Moodys: Negative gearing adds 9% to prices

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By Leith van Onselen

From The AFR comes some interesting analysis from Moody’s estimating that allowing property investors to deduct rental property losses against unrelated wage and salary income – known as “negative gearing” in Australia – has added some 9% or $44,000 to the typical Australian home value:

The report said that negative gearing costs the federal government around $4 billion in lost revenue and recognised by some economists as an “unfair and unproductive” distortion…

With low interest rates the impact of the subsidy has fallen from a 2008 peak of 15 per cent, “yet even today’s 9 per cent support is a substantial subsidy to the nation’s homeowners”…

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I can’t say that I am surprised. However, what is most disappointing about this result is that the extra investor demand from negative gearing has not alleviated Australia’s “housing shortage” one iota, with the RBA statistics clearly showing 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 below charts).

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Talk about  a monumental policy failure. Not only is the Budget losing billions of dollars a year in foregone revenue – funds that could instead be used on any number of worthwhile projects. But by forcing-up home prices, negative gearing is depriving many younger Australians of home ownership, while also failing to expand rental supply and affordability.

Go Australia.

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Unconventional Economist

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

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Comments

  1. It continues to astonish that both the major parties put the ideology of negative gearing over an increase to revenue which would only effect around 6% of eligible voters.

    EDIT: when they’re prepared to push through unpopular measures such as a carbon tax or half the May budget, directly affecting a far greater proportion of the electorate.

    Is it really the case that marginal electorates are completely dominated by people who would change their vote for this issue, irrespective of refugees, other budget measures, carbon tax and all the other rubbish that politicians want us to think is important?

    • Eligible voters? C’mon! It’s the % of politicians that own investment properties that counts; that’s all…..The recent Labour PM of NZ had 6 renters and proudly noted that “they were her pension plan!” ( What about your parliamentary one, Helen? Never mind, I digress). So what chance of a change if even a polly from the left wouldn’t want to tinker with the status quo…..

      • Just fed to the back teeth of reading articles discussing drawbacks of -ve gearing, then referring to the “political difficulties of withdrawing such a popular measure” – I call bullshit on those difficulties.

        As you say, the reason they don’t is far less they can’t and far more they don’t want to. Be nice if everyone can admit it and move on.

        EDIT: And it’s not -ve gearing in particular they’re attached to – it’s high priced housing, most likely. The best chance for the end of gearing is in the aftermath of a crash, when there is no further valued to be wiped off housing, and it can be quietly put to pasture.

        Idle thought: What is the proportion of PUP + Ricky Muir Senators/Members whose wealth is significantly locked up in -ve geared residential property? Wouldn’t expect too much of the big bloke’s money to be tied up that way.

      • @David

        “…as buyers discover the magic of getting by sitting on their hands…”

        What a beautiful image, on the verge of bein’ obscene as P.N. Rogers might say.

      • Now, now, Sailor, the words are:

        “…buyers discover the magic of getting richer by sitting on their hands in a falling market.”

        Abuse me, but don’t misquote me.

    • Denis413MEMBER

      6% of eligible voters?

      Try 80%…(give or take for FHB’s). The majority of voters own a house, and as this article indicates, 9% would be knocked off the asking price if negative gearing was eliminated.

      The Australian public aren’t quite bright enough to realise this is one of the many steps required to have a more productive economy. Rather, they will liken it to a “great big tax” of $45,000 per household…

      It will take a miracle for this country to change its course. Like the dark side of the force, once you go down the path of easy credit/house price growth, forever will you be seduced by it 🙂

      EDIT: Just saw your second post. Yes exactly. House prices are the precise reason they won’t touch it. Wealth effect…

      • moderate mouse

        Correct. Managing The Bubble, not the economy, is the name of the game these days. Anyone can see that removing the grossly distorting NG tax dodge would be good for the economy (9% on house prices is conservative in my opinion)…..but bad for The Bubble.

        End result…

        Bubble 1: Economy 0.

      • Suggest 80% of eligible voters owning a house is a little bit high – maybe in 1985, but much closer to 50% these days and getting closer to falling below 50% with every passing day.

      • Denis413MEMBER

        Sorry, you are right. But my point was, as you highlighted, house prices are the main determinant for this poor policy 🙂

    • “It continues to astonish that both the major parties put the ideology of negative gearing over an increase to revenue which would only effect around 6% of eligible voters.”

      This should be of no surprise whatsoever. None.

      The banks own the major parties —

      http://www.businessspectator.com.au/bs.nsf/Article/Liberal-Labor-polls-banks-funding-unions-election–pd20110721-JXTSN?OpenDocument&emcontent_Gottliebsen

      The banks benefit from any policy that encourages/enables consumption of their “product” (debt at usury).

      Freeing up “money” from the taxman means more money available to pay interest to the private usurer class.

      While this should be patently obvious to any thinking person, don’t take my word for it. Get a copy of Michael Hudson’s “The Bubble and Beyond” —

      http://michael-hudson.com/about/

      • I can highly recommend it. My copy just arrived last week. I skipped straight to Part II, page 207. “A property is worth whatever a bank will lend against it”

  2. Only 9%? Don’t think so when top income earners can claim almost 50% back in interest cost PLUS use rental to boost borrowing amount. More like 100% to 200% higher.

