REIA persists with negative gearing lies

ScreenHunter_43 Jan. 24 08.38

By Leith van Onselen

Repeat a lie often enough and it becomes true. This appears to be the approach taken by the Real Estate Institute of Australia (REIA), which has issued yet another media release warning the Government not to “meddle” with negative gearing, claiming that it would lead to rental shortgages and push-up rents:

The Real Estate of Australia (REIA) says it agrees with the new Grattan Institute Renovating Housing Policy report that a major overhaul of housing policy in Australia is needed, but differs in what needs to be done.

REIA President Peter Bushby says, “We strongly agree with the report’s recommendations to eliminate stamp duties, however it’s essential negative gearing be retained in its current form for the purpose of property investment.”

“REIA has always supported negative gearing because it helps in the provision of rental accommodation. Negative gearing for property investment is complementary to the goals of the Government’s Housing Affordability Fund (HAF) in addressing the supply of rental accommodation.”

“To remove it would show that we haven’t learnt anything from history. When negative gearing was abolished in 1985 it had disastrous consequences for the property market and for people trying to rent. Rents rose 37% across Australia and by 57% in Sydney. Thankfully, negative gearing was reinstated in 1987”…

“The myth that negative gearing is a plaything of the wealthy also needs to dispelled. The majority of taxpayers with a negatively geared property earn less than $80,000 a year.”

Once again, let’s use something called “evidence” to debunk each of the REIA’s claims regarding negative gearing, starting with this one:

“REIA has always supported negative gearing because it helps in the provision of rental accommodation. Negative gearing for property investment is complementary to the goals of the Government’s Housing Affordability Fund (HAF) in addressing the supply of rental accommodation.”

This claim is clearly false.  Reserve Bank of Australia (RBA) data clearly shows that the overwhelming majority of investors – over 90% – buy pre-existing dwellings, not new dwellings, and that the proportion of investors buying new dwellings has fallen spectacularly since negative gearing was re-introduced in September 1987 (see next chart).

ScreenHunter_30 Oct. 22 07.33

Moreover, the amount of investor funds going into new housing has barely shifted in 25 years:

ScreenHunter_31 Oct. 22 07.34

Because investors primarily purchase pre-existing dwellings, negative gearing in its current form simply substitutes homes for sale into homes for let. As such, negative gearing has done little to boost the overall supply of housing or improve rental supply or rental affordability.

In the event that negative gearing was once again quarantined and a proportion of investment properties were sold, who does the REIA think they would sell to? That’s right, renters. In turn, those renters would be turned into owner-occupiers, thereby reducing the demand for rental properties, leaving the rental supply-demand balance unchanged.

Now, let’s examine the REIA’s next claim:

“To remove it would show that we haven’t learnt anything from history. When negative gearing was abolished in 1985 it had disastrous consequences for the property market and for people trying to rent. Rents rose 37% across Australia and by 57% in Sydney. Thankfully, negative gearing was reinstated in 1987”…

This claim is false and downright disingenuous. The below chart plots the Australian Bureau of Statistics (ABS) rental series from 1972, with the period where negative gearing losses were quarantined (i.e between June 1985 and September 1987) shown in red. As you can see, there was nothing spectacular about this period, with much higher rental growth recorded in earlier periods when negative gearing was in place:

ScreenHunter_32 Oct. 22 07.40

Similarly, if we deflate the above series by CPI, in order to remove the effects of inflation, we again see that rental growth over the period when negative gearing was quarantined was nothing special, with periods of higher rental growth recorded both prior and subsequently:

ScreenHunter_33 Oct. 22 07.42

Moreover, rents in real terms rose in only four capital cities and fell in four capitals:

If it was true that the abolition of negative gearing caused rents to rise, shouldn’t rents have risen Australia-wide since negative gearing affects all rental markets?

Now, let’s examine the REIA’s final claim:

“The myth that negative gearing is a plaything of the wealthy also needs to dispelled. The majority of taxpayers with a negatively geared property earn less than $80,000 a year.”

This is partly true. The majority (72%) of negatively geared investors do earn less than $80,000 per year:

ScreenHunter_07 Apr. 30 11.17

However, the proportion of people holding negatively geared property also rises with income:

ScreenHunter_35 Oct. 22 07.52

As do the losses claimed:

ScreenHunter_36 Oct. 22 07.54

Overall,  the evidence shows that negative gearing does little to boost supply, yet the additional demand from tax subsidised investors places upward pressure on home prices, locking-out first time buyers. This might help to explain why most other nations – many with more affordable rental accomodation than Australia – do not allow negative gearing.

