Negative Gearing for the chop?

I can’t quite believe what I am reading, but here it is from the SMH:

The Gillard government has sounded out unions over steps to cool Australia’s housing market, with measures that range from a new sales tax for investors sitting on large property portfolios, to curbing the popular strategy of using negative gearing for multiple properties.

Senior federal Labor figures and key union backers are believed to have discussed the plan as a way to tackle housing affordability. Details of the proposals, which would apply to home owners with two or more investment properties, have not yet been developed. The talks come before a tax summit planned for later this year.

A spokesman for Treasurer Wayne Swan declined to comment. The Age believes no plans are in place for the coming federal budget.

If implemented, the moves would mark some of the biggest changes to property tax in nearly two decades, particularly in tackling the politically thorny issue of negative gearing, which provides billions of dollars of tax breaks to millions of Australians.

But to reduce political risk, the changes have been designed to target only the wealthiest property owners, leaving those with one investment property untouched.

One change believed to have been discussed is for owners of multiple investment properties to pay a levy of 4 per cent of sale price at the time of sale, on top of state-based taxes.

Another proposal is to scale back the negative gearing tax benefit from its 100 per cent benefit as the number of investment properties rise.

The proposals came as Mr Swan yesterday warned of a difficult budget against the backdrop of natural disasters and softer near-term economic conditions. He cautioned a return to boom conditions would stretch the economy’s capacity over coming years, but without the revenue surge.

Pure speculation, more “softening up” or a real plan? Maybe this is a deliberate leak to gauge the backlash? Who knows?

But if true, it certainly flies in the face of those who expect the government to step in to save the housing market yet again. As I discussed yesterday I see little evidence that the government is looking to implement some new form of housing stimulus. This reads to me like an attempt at a slow deflation. A courageous decision.

Comments

  1. I hope they scrap it all together, it is quite disgusting to give billions to speculators to outbid wannabe homeowners on existing dwellings.

    • I don’t believe they need to scrap it alltogether, just the ability to do it on existing properties, and only allow it for newly constructed buildings.

      If you think about it, the main issue we have with NG as it now stands, is investors competing against owner occupiers for existing properties, driving the price up and arguably forcing some of those potential buyers into renting those same properties back off them. ~90% of investor dollars go into existing properties, which blows the argument that investors are ‘providing much needed rental property’
      out of the water. So if we restricted it to new construction only, hopefully it would create extra supply – a good thing for lower prices as well as jobs, and remove most of the investor competion with homeowners for existing properties.

      • Agreed; reducing speculation on existing property while adding incentives to increase the overall housing supply would hopefully bring the prices down. Which unfortunately is probably why the government will not do it.

    • Pity you can’t tune in to 2GB over there. If this news filters thru to the Bogan world, it should be an interesting listen today, with multiple IP “Aussie battlers” calling in and going berserk.

      • No I am not Michael of Sydney.
        I just think that if they try to reintroduce a cut to negative gearing while the housing market seems to be at its upper limit, property prices will fall and investors will leave. This will decrease rental supply therefore higher rents will emerge.

        You don’t invest for taxation purposes, you invest to make a profit.

      • ‘property prices will fall and investors will leave. This will decrease rental supply therefore higher rents will emerge.’

        So-called investors might leave, but they won’t take their houses with them.

        As one leaves, another owner-occupier takes their place. This will decrease ‘renter’ supply in line with ‘rental’ supply.

      • @ Michael

        When an investor sells, there’s a buyer. They have to come from somewhere. If not from the pool of renters, then from the kids staying in their parents’ spare bedrooms.

        But if you bring the parents’ spare bedrooms into the equation, you also have to admit that renters too have recourse to this extra-market shelter, and can use it to moderate demand for rental housing.

      • Two years is not a good indicator when you’re talking about averages. It is obvious it was doing more harm than good.
        I think if you pull billions of dollars out of the economy when it is running out of steam someone has to pay and it is usually the consumer.

      • I wonder how renters in 100 other countries are coping without negative gearing.
        .
        We are different?

      • Real wealth doesn’t disappear.

        The real wealth here is the physical structure. Ownership ascertains about who receives the financial gain from it.

        An owner-occupier receives the utility, and would be expressed as the imputed rent.

        An investor receives an icnome stream.

        Either way someone receives the benefit of this real wealth.

        An investor being petulant over the retraction of negative gearing won’t cause the house to disappear. They can only dispose of it at a price a buyer is willing to pay.

        The gravy train has come to a halt.. choo choo!

      • James of Adelaide

        it won’t put pressure on rentals because all the houses you speculators own will either be for sale at a reasonable price for those renters who wish to purchase, while the rest will remain for rent… they won’t just magically disappear.

      • Michael I am a young Australian and it is in my best interest for house prices to fall, they are at ridiculous prices.
        They should be at 3, 4 times yearly income not 9, 10 times.
        Make no mistake of it this is good news.

      • Michael: “prices will fall and investors will leave. This will decrease rental supply therefore higher rents will emerge.”

