 120 day average ‘time out’ period between renters. That added a new dimension ( and taxpayer supported loss) to the ‘game’.

      • At a very high level:
        It depends on each landlord and where each sits in terms of tax brackets. An investor can hang out for higher rents (and thus sustain long periods of nil-tenants) depending on how much loss they can sustain till they hit the lower tax bracket. (And loan serviceability) Once that’s achieved the landlord needs to get the property rented out since his losses are now eating into his unrealised capital gains, or the losses are no longer being curtailed by the tax system (they are coming out of his pocket).
        Just plug all the data as variables into a spreadsheet: (Get the tax scales off the ATO web site and plug those into a spreadsheet as well)

        Calculate the losses from NG, then the taxable income after NG and determine the “strike price” for nil rent that make you reach the lower tax bracket and loan serviceability.

        In the SS adjust the vacancy period (where you don’t receive rents) and see what your bottom line is when you hit the lower tax bracket.

        After NG comes off your TI and If your Taxable income is still too high (i.e. you have not hit the lower tax bracket after NG) and need to get it lower, then do some salary sacrificing. Depending on your financial circumstances it may be better to sal sac rather than lower your rent to reduce. (Have the Sal Sac also as a variable in your spreadsheet).. Use a combination of salary sacrifice and negative gearing to get your TI to a lower tax bracket, but you need a SS to do it to see what variables to aim for.

    • Forrest,

      Sorry, but being a renter I think you attribute too much to the average landlord when it comes to this. My experience in this is that most renters when moving on have somewhere from 2 to 4 wks to find a new place, that puts pressure on them when VRs are like they are even though they have moved from less < 1% to close to 3%. Rents are sticky and it takes time for them to fall considerably unless VRs make a big move. If you check out Perth City (http://www.sqmresearch.com.au/graph_vacancy.php?sfx=&region=wa%3A%3APerth+City&t=1) the falls are substantial, but the VR from around 2% to a peak just under 8% to a present 4.8%. Rents are down close to 30% over 3 yrs. I haven't seen this in suburbs where the VR is closer to the norm.

      • Hey Dennis.
        The reasons why rents are sticky are due to the methodology used by landlords as well as the Agents that advertise the properties.

        At the end of the mining boom, there were still properties being advertised at “Boom” prices. When more stock comes on the market the agents make an assessment of the rent based on what other similar vacant properties are also being advertised at.

        Now keep in mind the tactic noted above, that is landlords consistently advertise at “above market” prices because they can sustain long periods with no rental income due to the generous tax advantages explained above.

        So when the agent looks on-line and sees 5 other properties in the same location (& same type) being advertised at this price then this “above market” price becomes the benchmark norm.

        What the agent or landlord don’t know is the benchmark used to price the new rental is based on other properties that have been left vacant for months…because they are too expensive! .

        So another above market property is added to the growing list…and so it goes on.

        Over time while waiting for higher rents, as each landlord approaches “taxation capitulation” (i.e. when they hit the lower tax bracket or have chewed up enough of their capital gains) waiting for a higher rent, then they gradually move the asking price down. But this doesn’t happen for at least 2 months. Then the slow melt begins and the landlords slowly drop their prices each month or so, until someone takes the bait.

        This all results in higher rents and a constricted rental market.

      • Hey Dennis,

        I’d argue that the linked graph shows vacancies fluctuating either randomly or seasonally around about 6% since early ’13. Not really much sign of actual decline in vacancies without a few more consecutive lower data points.

        At the same time, any redundancies which have occurred pretty much since the beginning of the year are unlikely to be showing up yet due to notice periods and the time it takes for final pay/ redundancy cheque to run low. So there’s more upward pressure on VR’s to come most likely.

      • Stat,

        I’d agree with the pressure to mount on Perth City VRs, and that will mean more downward pressure on rents, I just don’t think LLs can game rents in the manner FG suggests, well not when VRs increase substantially and the market has had a period of high VRs.

      • Dennis, have a look at the charts that you quoted from SQM research (asking rents & VR for postcode 6000). You will see that rents rise sharply over a short period of time, but taper off over a very long duration. Despite the current VR being worse now than during the GFC, rents remain higher now than during the GFC. (Albeit they are dropping). I have been studying this trend for around 3+ years in Perth and have drawn the conclusions noted above based on the activities of landlords.

        You noted that that downward pressure mounts on rents when VR rise. That is somewhat true. But there is a significant lag on the rents falling (you can see this in the charts) and this is due to the advantages that NG and CGT concessions provide to the landlords as I noted previously. Landlords simply keep asking for boom time rents despite having no tenant for months and can easily survive the lack of income due to NG & 50% CGT break.

        The crunch will come if-when landlords lose jobs (or have lower taxable income). Therefore NG becomes meaningless. Then the LL needs to get his asset to work for him. Cash flow then becomes mandatory, rather than optional.