Negative gearing also costs the government billions in lost tax revenue, which could be used to fund schools, hospitals, housing-related infrastructure, or any number of other worthwhile endeavours. It is pure and simple rent-seeking.

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www.twitter.com/Leithvo

 

Leith van Onselen

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

Comments

  1. Approx 700,000 boomers with NG IP’s are not going to want them as they retire. NG will go when the boomers can no longer use it.

    Rents will not increase as they are set by wages, not house prices.

    • I don’t know what are the related party rules, can the boomers buy their negative geared IPs with their own SMSFs?

      I know it may not make financial sense, but most boomers are greedy, dumb as a doorknob and will follow whatever their Fin. advisers tell them.

    • That’s drawing a long bow isn’t it. Most youngens who are politically minded think the chardonnay socialists are their saviors, so they can get that warm fuzzy Bob Marley feeling and maybe hook up with an arts chick, so they vote Labor or Green, then most of the Green votes go to Labor, plus the media says all but nothing about it.

      The REIA musn’t have much to do at the moment releasing these lies, because they’ve had a great run this year.

  2. REIA, rabid rentiers, defend the indefensible. But it’s only a matter of time until the “lost revenue” issue forces a rethink. Abbott needs this revenue to look like a sound fiscal manager.

    • Abbott needs this revenue to look like a sound fiscal manager.

      I’m not so sure, it looks like he’s examining everything possible (asset sales, off-balance-sheet lending, HECS debt securitisation, etc.) to achieve that look without touching the golden goose.

    • Tassie TomMEMBER

      Chris Joye will get a tap on the shoulder soon reminding him to fall into line.

      The AFR doesn’t make that much money from property ads, but the SMH and Age certainly do, and the heads of Fairfax (Gina excepted) will know which side their bread is buttered on.

  3. I m surprised they bring the discussion on The table as with these almost zirp rates ( and on the way to zirp) most investors (most got their properties long ago) are going to be positively geared ( save perhaps the depreciation).

    No willy Boomers do not have to sell at retirement, they ll be positively geared ( at least by then), they will use the money on the offset + super lump sum to repay most/all of the debt and get a regular and safe income stream, can even reverse mortgage them.

    • If interest rates rise and all those marginal investments that were positive geared go back to being negative geared what will the boomer do?

      If your property has just turned positively geared it means you are earning after tax around $10-$50 a week.

      Not much for a retirement.

      • flyingfoxMEMBER

        Thats where the your super subsidies will help pay off his debt when he takes out a lump sum. If all goes to hell, your taxes will pay his pension as well …

      • @dam We will see how long the free money lasts …

        As for me, I refuse to play games that are rigged against me, many more games in town.

        The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man. — GB Shaw

      • @ff

        “I refuse to play games that are rigged against me”

        and you re still renting/buying shares instead of properties ???

        I m not sure I get it

    • I m surprised they bring the discussion on The table as with these almost zirp rates ( and on the way to zirp)

      You seem to be under the delusion that ZIRP means free money for the mega mortgage mugs like your good self.

      NO, its free money for the banksters, who will on lend to you at 3-4%.

      Check out the various rates (both fixed and variable) in the US AFTER ZIRP and QEinfinity.

      http://www.bankrate.com/mortgage.aspx

    • “No willy Boomers do not have to sell at retirement, they ll be positively geared ( at least by then), they will use the money on the offset + super lump sum to repay most/all of the debt and get a regular and safe income stream, can even reverse mortgage them.”

      +1

      • Mmmmm and then have assets that put them at risk of losing the pension. Me thinks not. They will want to sell up and put the money into their pension exempt PPOR.

      • @Wn

        then they ll sell it to asian buyers ( plenty of them in 10-20 years time, we are only seeing the beginning of the wall of money)

      • then they ll sell it to asian buyers ( plenty of them in 10-20 years time, we are only seeing the beginning of the wall of money)

        LOL.. You have a lot of hope to keep your ponzi scheme going. But that’s all you have.