        Question. What happens to the rental property when our ‘investors’ leave & prices tank?
        Answer1: It gets bought by a renter.

        Rental supply will decrease as will the number of renters (currently potential home buyers sidelined by NG).

        The only way rentals will decrease relative to renters is if current ‘investors’ dynamite said ex-rental as they leave.

        Unlikely don’t you think?

      • Michael, rent is determined by income. House prices are determined by how much you can borrow. Half of all renters already pay more than 30% of their income in rent. There are more bedrooms per house and less people per house than ever before. Surely a more plausible option is that renters will start sharing houses or moving back with parents rather than rents continuing to rise? Desperate first home buyers will beg their mates to move in and help cover the mortgage. The trend of the last decade to more bedrooms and less people will reverse dramatically.

        I agree with you, nobody invests to make a loss. However negative gearing is most relevant for “investors” who make a loss. When was the last time you ever heard of a positively geared IP? I can’t find a single IP in my area that would turn a profit after expenses, yet still people buy them. Ergo, the “investors” are in fact speculators, and really are buying for taxation purposes.

        By the way using ABS statistics from the 1970s to 2007, after deflating by the CPI average Melbourne rent fell by 0.21% per year over a 30 year period. I don’t know why you imagine the coming years will be any different.

        I’ll give you my prediction for what it’s worth. If this measure comes into being in conjunction with the current flat/negative capital growth there will be a stampede. Every owner with more than one IP will be desperate to sell before it is introduced, and immediately prices will crash. (Have a look at current inventory and tell me which way you think it’s headed). For that reason I strongly suspect this simply won’t happen. However if it does, not only will you not be able to put the rent up, rents will fall as the economy tanks. They won’t fall as far as property prices, but they will fall. Now that IS consistent with history: have a look at rents in the 1990s recession. Or current rents in the USA. Or Ireland. Or the UK. Germany. Italy. Spain. etc etc etc etc.

    • Rents barely rose over 2009/2010 (on a national basis) even with a 40% increase in the cost of interest rates (5% to 7%) for investors buying with a variable rate mortgage.

      I always hear when X happens the rents will be going up, but have yet to see this occur with rising interest rates…

      Regardless even if rents do go up there would have to be a 100% increase in my rent (and the rent of many other Australian) before it would come close to the absurdly expensive cost of buying.

    • You can put your rent up to whatever you like! But tenants only have “X$” to spend – they can’t get a mortgage to pay rent. So when the $1000 p.w., or whatever, has been allocated, then it’s just a case of finding an address to suit that amount – any address – even if it was yours, it doesn’t have to remain so.

      • Oh…and don’t forget. If you don’t have negative gearing to ‘pay’ some of your outgoings when your tenants move on and leave your place empty, you will have to bear ALL the costs. Add that up, and see if it would not be better to DROP your rent, just to hang on to a source of income.

    • That’s your choice Michael. But if the stats in the SMH story are correct, for every one in your situation (> 1 property), there’s roughly 3 others (1 property) who wont have to put up the rent to cover the cost.

    • That’s your right I guess. But don’t forget there are plenty of places to rent right now.

  2. I can’t see how the property developers will let this pass. Expect to see TV ads saying how it is ‘Un-Australian’ to put another ‘Great Big Tax’ on multiple investment properties on TV real soon.

    Policywise it’s a good move. If they’re politically savvy they’ll link it to a lower tax rate to income earned from bank deposits. This will greatly reduce Australian banks’ dependance on foreign capital.

    • I’d say that too. There are too many taxes on everything right now. If the government wants to do something I genuinely believe it should be to get rid of negative gearing for all properties, other than new ones and ones already negatively geared.

      And I especially love removing tax on savings interest. There is no reason the government should get a slice of what I earn simply for not spending anything.

    • Dunno about that one. Developers and other real estate types aren’t exactly held in high esteem by the community. Resources tax, pokie restrictions etc only affect a few where as house prices and rent directly and indirectly affects everyone. There are more supporters for doing something than there are for doing nothing.

  3. The initiatives whilst welcome smack of complication and therefore what other effects. Why not simply strengthen the rights of tenants eg 12 months notice after lease expiry,minimum 5 year lease breakable by the tenant only with due notice,requirements for LLs to give rent credit for approved improvements and required maintenance. Regardless of -ve gearing benefits LLs under that system would not be investing for capital gains.

    • You’re missing the point. The government can no longer afford to forego the revenue lost to NG. It’s not about helping buyers, it’s about depleted government coffers.

    • Because conditions like that are completely ridiculous for casual landlords who *don’t* have a stable of investment properties.

      If I’m an expat living overseas (or, heck, just someone who moved to a different state or town for work), renting out my home (that I intend to return to and live in) to (barely, if at all) cover the mortgage while I’m gone, effectively having to know five years in advance when I’ll be returning is outrageously unfair.

  4. This is fantastic news.

    If I was a one man Australian Treasury aiming for a soft landing, the following policy would apply.