    • Hi Forrest,
      I agree it would work when the market has first turned, but after that they can hold out as much as they like, but it’ll do them no good. Upping your rent to cushion lower tenant offers will only work in a tight market. If VRs are normal inflating your price will see it sit there, no diff to sellers upping their price in a buyers market.

      I’d also reiterate I’ve not met many LLs/RE Agents that smart.

  6. mine-otour in a china shop

    Sometimes you lose all hope with this endless crap.

    However somebody must hold them to account using proper analytical evidence and MB is the place for me. Keep up the good work.

    Our heads may hurt with the constant brick wall banging but at least we can sleep at night knowing we aren’t ruled by bankrollers and incompetent fools who preach under the guise of economics.

  7. Every time I hear this smug buffoon open his mouth I don’t know whether to vomit or punch things.

    The other day in defence of NG he says he’s very concerned about increasing taxes, and that is other peoples money your taking. Fuck me, what about my money that’s being taken in higher taxes to prop up these speculators. What about my money that gets taken by our record profit banks should I ever actually get enough money to buy an overpriced house for my family.

    He sounds like an AstroTurfer from the comments section of one of Rupert’s titles. This guy is supposed to be the country’s fricken treasurer!!!!!!

  8. No one is listening! If Joe says rents will rise then that’s what everyone will believe because it’s scary. Hardly anyone ever looks at graphs. We property investors are the most protected group in Aus. The sooner you all come to terms with that and pretty yourselves up the sooner you will make friends! LOLOLOL!!!

      • I have a feeling that the coalition goes into meetings barefoot so that they can deal with numbers up to, and including 20.

      • The intentional lack of rigour and pressure to follow the whip really became apparent when Abbott came in, as if it was lifted from the Bush Administration.

        All the ALP need to do is paint a picture of Abbott being dumb, just like the Democrats did with Bush.

    • Sydney will probably become a “rich man’s suburb” by 2020, as in everyone there are earning 500K AUD a year households.

      In USA, when the GFC happened, New York and LA werent impacted as much since majority of the people who live there are rich.

      But its the suburbs surrounding Sydney that has potential to burst…. especially in 2017+ when a lot more companies shut down which will have an effect to financial institutions. Many people on 90-110K a year who live in suburbs around Sydney may face losing their jobs or being offered relocation as companies re-shuffle.

      TLDR: Sydney = City for rich people with no mortgages… not affected by crappy economy.

      • Sauce

        Probably true that. The rest become poor Hispanics cleaning the toilet bowls of the rich

  9. As the many go off to salute the anzacs, I am sure they are turning in their grave knowing they sacrificed their life for a populace that does not deserve it. The sheer greed, the lack of of seeing the bigger picture via advancing the country as a whole is lost upon the people and the politicians of this country. Everyone is in it for themselves, the greed is good mentality must die out before there is any real progress.

    • ” Everyone is in it for themselves, the greed is good mentality must die out before there is any real progress ” … WTF ??

      Capitalism at work, I am so thankful for that … the greed is promoting the progress … yes, yes, yes.

      • Actually progress is delivered through nation building, while greed seeks to tear strips off it to satisfy personal indulgences – it is absolutely unequivocal.

        Social programs on the whole tend to benefit society as a whole, while capitalism tends to feed off that structure like the parasitic organism it is. The truth is that like all good parasites it has convinced its host it will die without it, classic Munich Syndrome.

      • Funk I agree with you. However we need real capitalism – not the sort of thing we have now where certain groups, e.g. the Banks (but there are a whole variety on both the Left and right of the political and economic spectrum), get a grip around the throat of the economy (and government) and all the other capitalists are thrown under the bus in service to these groups.

      • @Glenn ; @flawse

        Yeah, got to hand it to you two … both right … very good points – both of you, truly.

      • Mate you can be as sarcastic as you like – these are unequivocal facts. Just because you have no interest in challenging your cognitive bias and instead have decided that the first thing that made sense to you as child is what you will stick to for the rest of your life does not mean it is even remotely correct.

        It simply means – you have failed to continue progress down the logical chain of progression of ration, reason, logic and facts.

        The idea that capitalism is the bedrock of creativity, that it is from there that entrepreneurial spirit of the industrious creative striving for profit and reward is a great story for kids and infants – and then you move on and grow up from such insanely rudimentary, base, totally lacking in nuance or intellectual rigorous considerations.

        A fantastic analogy is religion – as children we are taught that God created everything, heaven, hell etc – then we CONTINUE to question these simple ideas and grow as intelligent thinking people and realise that it is just absolute crap.

        There are many among us who totally fail to make that next logical progression and are forever stuck in a state of infantile thoughts and respond to those around them with the same type of derogatory sarcasm as you are displaying.

        You need to start realising that, you need to start becoming aware of how you are perceived outside of yourself to others because you are totally, completely and utterly wrong and stuck in an infantile loop the most feckless and gormless kind.

      • @Glenn
        Seriously, mate, never intended, neither am I actually being, as you unfortunately falsely state ” sarcastic “. If that’s the way it appeared, I apologize. All good.

