It’s Friday and it has been a long week, so it’s time for a good laugh. Today in Dad’s Army, “Madometer” Adam Carr has penned a piece arguing that negative gearing is a non-issue since it is hard to record a rental loss in today’s low interest rate environment:
In our new ultra-low interest rate world, negative gearing isn’t especially beneficial. Sit down and do the sums. It’s actually not that easy to sustain a large loss on an investment property. Indeed, any losses claimed on a geared property are likely to be quite modest. Certainly nothing to persuade — or dissuade — a would be investor to buy property.
You can see this by looking at some simple math. Take a look at the table below…
Now obviously investors have to throw in other costs: body corporate – what, about $1000 per quarter on average in Sydney, insurance, rates, agent fees etc and these vary considerably. Yet, even with those costs, an investor is still likely to break even with an LVR of 70 per cent and making money on any ratio lower than that. On average…
Only at an LVR of 90 per cent or higher, would an investor have any reasonable amount to take advantage of negative gearing…
Rather using some bogus stylised example, I prefer to look at the actual ATO statistics, which showed that total net rental income declared in 2011-12 was a loss of $7.9 billion:
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With negatively geared investors claiming an average loss of $10,900:
While it is true that interest rates have fallen since that time – with discount variable mortgage rates 4.8% currently – does the Madometer seriously believe that negative gearing is virtually non-existent?
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As a case in point, discount mortgage rates fell sharply in 2009 hitting a low of 5.1% – not that far above current levels. And yet aggregate rents were still a loss of $5.25 billion in 2009-10, with the average negatively geared investor declaring a loss of $9,200.
The current situation is also made worse by the fact that rental yields – particularly in the investor hot spots of Sydney and Melbourne – are anaemic (see below RP Data table).
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And the unprecedented volume of investors leveraging into property:
If anything, the ATO Statistics for 2014-15, when they are eventually released, are likely to show an explosion of negatively geared investment and record rental losses, despite the fall in interest rates.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