    Step 1 – Effective 1st of July 2012

    1 IP = 100% tax break
    2 IP = 100% on first, 50% on second
    3 IP = 100% on first, 50% on second, 25% on third
    4 IP = Same as above, but the 4th property has no tax break.

    Step 2 – Effective 1st of July 2015

    1 IP = 50% tax break
    2 IP = 50% on first, 25% on second
    3 IP = same as above, but no tax break on third

    Step 3 – Effective 1st of July 2018

    1 IP Metro = 50% tax break on new dwellings only. This will only be applicable for the first five years after dwelling completes construction.

    1 IP Regional/Country = 100% tax break on new dwellings only. This will encourage investor dollars to build up regional centers instead of focus all development in the big cities.

    • Better not to scrap negative gearing, just change it so that you can’t offset it against income – i.e. you can carry the losses like capital gains losses until you make a profit to offset them against.

    • that would keep the accountants busy – which is the opposite of good tax reform.

      Any good tax reform should sack a wide proportion of accountants involved in taxation – and put them into productive work (either as financial officers in a business or into other productive businesses)

      Given that the vast majority – as explained by Leith – of negative gearers only have 1 property, this mooted reform won’t do much, except take the “property ladders” spruikers out of business.

      Now that is a good thing.

      next step – AFSL for Real Estate Agents and property advisers?

      • Actually Prince, the fact that it would be harder to use properties as a leverage on additional properties means that housing loses its speculative nature. It would become a long term wealth tool only.

        However as you would be aware from commodities speculation adds “value”, and I would estimate that this is worth a 20% fall across the board.

        I doubt our highly leveraged banks can take that sort of hit.

    • It’ll be much simpler to cap the maximum percentage of tax a person can claim negative gearing on. It will have the same effect while making it a lot easier to implement.

    • You múst be a public servant Jason. Try administering the compliance on that sort òf arrangement.

    • We are talking about pollies here.
      .
      We have a Tax “Summit” coming up in October. So why not kick the can further down the road?
      .
      Meanwhile, business media pundits will pretend to seriously debate and discuss as to what is the right reform.

  5. First step is to bring it in for the multi-property owners and then expand it in future for all investment property owners. Jason I like your approach, however as someone keenly interested in seeing a nice tumble of prices I would like implementation in a shorter timeframe – eg. The current governments term.

    Deep T: AFSL for rea’s – now that would be a miracle.

  6. The main thing that has changed in the last few months is the spreading of knowledge that policies like negative gearing and first home owner grant have a big part to play with higher house prices.
    Only 6 months ago hardly anyone thought that something like the first home owner grant only helps vendor have more bidders and sell for more. Now more people know this every day, young voters are not happy and the government has to pay attention like it or not.

    • Very true. Today it is easy to independently get the facts on whatever, including NG and the inflationary FHB Bribe and its flow-on effect of increasing RE prices by multiples of the ‘bribe’.
      Thanks intertube, thanks forums and sites like this. Gen X & Y increasingly seeing through the scam that is Aus RE.

  7. On the other hand…

    Isn’t this a further relative preferencing of small-holding (ie one property only) amateur speculator landlords, who don’t give tenancy a second thought, over multi-property institutional investors who might taken a more professional approach to their business?

    And doesn’t it further encourage your devoted negative-gearist to borrow and spend up even bigger on their one property (‘I’m going for the premium end of the market’), rather than building a portfolio of several lower-price – and hence lower rent – properties, which is what low-income renters really need?

    • Interesting point. Clueless mum and dad investors might go for one big investment, less diversification = bigger risk.

    • I should add:

      Don’t get me wrong – negative gearing on property needs reform. But I don’t think it needs these reforms.

      How about allowing it for new construction only, and for x number of years.

    • Erhh, negative gearing is applied to personal income streams.

      Institutionals will run it through c company structure, based on yields, not capital gain.

      Conceptually negative gearing is a good idea, its puts the cost of capital on a before-tax footing to equalise with corporate stuctures.

      But it has fueled speculation, and its minsky feedback loops. combined with 50% CGT concession, it was a recipe for disaster.

  8. I like Jason’s idea of knocking it down in stages, but like the Prince I think having different levels for 1st property, 2nd 3rd etc, different rates for metro and rural etc just adds complication and inefficiency.

    Whatever we move to should be neat. I can already picture investors juggling mortgages to make sure the one with the highest interest payments gets the 100% deduction etc. Simplicity is key.

    Andy!,you’re not alone in wanting a housing crash, but I think we all need to acknowledge the unmitigated disaster that would bring. It won’t just be a case of homeowners losing equity and the rest of us pick up some bargains, it would be carnage. We need to cross our fingers for a steady deflation IMHO.

    • A housing crash might be a disaster, but to me it would be highly MITIGATED by the cheaper house I could buy. Therefore a crash would not be an unmitigated disaster.

  9. If the government is serious about coolikng off house prices they need to be a little bit more proactive and not just focus on demand but also on supply. If the government can enter a market on the demand side by fiddling with tax laws and tax rates and, through the Reserve Bank, interest rates and the money supply, then perhaps they should also enter a market on the supply side as well.