  10. truthisfashionable

    As has been mentioned on this site many times… Lets hope no changes are made and that the current system crushes itself. Only then will real change be able to be made. The election isn’t that far away, and a lack of achievement will be the liberals undoing anyway.

    • mine-otour in a china shop

      Much as I hope the self destruction doesn’t happen, I know deep down that this will how things will pan out with a market driven greed implosion. Of course phase 3 is the taxpayer is left to pick up the pieces and us all being told we need to all work harder and put our shoulders more to the wheel.

    • See Reus above, RE is more protected in Australia then Koala Bears, as a result its all we have left, there is nothing that will not be done to protect RE
      I’d say, if your not tied to straya, get out of here and live somewhere else, I would if I could

      • More protected that koalas eh?

        I wonder how many RE agents and investors have chlamydia.

      • I disagree with this.

        Nothing will be done to ameliorate the issues however I think there will be huge outcry to something like a new or increased first home owners grant.

        The writing is on the wall – the screaming from the bleachers of industry advocates tells us that. The TRUE canary in the coal mine will be bankers, politicians or RBA governors selling their IP’s

        THAT is where we all must watch with hawkish eyes,.

  11. The Budget is out of the limelight and the Lib’s can afford negative gearing again.

    Truth be told, its the capital gains discount that has to go.

  12. As a die-hard capitalist I cant help but think that while Greed may be the problem Greed is also the solution.
    So how does this happen? ….well basically a force called productivity transforms businesses from profitless to profitable and before you know it investment money follows flowing into ventures that were previously regarded as worthless. You see in my mind the solution to our housing affordability problem requires that we develop something even more outrageously profitable than housing, in other words we must create a new focus for our greedy capital.
    So for me this focus on Negative gearing is simply a distraction because without alternatives investments ALL capital is attracted towards the one performing asset class and the ensuing bidding war guarantees that prices get driven ever upward…

    • Ohhhh Yes! That IS the point – there has to be a better investment alternative available. Within the current structures there is no such thing!

      • No other investment can compete because housing is guaranteed via things such as Negative Gearing. Remove the artificial pillars holding up prices and other investments will look attractive. Its not about lifting other products to be on the same level as housing, its about bringing property down to reality with all the other investments.

        The problem is that the artifical pillars can’t be removed because Aussie battlers believe it is their right to have them in place and to do anything that effects property adversely is as un-australian as ISIS.

      • truthisfashionable

        This is a very good point… The Woolies and Coles equivalents in Asia are starting to really focus and invest in start-ups (with the hope they come up with a great product that they can utilize i’m sure) but it is quite interesting to see this taking shape.

        I read the other day that someone is again trying to make western Sydney a start-up / technology hub. I think its doomed to fail yet again because there is no big financial backers willing to assist, the price of land makes any office capable building have high rent and most people can’t afford to quit their existing job to make a go of a startup because all the expenses are too high..

        If a small-ish town with access to the NBN, a large amount of cheap land and willing councilors put forward a proposal to become a ‘silicon valley for Australian start-ups’ I think it would have a much higher chance of becoming what the country needs. Assuming it could attract the right financial backers (Dick Smith i’m thinking is a good possibility).

      • @truthisfashionable
        Yea the idea of a high tech startup locating itself in a regional town where employees can afford a great lifestyle on lowish wages has been tried before in Australia but it simply doesn’t work.
        you mention Dick Smith well last I heard he lived in Repton (a small town about 20min drive south of Coffs). Lets suggest he tried to get something started in Coffs….what would need to happen
        – Relocate key employees from Sydney, Melb, Singapore….etc
        – Find great schools for their kids (trust me key personnel are VERY concerned about their kids education) (Coffs has 4 public High Schools with all 4 ranking in the bottom 20% of NSW state)
        – Somehow guarantee those joining you that they wont be out of pocket if the whole venture flames out (in reality this means you have to pay their Sydney mortgage ….now why was it I located in Coffs?)
        Keep younger staff entertained (you’ll find that unless you surf or fish or are an OAP, then coffs is place you dont want to live, and your family definitely does not want to live.

    • +1000000000 CB. The problem is that government have rigged the system to suck capital into a zero sum game. We need a system where capital seeks out a positive sum game.

      Some people would call this leftist claptrap.

  13. I don’t think that is a lie UE (that rents would increase significantly if negative gearing was unwound). Its just common sense – currently investors are totally relying on capital gains – if thats not possible in the best Ponzi sense, then it would have to be income… And no – this is not a defence of NG.

    You are correct that the brief period in the 1980’s (1985-87) for rental growth in Sydney and Perth was probably more related to the general market conditions and the run up before the 87 crash… and had little to do with NG. Melbourne and South Australia and others likewise cannot be used as evidence that NG does not have an effect, because they were related to local debt conditions, and both suffering debt crisis that ultimately took down several state banks.

