“Mad” Adam leaps to negative gearing’s defence

ScreenHunter_3327 Jul. 16 11.18

By Leith van Onselen

Wow. The Murray Inquiry seems to have slipped something into the water. Following the HIA’s shallow defence of negative gearing, Business Spectator’s Adam Carr has chimed in with more gruel:

Home lending figures already show first home buyer activity at its lowest on record.

If that trend continues, then it’s likely Australia will follow other major advanced economies with already have low or declining rates of home ownership…

It’s against that backdrop that any punitive measures taken against investors, including regular calls to scrap tax breaks such as negative gearing, would prove extremely harmful and have deleterious consequences for the economy and society at large.

This is because if global trends are any guide… then the burden for maintaining Australia’s housing stock will increasingly fall to the investment community…

Australia already has an acute housing shortage. …if policymakers genuinely want to rebalance the economy and address Australia’s chronic housing shortage with a much needed construction rebound, then the country needs to stop treating investors as the enemy…

Sorry Adam. The reason first home buyer (FHB) demand is so low is because housing has become unaffordable. FHBs are priced-out of the market, in part because excessive speculative investment is placing upward pressure on prices, crowding-out FHBs in the process.

You simply cannot ignore the ABS housing finance data, which shows investor demand rising to record highs at the same time as FHB demand has fallen to record lows (and an inverse relationship between the two):

ScreenHunter_3328 Jul. 16 11.31

Negative gearing is clearly a major part of the problem facing FHBs, not part of the solution.

Carr’s claim that negatively geared investors are alleviating Australia’s housing shortage also does not hold water. A quick examination of of the RBA statistics shows that the overwhelming majority of investors – over 90% – invest in existing dwellings rather than construction, and that the proportion of investors constructing dwellings has fallen spectacularly since negative gearing was re-introduced in September 1987 (see next chart).

ScreenHunter_3329 Jul. 16 11.35

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

ScreenHunter_3330 Jul. 16 11.36

Because investors primarily purchase 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 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 Carr 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 unchanged.

Let’s also not forget that Australia is one of only a few nations that allow investors to deduct property losses against unrelated income. And yet we have one of the most unaffordable housing markets in the world and chronic supply problems (despite a massive land mass). What does this tell you about the efficacy of Carr’s arguments to retain negative gearing?

In any event. If Carr was truly interested in boosting housing supply, he would be lobbying to free-up the various supply-side constraints that prevent affordable homes from being built, rather than supporting an egregious tax lurk that costs taxpayers billions in foregone tax revenue, does nothing to boost supply, and crowds-out FHBs.

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Comments

    • Strange Economics

      More than 20 % of the economy is FIRE now. Half of the FIRE jobs are bank financing, leasing, repairing, and tax agenting second hand apartments to renters. But all the high paying jobs – bank and super funds, major lobbyists and future employers to the party of non-FOFA.

      If they removed neg gearing, then FHBs would buy all these houses, and there’d be less FIRE jobs. Might have to start making something again.

      Look at the local jobs websites in Melbourne – jobs are – sales of expensive fashion and luxury cars , and otherwise trades to renovate houses, real estate jobs, tax agents, mowing services, and real estate advertising.

      Australia is an RE speculator tax paradise – and the govt pays them for it as well as protects the banks. Even the Murray inquiry suggests negative gearing Should go.

  1. well broken down Leith, again.

    It seems the current exclusion of the principle residence from age pension means testing has not had any air time in a while…(WRT its effect on housing affordability)

  2. “..the country needs to stop treating investors as the enemy”

    Bloody hell, does this guy live under a rock. We don’t have investors, we have rent-seeking speculators in plague proportions buying established homes because that is what the RBA and the Tax Act is herding them into.

    I don’t know how you keep your sanity L.

    • That first sentence should read “…the country needs to stop treating FHB as the enemy”

    • Denis413MEMBER

      +1

      Adam Carr’s article reiterates how lack of an understanding of language contributes greatly to our current predicament.

      How many Australians think owning shares = investing… His article would read completely different if the correct word was used:

      “It’s against that backdrop that any punitive measures taken against speculators, including regular calls to scrap tax breaks such as negative gearing, would prove extremely harmful and have deleterious consequences for the economy and society at large.

      This is because if global trends are any guide… then the burden for maintaining Australia’s housing stock will increasingly fall to the Speculator community…

      Australia already has an acute housing shortage. …if policymakers genuinely want to rebalance the economy and address Australia’s chronic housing shortage with a much needed construction rebound, then the country needs to stop treating speculators as the enemy…”

      Thus, making his whole argument ridiculous.

      Societies lack of an understanding of investing/speculating severely prohibits meaningful discussion (and more or less just adds to the noise – i.e. Adam Carr’s article).

      • I can’t understand how a highly-leveraged tax-advantaged speculator buying an existing dwelling does anything to solve the housing shortage.
        By outbidding a young family they merely turn the family from proud owners into renting scum who can’t paint a wall or hang a hook, install an electrical safety switch, or secure a bookcase to the wall.