    This would mean that the government (at all levels, but mainly Federal) would actively build properties for the purpose of selling on the open market. With an increase in property supply, prices are more likely to cool off. Moreover, government built and owned housing could be refrained from sale in order to prop the market up if it ends up crashing. This would reqauire counter-cyclical economic behaviour by the government since it would involve selling properties when prices are high and holding back on sales when prices are low. The government could even choose to purchase private properties on the open market.

    Of course the goal of such an ongoing intervention in the housing market would be to maintain price stability and to prevent booms and busts. We don’t want overpriced housing but we don’t want a crash either. In a sense such an intervention would be akin to monetary policy except it is aimed at a specific market rather than the entire economy.

    Nevertheless, affordability should be a major goal. House prices at the moment are ridiculous and a correction is needed. Two metrics would need to be used to determine fair property value. The first being the rent/house price ratio which, according to The Economist, shows Australian houses to be 50% or more overvalued. This metric is similafr to the p/e ratio used in the share market. The second ratio should be a wage/house price ratio to ensure that house prices do not overshoot the owner’s ability to repay it.

    Of course such an intervention would be a radical departure from policy since the 1980s, yet in essence it is simply another way to maintain price stability by intervening in the market. Similar interventions in other parts of the economy (eg the share market) could also be made to prevent boom/bust cycles in specific markets.

    • Perhaps government could start choking demand and poking supply of property. The opposite of what they have done for the last few decades.

  10. I think a big driver for negative gearing has been the big tax breaks AND rapidly rising house prices – we all love paying less tax and getting rich ‘whilst we sleep’ (lazy investing).

    The amazing tax breaks involved in investment property are pretty much the only option for most employees to reduce their tax, so no wonder it is so prolific compared to many years ago.

    I support tax benefits for true investors but not speculators, with similar targets that Jason mentioned.

    I would also like to see law that gives owner occupiers priority over investors/speculators for purchases because they are not on an even playing field and I believe that owner occupiers are more important. The current ‘market price’ mechanism is a failure. I don’t have any suggestions yet.

    Deenominator: I hear what you are saying, but the last decade has been nothing short of horrible (so any change is welcome) and the possible ‘carnage’ you speak of is just fear of the unknown IMHO – if u have proof of this please share.

    If anyone ends up with negative equity it just meant they paid too much or were lent too much and should therefore take responsibility for contributing to this bubble and cop it as they 100% deserve.

    • It’s not fear of the unknown, its fear of turning into Ireland. What do you think will happen to consumer spending if house prices fall and you get widespread negative equity?

      No matter how much you think people “deserve” it, we will all suffer if it crashes.

      • Agree – but we are about 10 years overdue for a ‘suffering’. We have had it too good for too long in this country to the point where there are a whole generation of younger Australians that have no concept of reality.

      • I don’t believe its us “younger Australians” that are negative geared to the eyeballs and that have spent the last 20 years getting rich off a housing bubble.

        Keep your recession-we-have-to-have to yourself Jase, I don’t need to be taught a lesson.

        Agree we need to remove negative gearing, agree house prices are insane, don’t agree that we need to turn it into a moral crusade against people who “deserve” to lose their homes and entire wealth base, or to teach young people about “reality”.

      • All suffer?

        I’ve been suffering as a renter due to government largese propping up unviable, over-indebted bogan boomers and their fetish for investment property.

        I’ll probably only have two children instead of three because of the financial hardship imposed on me because of the last 20 years.

        Don’t tell me I have to suffer, I’ve paid my dues for this mess.

      • All suffer? Probably in terms of a per capita basis, although some will obviously suffer more than others if these tax changes are made or there is a housing downturn.

      • What do I think will happen? I don’t know for certain obviously but I would like to find out. If I had to guess:
        1. I will smile and cheer for at least 5 minutes because home ownership may become a reality.
        2. (Irresponsible) People who have over leveraged will end up with negative equity and will need to deal with it like any other investment that goes down. If that means reduced spending by them to pay down debt then so be it.
        3. (Responsible) People that have not over borrowed will have less of that theoretical “equity mate” but be otherwise much unchanged in their spending behaviour.
        4. Banks may cop losses for their over-lending which may come in the form of putting holds on mortgage repayments, or writing off portions of loans, etc.
        5. Housing will no longer be a speculative asset, and rental accomodation will only be provided by true investors (positively geared property).

      • Sounds great. Would I like that to happen? Yes. Do I think that is likely? No.

        I think you’re underestimating how much the rest of the economy is tied to housing prices.

        I hope you’re right and I’m wrong. Have to say i’m feeling a lot more positive about the whole mess after a boozy easter lunch..

      • Haha yes that’ll do the trick – Might try that one myself on Sunday. Time will tell what happens with our disgraceful market anyway.