    IMHO, it would be dishonest to use them as evidence that NG does not affect rents, because of course they do… if there is not capital gain, one has to go for yield (whether the rentier can afford to pay is entirely a different story). That is the whole basis for investing.

    The picture is far more complicated that you are suggesting, and you are only presenting one side. Personally I think NG (most of the time) is a silly idea… and I have no vested interest one way or the other.

    • For it to not be a lie, anyone renting out a place would have to put it on the market and find out what the market price is, and then tell the the prospective renter that since they are they are negative gearing it they will give them a discount and they won’t have to pay the whole rent that they agreed to pay. Frankly, I have never heard of any landlord that has done that.

      • I have read it a couple of times – and I am a pretty simple kind of guy, but that makes no sense!

        I am saying if your investment property is making a loss, and you cannot claim it elsewhere, you will have to stem those loses by raising the rent. Whenever it comes up for review. With the current leaser or a new one… That is just a simple and fundamental business concept. Investment = return… no return, no investment. Landlord sells quickly to stem losses.

      • What I was trying to say is that no one gives a discount because they can negative gear a property. They will charge what they can get regardless of whether they can negative gear it or not. So if negative gearing is removed the rent will not be raised as the landlord is already charging as much as they can get.

    • Are you saying there’s a fair bit of headroom in rent prices? RBA has slashed to the bone and that huge saving was passed on to renters in the form of… rent increases, albeit somewhat slowing ones per UE’s recent posts. I don’t think we’re far off from peak rent, particularly as the welcome headwinds come about.

      • Yeah – I think we are at peak rent, especially some quantitative surveys show that incomes in general are rising less than CPI and living costs…

    • “if there is not capital gain, one has to go for yield (whether the rentier can afford to pay is entirely a different story).”

      Can we then surmise that the price of the property has to fall in order make yields attractive?

      • Also what effect would the removal of NG have on properties that are owned outright or positively geared? Can we assume that a significant proportion of rental properties are owned outright or positively geared? If NG is removed then the ability of the negatively geared landlord to raise rents would be limited by competition with properties that are owned outright or positively geared (this is assuming that rental vacancies are high enough to enable competition between landlords).

      • Prices will fall thats inevitable – and yes, primarily to a point where yield makes sense (suggesting very big falls indeed). NG will have no effect on that fact. NG may help build the bubble, but it is not responsible for it.

      • NG will have no effect on that fact. NG may help build the bubble, but it is not responsible for it.

        It is atleast partly responsible. The other part being CG discount. This promotes the CG model of property investment over the yield model. However, CG is likely to have a lrger impact as it will affect both gearers and non -gearers.

      • Bubbles may start with a good reason, but we soon forget about that as our animal spirits take over. At the top of the market, we are not buying because of any NG benefits, we are buying because we are afraid of missing out… that is the classic sign of any bubble top.

        The truth is, NG hasn’t really played a role in this bubble for three or four or even five years now. Its a bubble for a bubbles sake..

    • So, Researchtime, you’re saying that a supplier of a service can simply raise its prices every time its costs increase and there will be no impact on demand for its service? I didn’t think things really worked that way.

      The far more likely outcome in my view is that demand would be unresponsive, the economics of real estate speculation would dramatically reverse and would be felt every month in the hip pocket of all those “battlers” who are so busy denying the latest 1 or 2 generations of their fellow citizens the fabled “fair go”, leading to a lot of motivated sellers hitting the market at once, sending prices down and yields to a more appropriate level.

      But maybe that’s just me. I’m just a bitter renter.

      • Service or asset? What is the current value of a Ferrari F50 I wonder? The answer: well that depends…

        I am a rentier too. Sometimes I would like to trade up – other times not. But lets say that things got tough, and my income fell substantially, yes I would downsize (or move further out more likely).

        That is what makes a market. The above analysis in fact deals in simplicities and only attracts a certain view from the contributors. The reality will be far more complicated.

        The biggest users of NG are Mum’s and Dad’s of the middle class (hate the term class – cannot think of an alternative). They have leveraged everything to capture the rising bubble, and as always, have hopped on too late. The wealthy are/will be fine, typically using little or no leverage, on more wealthy homes. The Mum’s and Dads have typically gone for outer suburbs on some metric related to distance from the CBD. As soon as they have equity in one home from capital appreciation, they use it to get a second home. Some of these people earning $50k pa own six or seven homes, the losses are simply enormous, far out-weighing their nominal income, solely relying on capital gains, which they inevitably leverage up upon.

        The NG argument I think is almost fictional. Maybe some do it – but lets be honest here, buying an investment home to notionally cut income tax is not the real reason why you buy is it!!! We buy on hope… hope – we all get rich, and with rates so low, and lending so flatulent, why bloody not… jump in boys, water is fine…

      • @RT

        Don’t confuse assets with luxury positional goods. A house in point piper is arguably both. One in Paramatta is likely neither.