      • flyingfoxMEMBER

        @dam Do you think the ponzi scheme in Asia is any different form here. The smart money has already started leaving property in Australia …

  4. How is it legal for such lies to be published – repeatedly!?
    The sooner AFSL are made mandatory for the RE industry the better.

  5. Forrest GumpMEMBER

    Like I said before.

    When the baby boomers hogging their Investment Properties for NG purposes fall off the electoral role and their grand kids (the bulk of which cannot afford a house) sign up to vote, the demographics will violently swing.

    Politicians will then happily abolish the evil practice of NG in favour of getting elected.

    • Let’s finally cut the “Baby Boomer” rubbish. It’s a bit like blaming people who are black for the problems in Africa. Poor government policy (ie NG) is concocted by politicians. Politicians were no different when Rome was built and won’t be any different when/if we get to inhabit other planets. The only thing that will change is the name of the most politically influential sector of the population. Tomorrow’s politicians will, I assure you, be looking to fix the system in favour of gen x & y at the expense of gen z and the relics of the BBs.
      Every generation, X, Y, BB will always take advantage of a rort if it’s available. They share one thing in common – they’re human. Put your blame where it belongs – Canberra, Australia where there is no leadership or integrity (PS can I claim expenses for writing this? The text has to travel somewhere).

      • @rob barret Excellent comment. The only difference is that the boomers are the largest voting block. Lets face it, we will all make use of loopholes if they exist.

    • Neville Gearless

      I’m a boomer but want NG to go, and the speculator parasites be gone with it. When you guys (XYZs…) can organise a protest on the steps of parliament, I’ll show.

      A decade ago a retired surgeon rallied 700 people in front of WA’s parliament protesting land tax, he claimed it discriminates against multiple property owners… oh the injustice !!

      They won.

      Why dont you guys do something?

      • You could always drip feed the reduction of NG, for a start remove NG for existing houses (let those that have it now keep NG, but as soon as they sell its gone.) the speculators would then have no choice but to build new housing (I would think that existing housing thats NG is only being used for housing in the inner suburbs, hence no land/cheap land to build)speculators looking for best bang for buck.

      • I recall that, I also recall the local state rag campaiging against it, dredging up examples of old grannys who were going to be forced to sell there million dollar propertys. Like you said, they won, the government dropped that tax proposal and instead put up stamp duty on everyone. Australians are well trained to support the interests of the elite.

      • Kids will inherit the houses (both PPORs and “investments”). They will sell them (too hard to agree how to split properties between multiple inheritors, easier to split money).

        A lot of properties will start to hit the market at the same time.

      • Is that the kind of society you want us to be, Turnitup? Where power and wealth is concentrated in the hands of wealthy property owners, and those that couldn’t afford it (and their children, children’s children, etc.) or didn’t choose to jump on the property ladder while they still could, are doomed to forever live as the subjects of landlords? Doomed to be second class citizens?

        You will recall that our birth rates are below replenishment levels, so that the land won’t necessarily be subdivided much as it is passed down. Conceivably, the inheritable holdings could even become further concentrated as wealthy people will generally seek out other wealthy people for marriage.

      • Is that the kind of society you want us to be, Turnitup? Where power and wealth is concentrated in the hands of wealthy property owners, and those that couldn’t afford it (and their children, children’s children, etc.) or didn’t choose to jump on the property ladder while they still could, are doomed to forever live as the subjects of landlords? Doomed to be second class citizens?

        You will recall that our birth rates are below replenishment levels, so that the land won’t necessarily be subdivided much as it is passed down. Conceivably, the inheritable holdings could even become further concentrated as wealthy people will generally seek out other wealthy people for marriage.

      • @Jason, sorry, had some trouble with replying, ignore the above duplicate of your post.

        No of course that is not the sort of society I want us to be. I doubt that many do.

        BUT, the average person has a lot more power than they realise. Unfortunately people like David Collyer manipulate peoples fears and encourage them into a state of incapacity. (I also suspect he lies about his rent to house value ratio; $500 a week for a house that is worth 1.2M in Melbourne does not compute. Try $700). They sit passively on the sidelines and watch other, braver souls have all the fun. Then when the property cycle encounters the slightest slow down, they jump up and down and write headlines like “we saved FHB’s $58,000 last year”. This is tripe. If I had listened to his scare mongering my family would be 80k worse off (we made that in 18 months on a sale. Not that we’re in it to make money, we just needed something bigger). The pleasure you get from doing up your own place the way you want is enormous. I wish everyone got to enjoy it, and I believe many more can. It is a long term investment, so if it goes balls up by 25% tomorrow (which it probably won’t) it won’t matter as you’re in it for the next 30 years.