  11. I would suggest the following

    July 1 2011 – 50% for 1IP if existing building -100% for new build
    July 1 2012 – 100% for new build IP
    July 1 2013 onwards – 50% for new build IP

    • I think that short time frame would only happen if the Government was forced to make drastic budget cuts in the short term and the property market had already tanked (aka. current state of US).

      You guys don’t feel the need to provide incentives for investors to build more dwellings outside the capital cities?

      As the baby boomer population retires, there are many benefits to provide incentives to leave the capital cities. Investors providing rentals, that retirees can live in regional and rural communities could actually increase the timeframe of infrastructure being required. Regional towns may need a few more doctors and hospitals, but they would not require schools. And you remove a lot of the unproductive dead wood from the inner ring of the cities that leads to a higher quality of life for working Australians.

  12. The fact these ideas are even being discussed by government will have a negative effect on house prices now with many investors deciding to get out now before the imposition of any tax.
    it also strengthens the message to potential home buyers that holding off right now might be a good thing as if a tax is introduced it will have a negative effect on prices…so why not wait for a while longer?
    my forecast is that the stats for Q2 and Q3 will show an acceleration of the trend downward in prices in response to this jawboning.

  13. I think it’s turned a ‘Monopoly game’…of
    Spend..
    That finds it unable too breed at home..
    In more ways than one…cheers JR

  14. I think some of us are suffering from the Stockholm syndrome – the property market has held the entire economy to ransom for so long, now we actually don’t want the blackmailers to be hurt along the innocent folk.
    .
    I say – send in the SWAT team.

  15. Why the focus on the number of IP’s? What if someone had a single 2 million dollar IP rather than say five $250,000 IP’s? Could limiting the number of IP’s allowed skew speculation into more expensive houses… Or is there a limit in the amount of tax deductions per property or something else that currently favours multiple IP’s?

  16. I tend to agree with Chrism – higher tax on people with more investment properties essentially inhibits specialisation and economies of scale in the provision of rental properties. It is far more efficient to have one landlord owning ten properties (so she can be familiar with her rights and responsiblities, establish a good relationship with property managers, repairpeople, minimise body corporate correspondence costs if all properties are in the one building etc) than ten landlords with one property each.

  17. The problem with a tiered strucutre on the number of properties is you encourage people to get creative and hold properties in different ownership structures: trusts, companies, husband, wife, joint, adult children…

    The ultimate is for deductions only against capital gains and investment income, not employment income – simple, no nonsense.

    However capping the amount an individual can claim as a tax deduction for investment related expenses would also be simple to implement (and tinker levels in future years).

    Both serve the purpose of government not missing out on revenue and having to introduce another tax (or cuts in spending to important areas)

    • “The problem with a tiered strucutre on the number of properties is you encourage people to get creative and hold properties in different ownership structures: trusts, companies, husband, wife, joint, adult children…”

      Trusts can’t distribute losses, so negative gearing doesn’t work unless offset by a shedload of possitvely geared/non-geared yieldinging assets that are in excess of the cost of capital.

      Investment companies can’t claim 50% CGT discount.

      I can see husband and wife one each.

      “The ultimate is for deductions only against capital gains and investment income, not employment income – simple, no nonsense.”

      It will hit hard on any loan taken against small unit securities. A lot of managed funds will not take kindly to such a proposal (unless the treatment was quaratined to property)

      “However capping the amount an individual can claim as a tax deduction for investment related expenses would also be simple to implement (and tinker levels in future years). ”

      Well that’s class warfare.

      • “It will hit hard on any loan taken against small unit securities. A lot of managed funds will not take kindly to such a proposal (unless the treatment was quaratined to property)”

        fair point. Two sets of rules never desirable. Class warfare it is. Where non-property gearing is subject to the same cap of claims against employment income (to balance and simplify)

  18. A point missed is that the system cannot afford to pay for new infrastructure and sustain the existing ones. How many of these new estates have public transport services, schools and so forth been dropped?

    • It can be afforded, it can always be afforded. Read some of Bill Mitchell’s work.

      People confuse real wealth with the nominal veil of exchange that lies over the top of it called money.

      Look at all our existing infrastrucutre, look at the late 19th/early 20th century nationa building. How was it afforded in a less sophisicated financial system?

      • Yes this is true, but at what expense for the country with more borrowing?

        It was afforded by investing and borrowing at a different time. In relation to housing, there has been an oversupply for years.

        Apart from profit, there is no need to expand with what we already have, and try to expand the economy with locally produced goods, and make Australia the country it once was.

        We dont need more housing for now.

  19. You need cheaper housing, and you need lower land costs per se, otherwise your economy is stuffed long term. “Land” is one of the 3 factors of production. Why would you inflate the price of the “urban land” part of it 9by rationing), which is where ALL the economic growth in the world is occurring?
    A few “too many houses” now and then is a piddly little price to pay for low and stable land prices. Look at the alternative, now the first world has been fooling around with urban growth constraints for long enough.
    Do a bit of maths – 1,000 too many homes at $180,000 each – or 6 million homes inflated in average “value” from $180,000 to $400,000. This is a no brainer.