      • Owning shares = investing. Ha ha that’s a good laugh. Unless it’s a guaranteed return it’s gambling isn’t it ?

  3. “It’s against that backdrop that any punitive measures taken against investors, including regular calls to scrap tax breaks such as negative gearing, would prove extremely harmful and have deleterious consequences for the economy and society at large.”

    This idiot must be very desperate about keeping the status quo, it is hilarious to read his arguments.

  4. The pigs are really squealing now. I don’t expect any reform, but the social problem is growing every day.

  5. Normally ACs stuff is good. Not sure what happened here.

    Maybe he installed an algo article app on his Mac/Wintel box, except it was written by a dev from Bizarro?

    • Perceptions an interesting thing isn’t it 😉

      I gave up reading his fantasies years ago. I really wondered if he was on mushies. This article reinforces I’m not missing out on anything from him.

      • I think most journos (and civvies) live in a false world that is an utter fishbowl. Surrounded by things that reasonate with their own world view.

        Feedback loop only serves to reinforce the fable.

        I don’t wish to sound uncharitable, but a 2 minute viewing of my FB newsfeed reinforces this.

      • No argument here. I come to MB for my comforting confirmation bias. I also look elsewhere to read between the lines – not so often the establishments bugles I readily admit.

        I expect journo’s to exercise what they’re purportedly paid for, thought through, clinical, clear, critical thinking – It seems scarce indeed, or maybe I’m on the mushies 🙂

  6. Don’t scrap negative gearing – make it available for only new builds. We get more housing supply, which reduces rent.

    Quarantine existing negative gearing arrangements. And let’s move forward.

    Make negative gearing positive for the community.

    • Sounds like a positive step to me – but with a minimum floor space set above dog box.

  7. Sydney Morning Domain has two articles right up the front about NG and Chinese buyers.

    But no comments allowed.

    The left is a fraud.

    • You forgot the capital ‘F’ (and maybe the capital R, A, U, D.

      Their property spruiking division owns the show, like all MSM rags. That’s because we don’t actually have an economy anymore, we just have a property speculator orgy that they want to make money from.

      • I thought it very interesting that on Monday Fairfax had a story about a report from the Reserve Bank suggesting it may be better value in future to rent rather than buy, if property values flatten out. Yesterday they had a delightful piece by a 23 year old staff journalist bemoaning the perils of renting including among other things that you are not allowed to own a pet. So terrible was renting he suggested that whatever the Reserve Bank said, it was his considered opinion that it was better to buy than to rent. Nowhere in the article did he suggest reforms along European lines to increase the security and rights of renters. So one day after the Reserve Bank article, one by a 23 year old staffer saying how horrific renting is meant to be and how the Reserve Bank is wrong.

      • We haven’t got any political diversity either. We just have a property speculator orgy that they want to make money from!

  8. I wonder if this leap to defense of NG has anything to do with Hockey threatening saving measures that bypass the senate ?? If they are not going to get their expenditure cuts passed, then they may be forced to cut in areas they would otherwise not touch, simply as a political face saving measure. They expended a great deal of political effort to get the carbon tax passed (for no real result anyway), for seemingly nothing more than political face saving.
    Perhaps there is concern that the same situation may exist regarding patching the budget blowout by billions, with the current senate blocking expenditure cuts.
    Maybe the vested interest groups think the govt will look in their direction now for savings purely because they have no other choice, hence the reaction today.

    • if they tightened up age pension eligibility they’d find a quick ten or twenty billion…and who knows, housing may even become incrementally more affordable! why the f##k is this such a taboo, anyone?

      • moderate mouse

        Cos it’s harder to take away from the Haves than to provide an even playing field for the Have Nots.

      • @mm Yes that is true. Politicians can always direct the blame for “negative” outcomes on the market… KRudd prime example. The GFC was the best scapegoat in yonks to make a real legacy, but instead he’ll be remebered for “fair shake of the sauce bottle”.

  9. Those second and third graphs are epic!

    It has always struck me that the Australian economy is rather inefficient… how else does one explain the lack of supply response to insanely high house prices?

    The drug dealers worked out ways around making it illegal to sell drugs… why can’t house builders work out ways around making it illegal to build houses?

    • why can’t house builders work out ways around making it illegal to build houses?

      – they have…..they’re called cheap and nasty ‘dog boxes’ and they’ll go for half a million dollars plus each!

    • And it’s not like they are new. Seriously, only Australians could be stupid enough to double down on a Central Bank inspired asset boom of unimaginable proportions, by making any amount of debt to speculate deductible.

      Funny stuff, will be funnier when the whole lot goes tits up.

  10. You have to feel sorry for the NG ers who have to bear the burden of maintaining Australia’s housing stock. I suppose somebody has to.
    LVO must be sick of writing about it but I know my adult children who can’t service a $750 mortgage in Sydney just love to be reminded.