        I understand that people here feel disenfranchised because something that they grew up thinking was going to be obtainable is now ‘out of reach’, but it is not as far out of reach as most think. OK, if you’re on 40k a year it is going to be hard, I get that. Buying takes a bit of a leap of faith, but unfortunately a few people have backed themselves into this corner and their pride is stopping them buying. DC said something along the lines of ‘even the most optimistic outlook for 2013 is zero growth’ (I’m talking Melbourne). Well, he this was selective reporting, but anyways, how wrong was that!? Where’s the headline “we cost FHB’s 8% growth this year!” You won’t see it.

        Here’s what I’d be doing if I were you guys….. I’d stop checking in here everyday to seek myself an electronic reassurance from other miserable types and I would start to dream big. I would try to bandy together as many people in my own category as possible, and I would try to rally them together to buy in a new up-and-coming suburb. You then have the power to make it cool. You get involved, you join the PTA at the local Primary School, you invest your time and money in your neighbourhood and you build your own lifestyle. It might mean that you can’t keep renting in the cool suburbs anymore, but you start your own cool neighbourhood. I’ve seen it done in Melbourne. Neighbourhoods that used to stink have quickly become gentrified on the back of people willing to dream big and put their head down and their bum up.

        Jason, the second class citizens description is an interesting one. What do you really mean by that? Do you mean that people who cannot afford to buy properties in affluent neighbourhoods are second class citizens? Or people who cannot afford to buy at all? If you’re genuinely worried about “holdings becoming further concentrated”, I would suggest to do your best to buy the worst house in the best street in an up and coming neighbourhood.

        Best of luck!

    • @flyingfox

      I generally despise RE agents and do not use a broker. I’m a regular bloke who goes to work everyday and enjoys ‘owning’ (tbh the bank owns 75% of it) the house he and his family live in. Looking forward to extending the deck and putting in some proper grass out the back, along with a sandpit and a trampoline for the little tike in about a year. I’ve rented for years and in the end I hated it. As I never intend to sell, I don’t care too much what happens to the so-called value of the place. It’s worth exactly whatever the next ‘fool’, as you guys call them, is willing to pay. Although it’s pretty much the cheapest house in one of Melbourne’s best suburbs so I think it should be OK. With any luck on your behalf, David Collyer will be right, houses will be given away when the bubble bursts (it has to because it did in Ireland. If not an Ireland style bust then a Japan-style slow melt) and who knows, we might become neighbours! You can even bring the kids round for a play in the sandpit!

  6. As dam suggests, there are relatively few NGers left in the marketplace ( well, relative to when mortgage rates were higher). So…what better time to abolish it than when few people are affected? Now, is as good a time as there is likely to be. The Government needs to retain the tax take, and most will not notice what they are not missing!

  7. Shift NG to new builds only.

    *Take the investor heat out of the established house market.

    *Boost housing supply

    *Boost constuction/employment

    *Boost revenue

  8. arescarti42MEMBER

    It’s worth pointing out that HIA released a short research note on Australia’s rental market, which also warns about mucking with negative gearing.

    http://economics.hia.com.au/media/Rental%20Market%20Discussion%20Paper.pdf

    “The strong linkage between interest rate changes and rental inflation means that the deductibility of rental expenses (including
    negative gearing) results in rents being lower than what they would be in its absence. Any restrictions on the taxation regime relating to rental properties are therefore likely to force rental costs to increase, significantly reducing affordability in the rental sector.”

    The thing that really annoys me with a lot of the analysis on rents around (HIA and Australians for Affordable Housing are guilty of it) is the idea that increased costs borne by investors will just be passed on to renters in the form of higher rents.

    The reality is rents are determined by the market, not meeting the costs of investors. If an investor tries to charge above market rent to cover their increased costs, they’ll just end up with a vacant house. If all investors try to do that then demand will fall and some of them will end up with empty houses, and have an incentive to lower rent to fill them.