  20. Honestly, i still think that the govt will do “what they reasonably can”, to “save” the housing market – which will be a lot, with “good” justification, given the economic and social fallout that comes from a tanking house market…”for greater good”, etc, etc

    Just my thoughts.

  21. Get rid of NG, every other country manages quite well without it, whats the problem?

    Different here?

    Reminds me of the ‘Pubs couldn’t exist without pokies’ argument, look around you FFS, look at some of the countries that had pubs and housing markets for a few hundred years before Australia was invented.

    • Other countries have other policies in place which do not necessarily make more sense.

      For example, in The Netherlands mortgage interest is tax deductible. This obviously pushes housing prices upward. There have been some cautious attempts at abolishing the policy but the people just won’t allow it… political suicide.

      An example of a REALLY good policy imo is the existence of a large, high quality rental housing scheme. This means there are always affordable options available so there isn’t a rush to buy property. Coupled to this are broader tentant rights which allows people to feel at home in a rental property. My grandparents lived in a rental their entire lives and enjoyed it a lot.

      The situation in Oz is a very complex one. You’ve got negative gearing, rentals provide no real alternative, urban sprawl makes it hard to find affordable land within commuting distance, there’s the social pressure and pension schemes were (are?) not sufficient to ‘guarantee’ proper income after 65… just to name a few.
      On a positive note, that should mean government has lots of options to improve housing affordability. 😛

  22. Is it possible that there actually a bit of common sense coming out of the Australian Government? Shock, horror.

  23. Endrortsonhousing

    My jaw will hit the floor if the Government does anything substantial about negative gearing or indeed on any measure to make any real inroads regarding housing. The only thing that might make them care is if they can run the numbers in such a way as to show that it is a net vote winner to come up with some negative gearing change. I think that this could be an rich vein of votes if they play their cards right but I really just can’t see them getting serious about it – the demographics of senior members in the Government is such that they simply do not comprehend the depth of feeling on this issue in the younger cohort of voters.

    On a completely unrelated topic, it is interesting to see that Open Australia has a list of MPs with their register of interests. It seems very common for MPs to have investment properties and relatively less common for MPs to invest in shares etc:

    http://www.openaustralia.org/senators/

    • Agreed, “show that it is a net vote winner to come up with some negative gearing change” and it is a done deal.
      Of course, if that were decided, then there would be a short interlude before announcing to the general public.
      The reason, so that our pollies could unload their rental portfolios.

  24. I read all your comments with some level of interest. There are a lot of opinions being put forward as fact without much substantiation. I don’t think there are any certainties in this issue. It will be a matter of suck it and see. Make the change if they make it and then see where we sit five years from. I would be interested to review some of these comments then. Many of us (and it could well be me) would have egg on our faces.

    All that aside, here is my take on it as an interested party.

    Does negative gearing lead to an increase in the average house price? Most likely. It’s simply supply and demand. More buyers in the market lead to higher demand which leads to higher prices.

    Does negative gearing lead to more stock on the market? Most likely. Investor build houses that they rent to people for profit. Or they buy existing houses leaving less stock to choose from encouraging other market participants to build.

    Does one factor outweigh the other? Most likely. Which one? I don’t know hence my suck it and see comment above.

    Here is what I do know though. I am a negatively geared property investor. I have recently purchased my second property making me one of the evil landlords so vilified above. If negative gearing is abolished I will leave the market, or at the minimum not purchase any more properties. My second investment is a house and land package in a new estate. The developers tell me that 30% of the properties in this estate are bought by investors. If those investors leave the market it effectively results in 30% less new dwellings being built in that estate. Even if first home buyers take up half of that slack you still have a net result of 15% fewer dwellings being built. I find it hard to see how this can have a positive on reducing house prices.

    There are many ways for the government to bring down house prices. Perhaps they could release more land thus reducing the price of land overall. Or even better in my opinion they could encourage more medium to high density housing around our major capital cities. While unpopular with some this results in more dwellings per metre of land, it results in an increase in the number of affordable properties on the market (units not houses), it makes the provision of services such as public transport easier, reduces our reliance on cars and lowers our greenhouse emissions all in one.

    Or maybe we could look at all three plus all the others I haven’t even thought of. We could take a balanced and considered approach to housing affordability that utilises a number of different strategies to tackle the problem from a number of directions.

    Or we could just slag off the landlords because they are an easy target to sell politically.

    Two final points.

    1. The generally accepted principle in our taxation system is that expenses incurred in the generation of income can be claimed as a tax deduction. This is the logic behind the deductibility of interest expenses. If we wish to abolish negative gearing are we also going to look at abolishing work related expenses as tax deductions? By the same logic a small business should not be able to claim its rent as a business expense.

    2. There were a lot of comments above about the abolition of negative gearing meaning investors would have to focus on positively geared investments. If this change was brought positively geared investors would also leave the market as despite their investment “turning a profit.” The only reason they are able to turn this profit is because the investor can claim a deduction for the interest on their loan. Positive v Negative gearing is related to the income received from the investment and has nothing to do with the level of deductibility of the interest.