      • I haven’t – A house in Parramatta is now <$1m in many cases – with virtually no yield. An F50 is not a luxury item. It is an investment – and a very good one at that…

        Its not black and white out there FF. There is the whole spectrum of colour in between. If you are smart, you will appreciate that…

      • Flying fox.
        If you are going to give Parramatta a kick, at least spell it correctly. I have a luxury pad overlooking the mighty Parramatta river, purchased off the plan in mid 2013 for a song. I have a nice young couple renting since I took the keys at start of the year at what I consider about 80% of market value (i.e. the low end of the market range). The trade off is I like them, they take good care of the place, and I don’t need an agent to manage the place so I have cut out the real estate agent.
        Gross yield is 4.7%; unrealised capital gain (“equity mate”) $150,000 +.
        The unit is both a luxury and an asset, and is in Parramatta.

      • Not sure you’re getting my point RT. Provision of accommodation is a service, right? (BTW, I’m a “landlord” myself, though I despise the term.) The service is sold to the consumer/customer, the “tenant”.

        If the cost of provision of that service goes up, either the provider charges more for the service or his/her bottom line deteriorates. Your OP implied that it’s just common sense that prices would be raised.

        What I’m saying is that this isn’t so simple, for a “landlord” or any service provider. I’d say there’s not a lot of room for people to actually pay more rent. Wages aren’t moving north at any great rate. At the margin, people would exit the tenancy market – for example, move back home.

        So in this version of events the service provider is stuck with the losses and can’t claim them back at tax time. The speculative enterprise is revealed as the money pit that it is and you have hordes of people trying to offload while they can still escape with their shirts. Utter carnage would ensue.

        That’s the future that the Lib/Lab oligopoly can see and it’s why they’re each determined that it doesn’t happen on their watch.

      • @Tian

        The unit is both a luxury and an asset, and is in Parramatta.

        Parramatta is not a luxury positional good. You pad might a luxurious one….big difference.

      • @RT

        An F50 is not a luxury item. It is an investment – and a very good one at that…

        Think about it for a sec mate. It is an investment exactly because it is a luxury positional, not to mention scarce, good.

        While there is only one Sydney Harbour, there are other places that do compete quite well. If you want an F50, well …

      • McPaddy – I do get your point, as I have mentioned above, I think living costs are growing faster than incomes. So increasing rent is probably not an option for many, and a marginal option for most, because there are big costs involved in moving, kids in school, etc.

        As for your conclusion, that is inevitable IMHO.

        I know some big property holders, with substantial holdings, they are not remotely interested in NG, as they have investments and not a wage. They started (often) with a 30% holding, and although I thought prices expensive then, they have proved me incorrect, and are probably sitting of 60-70% equity now. They will probably be OK in a correction. In either case other investments can be called upon in needed.

        The vast majority of Mum’s and Dads have 15% equity or less, typical yields are around 2.9% for Sydney (Colonial data – a week old). Net yields are probably less than 2%. And to be honest, they don’t care about NG either – they are just in it for the capital appreciation, hoping to flip in several years. many in fact are on interest only loans.

        its the second group that will sell, and crash the market. And it will affect more expensive homes too, as they often grow faster and fall further in cycles. But its a relative game. Even if the wealthy lose 50% of their value, they will still have enough income to follow through – Mum’s and Dads, however, will be utterly wiped out…

      • @RT

        And to be honest, they don’t care about NG either –

        Errr I would think not. They need NG for the cashflow.

      • i should point out – that after a crash, there will be big ST effects and LT effects (another failing of the analysis above). I think in the short-term, rents will have to rise (more rentiers competing for smaller numbers of homes), and there will be far less places to rent, as landlords exit the market.

        In the LT, there will be of course a new equilibrium. maybe less places to rent, but maybe more people marginally owning a home? Unlikely IMHO? Rents will be higher relative to house prices, yields higher, lower interest rates (as seen in US and UK for similar reasons) – house prices substantially lower (even if only in USD terms).

      • FF – no in many cases, cash-flow is actually negative. Many are borrowing just to pay bills etc. Its just a big ponzi bet… seriously, NG has played virtually no role in this bubble for years.

        Not adverse to NG being cut (although I can see it could be a very useful tool at a certain stage of the housing cycle – maybe its just me, but I could see myself playing that game in a couple of years if it is still around maybe) – I just think many are looking in the wrong direction. Its a non-issue… for the above reasons.

      • “Maybe some do it – but lets be honest here, buying an investment home to notionally cut income tax is not the real reason why you buy is it!!!”

        Don’t be too sure of that. A relative of mine, who earns more than double what I do, is doing that on the advice of her financial advisor.

      • @RT

        no in many cases, cash-flow is actually negative.

        Which would be more negative if not for NG ….

      • I mean negative, negative, in that their losses are far, far greater than their income would ever be… and they are borrowing to put food on their table because all their income plus some are servicing interest repayments. This is far more common than you think!