  9. We would love to hear from you:
    The Real Estate Institute of Australia is located at:

    16 Thesiger Court
    Deakin ACT 2600

    Postal Address

    PO Box 234
    Deakin West ACT 2600

    Tel: 02 6282 4277
    Fax: 02 6285 2444
    Email: [email protected]

  10. Except for special circumstances, they should limit Negative gearing to a fixed period.

    If you can’t turn around your investments in that time, you should need to prove that you are changing your business model. In the case of property, this should mean that you sell and find a more profitable venture, which could be another property.

    This wouldn’t be a big change, and it would put some pressure on investors to handle their affairs better.

  11. A big round of applause to those 100,000 or so battlers with taxable income of less than $6000 sustaining investment properties. We salute you.

    • GunnamattaMEMBER

      $6000, six thousand?

      We have investment property owners with taxable incomes of six f£cking thousand?

      Off the top of my head I would have thought family tax benefit for a family with two kids was worth about that…

      • That wouldn’t be family trusts flicking some income the way of a family member up to the old tax cap of 6K by any chance would it 😉

        Those 100,000 low income earners will find themselves in the ‘income less than 20K’ pile in new numbers i suspect.

      • “You know that look that dogs have when they hear an animal noise coming from the idiot box?”

        lol

    • I’d love to know the composition of that ‘taxable income’. They could mathematically have an income of $86K and say 5 investment properties each with a ‘loss’ of $16K per annum. ($86 – 5×16 = $6K). That $16K would include non-cash items like depreciation, so from a cash flow perspective they can survive but vegemite sandwiches are still in order.

      I know a guy earning $200K who can barely function trying to cover the losses on his 5 IPs. His $200K ish income would be reduced to under the top bracket when losses are accounted for. So which gets recorded? $200K or $150K (assuming a loss of $10K for each of his properties)?

      Once again the tax system favours these guys in that those end of year losses can be estimated and accounted for monthly to reduce the monthly tax payment and smooth the cash flow throughout the year. He doesn’t bother with this, hence the tight cash flow during the year. Sorry to digress, but it sh1ts me!

      • Taxable income = assessable income + statutory income – general and specific deductions.

        This is the amount the tax rates are applied to (but not all benefits) and it appears this is the number used to determine these figures.

        So yes – if you add discretionary trusts (which chose the derivation) and the meaninglessness of the ‘taxable income’ in the context of understanding the assessable income – then it’s a pretty useless figure.

        Assessable Income would be a much better representation of who is claiming deductions through NG.

      • Mining BoganMEMBER

        Jimbo, one of my fellow bogans is like that $200k guy. Actually, we both just applied for the same job back east. He tells me he knocked the position back because his wife says that with the ‘investments’ they can’t survive on less than $180k.

        You know that look that dogs have when they hear an animal noise coming from the idiot box? That’s how he looked when I suggested selling the houses.

        It’s just a greedy, fucked-up system that we should be ashamed of.

      • “You know that look that dogs have when they hear an animal noise coming from the idiot box? That’s how he looked when I suggested selling the houses.”

        Love it +100

      • I know the look Mining Bogan. I first saw it playing Monopoly as a kid when someone would try throwing a few too many hotels on Park Lane or Mayfair. Great move if you can survive a few rounds with no liquid buffer. IF. It’s where accumulation ego conflicts with staying financially nimble when the need arises – as in your mate’s case (aka greed as you say).

        What’s going on out West? Are many looking to score roles East?

      • flyingfoxMEMBER

        @Mining Bogan

        Yes we have a lot to thank the mining boom for. I remember a few years back there were organised trips from Perth to Melbourne for buying RE.

        At least they are spreading the wealth around …

      • ‘…he knocked the position back because his wife says that with the ‘investments’ they can’t survive on less than $180k.’

        I’m so glad I’m not that soldier.

  12. With apologies to Lord V.

    There is no right or wrong or truth or lies. There is only rent, and those too weak to seek it.

  13. A little bit off-topic but I’ve seen multiple authors, commenters and even REIA push for the removal of stamp duty and replacing it with land tax.

    Anyone care to justify it?

    I get the neo-classical rationale (I think), i.e. lower transaction costs -> more efficient market.

    Okay but in reality, won’t vendors just incorporate the saving into a higher offer price (similar to what happened with FHB grants). Therefore, just another transfer (back from the tax-payer to existing owners). Right?

    Isn’t that why even REIA supports it?