  25. What about negative gearing for investing in shares? Do we drop that as well? Surely we have to if we do it for property.

    What people don’t realise is that all property investors won’t suddenly sell their properties sparking a collapse in property prices. All we’ll do is raise rents against any loss of benefits. Its a very simple equation.

    And with no incentive to buy more properties there will be less to rent. Its the system we have, either jump on board and benefit or sit on the sidelines and be poor forever. Just don’t whinge about it.

    The only way any of you first home buyers will be able to afford a house is if you lower your ridiculous expecations or earn more money. Thats howeveryone else did it or are you somehow different?

    Oh thats right no one is ever different, we are all the same, we MUST follow the US despite the fact we don’t follow their employment rates or interest rates but you know we’re all the same.

    You got a chance to pick up a bargain of a fool who is scared by negative publicity. Go get ’em because it won’t last much longer.

    • Nice rant Ryan. It’s a shame your claim that rents will rise is completely without factual basis. Last time negative gearing was quarantined – between 1985 and 1987 – there was no impact on rents. I suggest that you read these articles for more insight (here, here and here).

      “Jumping on board” now is the worst advice possible. Buying a negative cashflow property when prices are expected to stagnate or fall is a recipe for disaster.

      • You have a whole 2 years evidence. Oh well game over, why bother even aguring then? Trust me, landlords will raise rents if they lose out. We’re already on tight budgets as it is just like everyone else. At the moment I rent my property out lower than market rate because I have great tenants and with the current system I can afford to. Take away the system and I can no longer afford to. Its as simple as that.

        At some point you have to be contrarian. We’ve had 3 years of nothing, the scare is over. Anyone looking at facts and economic indicators can see whats coming. We’ll have another boom before a potential drop.

    • Ryan, in which bank can I get a 500k loan @ 7% interest to buy shares AND then only keep the shares as collateral with the bank?
      .
      Apples and oranges..

      • No but I can borrow against equity in a home loan to invest in the economy. Further to that I can offset my cashflow losses against the ridiculous high tax I pay.

        Why is this such an issue?

    • There is nothing wrong – per se – with borrowing to finance an investment.

      What is an investment: something that makes money – positive cashflow.

      Shares can be an investment because the underlying companies produce cashflow (well you better bloody hope they do….) that is usually given out with dividends – or better – reinvested and reflected in increased equity per share over time (which should usually – usually – be reflected in a higher share price on the secondary market)

      So borrowing some money to buy shares can be a good thing, if done sensibly.

      Sensibly = LVR no greater than 50% or so. Why so “low” – because there are so many risks with shares and major parts of your portfolio may not pay dividends so you suddenly have no cashflow if you are reliant upon them to service your loan.

      This risk is reflected in the margin applied to share lending – currently around 9 to 10.5% to borrow. Although I disagree with the maximum LVR’s used within a lot of products, the underlying principle is you are assisting your investment with some debt, not basing the entire investment on the tax advantages built within the debt.

      “The generally accepted principle in our taxation system is that expenses incurred in the generation of income can be claimed as a tax deduction.”

      True – but wheres the income? Show me the money Lee.

      If you’re not making an income year in year out, you are not generating income, therefore by your principle, you are not making any claimable expenses at all.

      • See how much positive cash flow you get from dividends when you borrow to buy shares. But its still an investment.

  26. I’m one of those landlords that owns 6 investment properties. The labour fiscal pygmies like to characterise us as a money hungry hook nosed shylocks.

    The reality is most of us shylocks own our own business and work 7 daya a week. We don’t invest in property for the tax deduction… that is just the icing on the cake.

    The reason you invest in free hold property is related to having control and being able to use the equity for cheaper finance.

    We started out with capital gain as a secondary motivating factor but very quickly with the rapacious state government land tax impositions and obscene capital gain stand and deliver taxes you learn that cash flow is king.

    The argument that property investors are stealing first home aspirants dreams is laugable. Your enemy is greedy government, labour unions and the corporations in bed with both labour and liberal governments. The greens are the fairies at the bottom of the garden.

    20% of the population create 80% of the revenue and wealth and most of that comes from small business. I often hear people moan about having nothing. They live for today and spend everything they earn.

    Have a look at what the average person spends eating out every day. Is it any wonder they own nothing.

    Envey is a cancer that in Australian terms is the tall poppy syndrome. Try being accountable for your future.

    When I came to this country in 1973 there was less than 2% unemployment, very little government assistance and if you didn’t work you were a bludger.

    Today we have both labour and liberal governments promising things they can never deliver on, wake up be the master of your future.

    • So your supplying a roof over peoples heads AND providing jobs. You really are the worst kind of person!

      • Capitalist Pig

        I’m worse than that. The properties we control are leased to businesses. We started in the early 90’s investing in houses but soon discovered that was a mugs game with the landlord having to pick up the rates and land taxes.