      • Who knows???? its a case by case basis isn’t it… there are heaps of jurisdictions where similar things occur and people borrow to the hilt!!! NZ has a massive massive property bubble (a fair bit bigger than ours actually), and RBNZ Assistant Governor John McDermott made a dovish speech last night in which he did not even mention housing!!!!!

        “At present, the Bank is not considering any increase in interest rates. Before considering any tightening in monetary policy we would need to be confident that increased capacity utilisation and labour market tightness was generating, or about to generate, a substantial increase in inflation.”

        Inflation has been low in New Zealand for a number of years. At present, the outlook requires a period of supportive monetary policy. Our approach, as a flexible inflation targeter, is to support ongoing sustainable growth in New Zealand that should help raise costs and prices in order to achieve our inflation target. We will not react to temporary deviations from target, as this will only generate unnecessary volatility in activity.”

      • But yeah – its completely irrelevant isn’t it???? Its all about interest rates, and has been for years effectively (with massive Foreign investment of course). NG has been around for yonks and has absolutely nothing to do with current market conditions – its all about leverage. its simple math actually. Cutting NG will have an effect, no doubt. How big – no idea, but I suspect it would raise rental rates at a bare minimum and maybe knock 5-10% of investment housing values, maybe. Cutting foreign investment into housing will have a far greater effect, thereby increasing supply, maybe as much as 10-15% onto the market – but the big one would be raising invest rates, which would be ground zero… and you would be looking at 30-40% declines, realistically, over a normal interest rate cycle.

        And let us not forget Japan – with NG has had 24 years of uninterrupted house price declines… which just goes to show NG is a nothing if there are not other factors involved.

      • @RT

        It is the combination of NG and the CG discount that promotes the current model. You need both. So cutting either one will have a large effect as NG allows you to be in low yield scenario and CG discount allows for the income loss to be converted to a CG gain at a lower tax rate…it is simple maths and logic that somehow escapes many.

      • Don’t confuse it – yes CG may have something to do with it – especially family homes… NG has been around for decades, and is structural and in no way is responsible for current conditions. Marginal impact only.

        Call it is what it is – its a bubble, pure and simple. The reasons how we got here are irrelevant, NG especially in this instance. I will be honest with you, I think you are barking up the wrong tree… if interest rates fall again May, we will go up again, even if NG was dropped in that instant. Thats what bubbles do…

        Its not unreasonable to expect another 12-18 months of house prices rises (15-25% collectively), especially with foreign investment, future lower interest rates and a substantially lower AUD.

        At which point – we will be toast…

      • Don’t confuse it
        It’s not rocket science mate! Prices started shooting up when the CG discount was introduced. Ofcourse interest rates play a part but the real culprit in the current model with investors outbiding OO is the combination of NG and CG discount. Get rid of either and then it is only about interest rates.

      • No it was the lowering of interest rates… from very high and unusual levels, historically. Have no doubt CG made it even more attractive.

        Not entirely disagreeing with you. the only criticism is not how we got here, but what the future effect will be as a result of the crash… we are talking semantics only.

        And there always other effects, general economic conditions, unemployment rates, exchange rates, demographics, etc, etc, etc. Nothing if life is that simple.

      • @RT

        No it was the lowering of interest rates

        Biggest drop in rates was ~95-96. The CG legislation was introduced in late 99. Guess when the Sydney market took off?

      • My understanding (and I stand to be corrected) was that Sydney had a massive run up before the Olympics, and just after, and was then probably flat for a decade after… ironically, many Aussie swimmers (cannot remember their names of the top of my head) who bought investment properties around that time made significant losses when they sold around the 2004-2008 region.

      • It’s not rocket science mate! Prices started shooting up when the CG discount was introduced.
        Wow! I didn’t know that the capital gains discount was introduced in Sydney in 1987. Tell me more.

      • Exactly… shame you can’t do that with your mortgage. The only option for most is that they have to sell quickly to limit losses.

      • +1

        A little fact that can be mised though, as was the case here in SE QLD during our little 2010/11 correction. As prices fell the spruikers started trumpeting improving yields, particularly in Brisbane, and of course the MSM went along for the ride.

      • Yup. Without that epic Chinese stimulus restarting the QLD mining boom plus the epic capex Brisbane’s RE market would have been toast. Even with the Chinese stimulus prices fell in real and IIRC nominal terms, albeit briefly.

        Which worked nicely for me and my family. Because we bought in early 2012, pretty much at the bottom of the market, we own a nice little postwar three bedder on the bayside. Great place to bring up a family but prices are easily $100K higher in our suburb now. It’s lunacy but looks sane in comparison to Sydney and Melbourne!

    • [email protected]

      I gather you rent RT?
      Would you cop higher rent?
      I certainly wouldn’t, I would vacate.

      • I think I would have to weather it, it would cost me <$4,500 just in removalist costs to move within Sydney – and kids in a really good school… its not that easy. If it was I would have left ages ago.

        But never say never.