    • The REIA supports removing stamp duties, but I haven’t seen them explicitly support replacing them with land taxes (i.e. they want the stamp duty cut without the associated land tax increase).

      Arguments in favour of land taxes over stamp duties are provided here and here.

    • I’ll try to answer. I very much support the abolition of stamp duty in return for land tax.

      In the ACT (where it is happening) stamp duty is being phased out over 20 years, so the reduction in stamp duty PER YEAR is only a grand or two for the average property.

      So yes, buyers may have another $1000 to offer or to leverage, but it’s comparatively very little, so I don’t really see it putting a rocket under house prices or affecting calculations as much.

      A FHB Grant of $7K or $14K is a different proposition. It can ONLY be used for a house purchase (unlike $1000 cash) so it inevitably goes straight onto house prices.

      The rationale for the change is quite compelling. Stamp duty is a strong disincentive to people selling / moving even when it suits them to. So it reduces the efficiency of land use (people live in the wrong size house, or in an area that no longer suits them, because they get penalised between $20K and $50K just for moving). This also prevents transactions in the market, which is why REAs hate it – but while they are obviously being driven by self-interest, it doesn’t make them wrong this time! Stamp duty also hits new home buyers with a big lump sum at a time when they can least afford it (as opposed to paying it gradually over years, like land tax).

      From a government perspective, the switch will make government revenues more stable (when reliant on stamp duty they fluctuate too much). But in theory it’s a break-even proposition, so again I don’t think the government is being evil here. I think it’s an excellent move.

  14. These mongrels can lie as much as they like when you have inept and gutless agencies like ASIC ignoring you.

  15. This is crap! Why is negative gearing being demonised? Housing is just another investment asset class and if costs exceed income, a tax benefit is gained. The tax loss is consolidated against other income. How is this any different to every other business? Further, how is this reducing tax take? Is the suggestion that all businesses should not be able to consolidate losses, or at least, hold a FITB?
    All of these clowns railing against negative gearing need to find other reasons for social policy failure, rather than screwing with the equal treatment of legitimate classes of investment.

    • Negative gearing on property means losses can be claimed against other unrelated income.

      This is nothing like running a business, where losses can only be offset against income earned by that business.

      This actively encourages people into loss-making property investments. And taxpayers foot the bill.

      • Correct A 2 – in fact, previous governments were so concerned about businesses sheltering income behind unrelated losses that specific provisions were enacted to ensure business didn’t do this (non-commercial losses).

        The fact this hasn’t been done for negative gearing is purely political. And actually there is a very strong legal case that the losses are actually capital in nature (and hence only deductible against the capital gain on the asset) as the primary purpose of the investment is to speculate on asset prices.

        People can make their own mind up on why the ATO has not chosen to pursue this argument.

    • TrialError. Your arguments are nicely debunked by Saul Eslake:

      “Some supporters of negative gearing also argue that since businesses can deduct all of the operating expenses they incur (including interest) against their profits in order to determine their taxable income, and can also ‘carry forward’ net losses incurred in any given year against profits earned in subsequent years so as to reduce the tax otherwise payable, it is only ‘fair and reasonable’ that investors should be able to do the same.

      There are two flaws in this argument, in my view. First, a large part of the appeal of ‘negative gearing’ comes from the way in which it allows income which would otherwise have been taxed at the investor’s marginal rate effectively to be converted into capital gains, which are taxed at half the investor’s marginal rate. Businesses – if they are incorporated, as most businesses these days are – can’t do that. Companies aren’t eligible for the 50% discount on tax payable on gains on assets held for more than one year.

      Second, while individuals are allowed to deduct expenses incurred in connection with producing investment income from their taxable income, they aren’t allowed to deduct many types of expenses incurred in producing wage and salary income.

      To take an obvious example, wage and salary earners aren’t allowed to deduct the cost of travelling to and from work; nor are they allowed to deduct child care expenses.

      Or, to take another example which may be an even closer analogy with ‘negative gearing’ for investment purposes, individuals aren’t allowed to deduct interest on borrowings undertaken to finance their own education as a tax deduction, even though that additional education may contribute materially to enhancing their future earnings – and even though any such additional future earnings will be taxed at that individual’s full marginal rate, as opposed to half that rate in the case of capital gains on an investment asset.”