        We changed tact and bought commercial properties as the tenant originally had to pay the single unit land tax imposition as well as the rates, all outgoings, such as building insurance etc.

        Then along came the Victorian robin hoods better known as the (hard) labour party. These numb-nuts changed the law that made the landlord responsible for the land tax and legislated that you could not pass it on through rent increases…. ya right pull my other leg.

        Real life example? I had one property that in 1999 I was paying $800 land tax and the robber baron state thieves had it jacked up to $8000 by the 2005.

        Righto I said so the single unit land tax on that has gone up 10 times what it was worth so I added another $25,000 p.a. when the lease was up for renewal. Has nothing to do with me putting the rent up ?… because of the land tax? oh no certainly not!! Mr valuer if you say my property is now worth Z and your going to charge me 10 times what I was paying when it was worth x then my rental yield must be Y.

        Now for joe blog who is sucking on a tinny while having a punt on the footy he don’t care, the labour party will look after him when his boss lets him go because he doesn’t have the cash flow to continue paying his wage.

      • That’s a pretty narrow minded view in my opinion Capitalist Pig.

        Would you prefer to pay more land tax overall and less tax on company or sole trader earnings? Surely we would all be better off as a society if productive enterprises (which you claim to have) along with employees were taxed less? Then your business would have more cashflow to pay the ‘tinny drinking punter’ and keep him off the dole queue.
        I am not against people investing their capital to improve their lot – heck I invest in companies on the ASX all the time – but the companies need to be a viable investment (need to generate cashflow and profits) rather than rely on tax benefits to survive. Property investors are merely speculating on a future capital gain and expect the ‘tinny drinking punters’ to subsidise them along the way. Commercial property has been closer to the type of investing that I am talking about with less speculative capital gain (than resi property) and higher income from commercial tenants but they should pay a higher land tax (along with all property owners). Check out ‘Boom Bust’ by Fred Harrison to see what I mean.

        Regards

        Nick

      • Thants nice Nick “Your not against people investing to improve their lot” but your quite happy for our government to expropriate my capital that I have accumulated with after tax dollars mmm.

        I choose to invest in property and you choose to speculate in the share market but I should pay more tax than you.But of course when you put your money in the share markets craps shoot your not expecting have a capital gain?

        You have no control when you speculate by putting your money in the share market. The goldman sachs of the world can and have fleeced a whole generation.

        For 20 years our super went into two buildings we operate our businesses from and the investment advisors and our accountants lectured us about diversifying by having a fist full of paper equities.

        Why is it that the bank will now lend me 80% each time I purchase another commercial building without a margin call?

        It seems the banks think like us “the share market is no place for orphans or pensioners”. Sound familiar? the expression dates back to the great depression.

    • Nice rant. But I have heard this blame-the-gen-y-and-their-lifestyle rant before.
      .
      We are a consumption driven economy. If there is less consumption, as you would prefer, there will be less number of small businesses still running.
      .
      Aren’t restaurant owners small business people too? Do you hate them so much that you want people to eat out less?
      .
      Please sort out all your internal contradictions before you rant again.

  27. Why out of everyone here no-one has even commented on the recent relaxation of the laws restricting foreign ownership of residential housing recently implemented by the Labor government to prop up porperty house prices to avoid a US style meltdown? I believe (admittedly without stats evidence) that this is one of the single biggest reasons property has recently surged. We are getting a lot of people buying housing that i see competing with me to purchase. Surely removing this additional unwarranted competition from our markets and increasing supply, forcing local councils to rezone in inner city areas would go a long way to deflate property without the sudden 20% drop you all seem to be salivating for. I for one would not like to see the economic consequences of a knee jerk reaction despite being able to purchase a property at a reasonable price (if i still had my job).

    • If a few houses sell for fewer dollars today than they would have sold for last year WE WILL ALL BE ROONED.

  28. If income and property taxes were CUT, people could eat out more and have more of there own money from being STOLEN. A GST of 10% is enough and then cut the “public service” who fix type writers and watch pornos all day and hang out at the TAB and they can find a job in the new productive sector. Hong Kong supposedly has a good model and they have trouble deciding were to spend the minimal flat tax take.

  29. It always amuses me that people who contribute little or nothing to the tax base are happy for those who do pay to pay more tax.

    The solution is not imposing more taxes but rather to make the taxes low enough so that no one is bothered with paying the tax because they are too busy making money and it is easier to make more rather than spend time trying to limit their taxes.

    The amount of taxes levied on property from state taxes levied when land is developed to GST on the materials used to build to the GST
    on the sale of the new property to the stamp duty on the sale of the property to the Capital Gains on the sale of the property to the inome tax paid to the workers who build the property and the income tax paid if the property is rented prior to sale.

    Every time I hear a pollie talk about tax reform I puke because I know its another con.

    Remember how by broadening the tax base the GST was going to solve the states problems and they were going to reduce useless taxes. Ya pull my other leg, You now pay tax on tax of petrol and Insurance premiums.

    Good one bozo