    • God Bless this army of caring Landlords for subsidising the poor rental class, we salute you!

    • ‘Whether the renter can afford to pay is an entirely different story”

      I think u just answered your own thought bubble.
      Market rents are a function of supply and DEMAND. It’s not a single sided equation.

    • Your premise appears to be that landlords are currently charging much less rent than they could be.

      That seems highly questionable.

  14. Our Treasurer deliberately misleads the country on the need for NG reform ….
    ….and nothing but deafening silence from our oh-so-prudent Reserve Bank Governor.
    If Stevens was managing the bubble he would immediately and unequivocally correct the buffoon.

    • mine-otour in a china shop

      Glenn only tells it as it in New York or London to reassure the foreign investors we are on top of it all.

      Back in Oz he is in BBQ mode telling us all that there are no risks, no bubbles and it is all sustainable and financially stable.

      • I’d love to crash one of those BBQ’s at his water front home in Sylvania waters one day – with a bull dozer

  15. Abolish Parliamentary Privilege!
    The days of outright lies of our “leaders” being used to justify abhorrent policy are long gone. We are far more educated and informed these days.

    • “We are far more educated and informed these days.” Blimey Andy – you invoked in me a cease breathing/choking response. One thing I’ve found is that is a mistake to judge the world by taking oneself as typical!

      • Sure thing flawse … sure thing !!!. Cannot judge the world taking anyone as the typical.

      • 🙂 Nice one Alby! I need a bit of ‘reality’ like your comment every now and again. That’s what I was meaning re Andy’s comment about being better educated and informed. I’m 67 years old (I know i got ya beat ! 🙂 ) and I’ve never seen, in that time, the Aus population more ignorant, profligate, shallow and just plain stupid. The level of thinking that television is pitched at is just the absolute pits.

  16. A lot of Australians have invested their hard earned money in real estate, and in doing so, the government will offset their stupidity in order to give themselves and their children some financial security”.

    Just needed a rewrite…..

  17. Joe’s just doing what he’s been groomed to do. Hands up anyone who doesn’t think that what we are about to face is serious….
    “When it gets serious, you have to lie” (Jean-Claude Juncker – former PM of Luxembourg)

  18. The reality is that there is not much he can do about it right now… I’m sure he realizes Australia (especially Sydney) is in the midst of a massive property bubble.
    As previously noted on MB, it can be likened to a house of cards. Any type of policy reform can bring the whole thing down.
    With this in mind, all he can really do is to lie about the effects that negative gearing has on property prices since it’s introduction (inflates prices via shift in demand curve), and continue to deny that a ‘bubble’ even exists (lazy analysis).
    The reason for this is quite simple really. I suggest it has a lot to do with an individual’s ego.
    He obviously plans on living in Australia with his family long after his time in politics is over, does Joe really want to go down in history as the person who ‘sunk’ Australia?
    Joe’s neck is on the line, and you can bet your bottom dollar the he and Tony will continue to kick this can down the road for as long as they can!

  19. This has been all too easy for LNP.

    Come election time, they simply have to bring out the three word boat cliches and it’s all over for Labor and Greens. Well done Greens.

    Next election we’ll get less humanitarian refugees, more corporate pain on Australians. Greens and Labor couldn’t be dumber with what they did with borders WHEN THEY HAD THE POWER. Labor and Greens now get to sit in the corner and talk about NG but have no capacity to do anything about it.

    Just way too easy for LNP.

  20. ” Here’s Luci” (RBA) in 2012 to the Mortgage Association
    Back then, she was ‘free to move about the cabin’. ( Solid advice imo)
    http://www.rba.gov.au/speeches/2012/sp-so-230212.html

    “If I may use an analogy: we know that the key to maintaining a healthy weight is to have a healthy diet and to exercise regularly. Yet we find it hard to avoid temptation. And so it is with maintaining a healthy mortgage market. It is always tempting to ease lending standards, and dress that up as responding to competition or giving the customer a better deal. It must be hard to resist the disappointed customers who just want to borrow that bit extra to purchase their dream home, especially when the loan officer is also trying to make budget on new loan approvals. But in the experience of the United States, we have seen what can happen when lenders yield to that temptation.”

    • Surely not the same Luci who said before the GFC that people should stop worrying and learn to love the bubble?

  21. Excerpt : https://au.pfinance.yahoo.com/our-experts/michael-yardney/article/-/27318614/why-be-so-negative-about-negative-gearing/ :
    But negative gearing is not just for the rich
    However the assertion that all negatively geared property investors are ‘ugly wealthy Australians’ is simply unfounded and incorrect.
    According to 20011/12 A.T.O taxation records 1.267 million taxpayers claimed negatively gearing against their property investments. Interestingly, these investors predominately do not come from the wealthy end of town.
    Indeed, 70 per cent of negatively geared investors earned less than $80,000. Less than 6 per cent were in the top tax bracket.
    Fact is using the benefit of negative gearing investment has allowed many ordinary working class Australians to invest in property and to take control of their financial destiny.