    • Some of them are doing it to provide shelter for less-fortunate or, dare I say, less hard-working citizens. However other investors have a more far-sighted style of good-intention, and are doing it in order to be less of a burden on future taxpayers during retirement.

      • Yeah, they’ll be less of a burden during 15 years of retirement but a leech on the tax system for the 20 years in the lead up. Master logician right there.

      • moderate mouse

        Surprise surprise, The Claw is a defender of NG.

        But for the supply-response of course. And for the less-fortunate. And for the children…… we must always think of the children.

      • I hope nobody took that seriously. I posted my real feelings on the matter higher up the page
        http://www.macrobusiness.com.au/2014/07/mad-adam-leaps-to-negative-gearings-defence/#comment-432696

        I can’t understand how a highly-leveraged tax-advantaged speculator buying an existing dwelling does anything to solve the housing shortage.
        By outbidding a young family they merely turn the family from proud owners into renting scum who can’t paint a wall or hang a hook, install an electrical safety switch, or secure a bookcase to the wall.

      • Claw,

        When you are being that dry you need a flashing light !

        The sooner all those eager residential investing types start constructing a frenzy of new houses and apartments such that the topic of the price of housing becomes as dull as dishwater – like it is in Germany – the better we will all be.

        When supply is flexible and sufficient, capital gains will be thin on the ground and negative gearing will again only be something mechanics have an opinion about.

        It is not entirely surprising that supplying new housing does not appeal to the negative gearing mindset – must be something about expanding supply that worries them!

  11. ceteris paribus

    Love the rent-seeking language- the “burden for maintaining the Australian housing stock” falls to the investors. And I thought they were just creaming off tax concessions and speculating for capital gain. It seems I was wrong.

    Just wait for the Australian and the AFR to start spinning the disinformation against the Murray position on NG and super tax breaks. Gotti will be there too, with the herald Sun, the telegraph and the courier Mail.

    It will ooze from every page. Most importantly, they will be desperate to get Murray, the banker, to recant publicly or at least run dead in future reports.

    I can hear the phones ringing as I type.

    • Strange Economics

      With some sensible solutions Murray has now become the Edward Snowden of the banks and exposed negative gearing after 20 years of lending? Who could have been a safer chairman (we thought) than the ex-CBA lead.

      • moderate mouse

        Yeah I’m pretty impressed on the whole. Murray might find himself the recipient of a few less bottles of single malt this Christmas. But let’s reserve judgement until the final report.

  12. If you or your business would like to steady the course of the national agenda, please contact News Corp Australia and ask to speak to your local Sales Executive.

  13. If investors want to pile into an asset class, they should be free to do it. My problem is that when the market tries to self correct ( GFC ) , the Govt intervenes and lowers rates to rescue the investors at the cost of savers.

    If the Govt intervened less banks shareholders would have learnt a nasty lesson during GFC as massive amount of equity capital would have needed to be raised and today their appetite for lending into bubbles would be somewhat diminished.

  14. As someone who funds resi property developments, in my opinion removing NG would have zero impact on housing supply.

    Here’s how the game works. Developers find a site and work out what they can pay for it based on (a) construction and development costs (b) estimated sales prices (plus their profit margin). Assumption (a) is easier to predict and control, the punt is largely on (b) – sale prices.

    If removing NG reduced investor demand, then house prices would adjust accordingly, and developers would simply reflect this in the prices they pay for development sites (ie land). Given where land prices are, the only losers would be existing landholders, and by losers I mean people who don’t win quite as much as they would have otherwise won.

    The real problem with supply is the constipated planning system that drives land prices sky high…


    • Given where land prices are, the only losers would be existing landholders, and by losers I mean people who don’t win quite as much as they would have otherwise won.

      So you are saying that without changing the level of supply, the purchase price of new properties will go down, allowing more people to buy them?

      Great. Let’s do that then.

  15. Uranium GeoMEMBER

    Maybe ‘land holders’ should read land bankers?

    Don’t the land bankers work in conjunction with the local government planners?

  16. WON’T SOMEBODY PLEASE THINK OF THE INVESTORS?!?

    Maybe we can start a charity for them. All donations tax deductible, of course.

  17. Two days ago he predicts monster recession. Now this? I am confused. Adam do I buy another IP or not?!?!?!

  18. The first home buyers have been on the investment, ahem, speculation train now for years, Gen Y haven’t deserted property at all.

    http://www.abs.gov.au/ausstats/[email protected]/mf/5609.0 FIRST HOME BUYERS

    An investigation is underway to evaluate the robustness of estimates of loans to first home buyers (Table 9). In collecting this information, lenders are asked to report all loans to first home buyers. Concerns have been raised that under-reporting could occur if some lenders were only able to accurately report on those buyers receiving a first home buyer grant.

    Most data on first home buyers are collected by the Australian Prudential Regulation Authority (APRA) under the Financial Sector (Collection of Data) Act 2001. APRA is contacting lenders on behalf of the ABS to investigate whether lenders experience any difficulties reporting on loans to first home buyers.
    The outcomes from the investigation will be published on the ABS website