      Funny also how the overwhelming majority of developed economies DO NOT ALLOW RENTAL LOSSES TO BE OFFSET AGAINST WAGE/SALARY INCOME. For very good reason.

      And no, housing is not “just another investment class”. It is an essential need. It’s that kind of thinking that is part of the bloody problem.

  16. Wasted OpportunitiesMEMBER

    Can anyone give a rational explanation for the 110,332 people with less than $6,000 taxable income, who are collectively making a loss of $1.4B (or $13,000 each on average) per year?

    I can’t come up with one.

    • I would assume that figure for taxable income is AFTER the rental losses have been deducted..

      They could be relying on a partner’s income, or be distributing their income in some creative accounting trust situation.

      • Wasted OpportunitiesMEMBER

        Yep, that explains the mechanism. I guess what has me more puzzled is the strategy. There’s no need for a negative gearing strategy with such low taxable income. The people in this segment should surely be overwhelmingly owning income-generating properties if they want real estate, but the ratio of negative/positive gearing is the same as the top income bracket.

        I just can’t think of a good reason why each of those 110,000 people shouldn’t be putting a “For Sale” sign up right now.

        Edit: except for outrageous expectations of future capital gains of course.

  17. I’m really surprised by the first graph used, investment property loans for new dwellings cannot possibly be that low, are we not including off the plan apartment purchases as new dwellings?

  18. TheRedEconomistMEMBER

    If the introduction of a Land Tax or changes in negative gearing on residential property gets any momentum, expect something like this on the TV or radio.

    http://www.nodrinkcontainertax.org.au/

    Now you understand governments are hesitant to take on industry self interest.

    The common good can get stuffed!!!!

  19. In response to claims that 90% of investors buy pre-existing dwellings and overall negative gearing doing little to boost supply, there are overall supply side issues which investors are not responsible for, including three levels of government which create supply constraints.

    Investors, too, have their own interests in seeking high rental returns. Inner and middle suburbs provide higher returns but the stock already exists, for the most part. In contrast, newer suburbs have new development but returns there are lower, therefore the majority of investors choose to buy existing stock.

    Investors have purchased under the current guidelines so their financial planning is on the understanding that negative gearing is part of the package.

    Some people forget that without the incentives given to investors, their support would fall rapidly and the Government would be left with a far greater burden on it for social housing.

    Peter Bushby

    President, Real Estate Institute of Australia

    • Nice of you to respond, Peter.

      So what is your point?

      Your first two paragraphs simply confirm that negative gearing is mostly used for existing properties and does not boost housing supply or help address the existing barriers to better supply.

      Your third statement is a self-evident truism (“the current system is the one currently used”).

      Your fourth paragraph is false. Investors selling up does not reduce the number of houses, so there is no increased burden on “social housing”.

      To repeat: negative gearing does not boost housing supply.

      • A2,

        Nice rejoinder.

        Rather than trundling out dross and flim flam, the REIA would be better served by giving the Housing Industry Association and the Master Builders Association a call and helping them man the BBQ at the National Summit for New Housing Construction.

        All those new houses will need to be sold by someone.

        Perhaps Mr Bushby could line up a few investors keen for some negative gearing action.

    • ‘…… the Government would be left with a far greater burden on it for social housing’

      The Government could build a lot of housing for $6B a year and growing, year in year out, not to mention allocating funds to other programs that may assist people out of that public housing space.

      ‘Investors, too, have their own interests in seeking high rental returns. Inner and middle suburbs provide higher returns but the stock already exists, for the most part. In contrast, newer suburbs have new development but returns there are lower, therefore the majority of investors choose to buy existing stock. ‘

      Not always the case (rarely?). Rental returns (yields) are generally poor in higher value, capital growth suburbs. If it were rental returns investors were after we’d have the mother of all bubbles in every country town in the country (assuming we don’t already). I’d be lucky to get a 3-4% gross yield on a property in the inner-middle Melbourne ring. Conversely I could find plenty of 6-10% options in country Victoria. This tells me investors are speculating heavily, as opposed to making sound whole of life cycle investments.

    • “In response to claims that 90% of investors buy pre-existing dwellings…”

      It isn’t a claim Peter, it’s data from the Reserve Bank of Australia.

    • I look forward to the Real Estate Institute of Australia lobbying for the removal of supply side restraints in their altruistic quest for Australian housing policy.