    • Indeed, 70 per cent of negatively geared investors earned less than $80,000. Less than 6 per cent were in the top tax bracket.

      And how many of those actually got there due to deductions?

    • Which is worse for the macro-point of view.

      Those 70%, if accurate, are much more volatile, once the interest rates move up, some on the fringe will likely panic. Then once unemployment rolls on, ~tens of thousands from 2016 and 2018… panic on a more grand scale.

      Bank policies are so corrupt… someone out there has 2+ INTEREST only mortgages on Investment properties…. actually make someone “a lot”.

      People after quick profit scheme, there are so many of them that they’ll ruin the economy….. Banks laughed though… all those multi-billion dollar profits a year for the last decade.

    • “Fact is using the benefit of negative gearing investment has allowed many ordinary working class Australians to invest in property and to take control of their financial destiny.”

      Yes.

      – By speculating.
      – By participating in the economic ruin of the country.
      – By dodging tax.
      – By denying those who come after them the same opportunity.

      Awesome outcome.

  22. “Joe Hockey flat out lies on negative gearing”
    He is doing what politicians do best.

    How can you tell a politician is lying ? His lips are moving.
    What do you do if you see a bus load of politicians going over a cliff ? Nothing.

  23. 1 Timothy 6:10 King James Version (KJV)
    10 For the love of money is the root of all evil: which while some coveted after, they have erred from the faith, and pierced themselves through with many sorrows.

    • “For God so loved the world, that he gave his only begotten Son, that whosoever believeth in him will believeth in anything. – Hitchens 3:16”
      ― Christopher Hitchens

      • Isaiah 40:12 King James Version (KJV)
        12 Who hath measured the waters in the hollow of his hand, and meted out heaven with the span, and comprehended the dust of the earth in a measure, and weighed the mountains in scales, and the hills in a balance?

        God knows the wisdom of man, it is vain. Do you not know that there is life after death?

      • “The rich kid becomes a junkie,
        the poor kid an advertiser.
        What a tragic waste of potential.
        Being a junkie’s not so good either.”

        TISM

  24. What a grub. But this is the government Australia wants. One with a head in the sand worldview, illogical arguments and unjustifiable claims. Sounds like the majority of punters out there! Disgraceful

  25. It doesn’t much matter. With the decline in national income because of commodity downturns, the chance of being able to maintain unproductive tax breaks over the long term is zero. The external account, and our credit rating, will both be smashed.

    It’s just a matter of time. As others have said, Joe and Tones are in can kicking mode, desperate to ensure that the correction doesn’t happen on their watch.

    Me…. I’m patient. I can play this game for another decade or more if need be.

    • How about slashing and burning the CSIRO and then handing 4 million to a “climate change denier” – Abbotts certainly upto the task.

      Or how about you call in the god damned Chinese Ambassador and hand him a globally PUBLIC dressing down to try and look tough in domestic politics and then shovel shit in his face and claim Japan is our most important trading nation – only for China to publicly state there will be consequences and now we can’t sell our natural resources any more.

      Julie Bishop – EASILY the worst foreign minister any country has ever had.

      Australia accused of crimes against humanity – Morrison.

      Australia now ranked 90th on earth and slipping fast in broad band speed – Malcom.

      I could go on and on – this is by far the worst government this country has ever seen.

  26. Do you think that Joe Hockey MP or any of his staffers read Macrobusiness, let alone care about the litigiousness comments here? Or be brave enough to defend negative gearing on Macrobusiness, I don’t think so.

    • Couldn’t do that here. What if the electorate wants something different from what the government wants? What if the electorate really do want to abolish negative gearing when it’s helping keeping real estate prices inflated? What, and let prices fall when politicians each own several properties?

      Imagine if we had a ballot asking if we wanted to continue having huge immigration. We could all guess what the answer would be. But that flies directly in the face of our wonderful Ponzi scheme.

      And what would happen if we had a say on the amount of foreign investment going on? And selling off all the farmland to foreign buyers? Hell, that could even pop the bubble.

      Nah, not going to happen here.

      • Yes, I guess any form of direct democracy is not available here. We’re not mature enough for this:
        http://en.wikipedia.org/wiki/Direct_democracy#Switzerland

        Most western countries have representative systems. Switzerland is a rare example of a country with instruments of direct democracy (at the level of the towns, cantons and federal state). Citizens have more power than in a representative democracy. At the federal level, citizens can propose changes to the constitution (federal popular initiative) or ask for a referendum to be held on any law voted by the parliament. Between January 1995 and June 2005, Swiss citizens voted 31 times, on 103 questions. During the same period, French citizens participated in only two referendums

      • Direct democracy is possible here. It’s called a mandate.

        Most people have no idea what a mandate is and waste their time on ineffectual petitions.

        The highest authority under the Commonwealth Constitution is the people of the Commonwealth – certainly not some bums in Parliament!