    • outsidetrader

      I don’t think 109% of people negatively gear and to suggest that 209% do is even more of a statistical impossibility.

      And I didn’t even need to give 110% to reach those conclusions 😛

      • @ outsidetrader Does all the housing inventory get sold every year? 😉 Probably not… It’s all at the MARGINS.

      • outsidetrader

        Sorry – misread your original post.

        I agree – wouldn’t be surprised if the price impact was more than 9%.

  3. the construction vs existing homes graph made me vomit a little bit. Madoff would be proud of such a Ponzi.

  4. Strange Economics

    The benefits of negative gearing flow more to the
    upper income earners and the banks – both big supporters of the govt. (see FOFA, etc).
    And the treasurer is from the North Sydney Hockey Real Estate agency, so his education on the “benefits” of negative gearing would have been clear.
    The $ 4 billion a year increasing every year could balance the budget singlehandedly. Why is nt it time now to be limited now to new construction?

    • Denis413MEMBER

      Yes, and where do the majority of political donations come from? The upper end of town/banks…

      • Thanks to our glorious political system, the parties have to borrow from the banks to finance their election campaigns.

        Guess what kind of policies all parties enable? Those that benefit the banks. Quelle surprise.

      • Denis413MEMBER

        Careful, you will be labelled a conspiracy theorist (despite how obvious it is…) 🙂

        The deeper we go in, the more it looks a crisis is the only way for true change to be made.

        Unfortunately, our overlords too are extremely adept at managing/taking advantage of crisis.

      • “Unfortunately our overlords too are extremely adept at managing/taking advantage of crisis.”

        Correct. This is what concerns me most about those placing their faith in a crisis as somehow representing the moment when we will get something better.

        On the contrary, there is every reason to be gravely concerned that a crisis will be used to more completely entrench the power of the usurers over us all, via something worse (eg, elimination of physical cash; new regional and/or global currency regimes; etc).

        Basic rule of logic: if the usurer class approve, you do not want it.

    • Mr Abbott and Hockey do not have the vision nor the courage to provide Australia with the reforms that we need. OTOH, neither does Bill Shorten.

      I’ll vote for any party that promises to limit negative gearing to new property construction only, whilst quarantining existing arrangements as a transition measure.

      If an existing investment property is sold, negative gearing benefits must be eliminated.

  5. housing affordability policy:

    – remove NG – prices down 9%
    – CGT discount – prices down 10% more
    – prevent subprime mortgages (high LVR, high repayments as % of real disposable income) – prices down 10% more
    – introduce speculation tax – prices down 10% more

    all of this could be done in a single day at no cost

    we don’t need to build million empty homes to make housing affordable

    • The Patrician

      You forgot
      – require proof of purchaser’s FIRB compliant residency status on transfer of title of existing dwellings.

    • we don’t need to build million empty homes to make housing affordable

      Just pass a law placing a $100,000 maximum on the sale price of any house. All houses become instantly affordable.

      Problem solved? What was the problem again?

      • I like this policy – it will have no direct effect on the price of houses, but drive housing transactions underground, preventing the collection of stamp duty and preventing the banks from lending money (house purchasers will have to borrow from the vendors or people they meet at the pub who don’t keep records), RE Agents from making commission, and lead to the majority of houses being constructed by community groups in the mode of Amish barn raisings. Great for community spirit.

      • you think homes are expensive because there are no enough homes for everyone?

        how about one million empty homes around (934,470 as of 2011)?

        one in 9 homes in Australia is empty – almost equally distributed around the country. Even in suburbs with the least number of empty homes one in 20 is empty – hundreds and thousands in every suburb

        Removing CGT discount and introducing speculation tax would not affect people who build new homes, only people who buy existing homes to make quick profit would be affected.

        Builders would benefit because land prices would fall making their the largest cost significantly lower.

      • I thought I had asked two questions:

        1) Would my scheme solve the problem?
        2) What was the problem again?

        Instead someone trots out that empty house nonsense again.

      • I answered in the affirmative to the first one!

        EDIT: The reason being, apart from re introducing a barter economy, is that it closes the property market to the vested interests that everyone seems to agree are the cause of the problem

        The problem, I guess, being people searching for a roof over their heads not being able to find one.

    • Oh Doc! There would, on the face of it, be a wicked cost. Our economy is so geared to this idiocy the dislocation caused by a significant fall in house prices and general RE and building activity would be something to behold.
      HOWEVER what you would really be doing would be crystallising the costs of decades past into a very short period. It all has to be paid sometime!

    • doctorX, the point of de-restricting the supply side, or at least my understanding of it, is not to actually build a million empty homes, it’s merely the threat that you could that will dampen any speculative urges.

  6. The Patrician

    In the midst of a “budget revenue emergency” Hockey should be condemned for his support of the NG status quo.

    Ditto Bowen.

    • They shouldn’t be allowed to fix it, now. They should be universally condemned after it goes nuclear, and their names blackened in the history books.

  7. “what is most disappointing about this result is that the extra investor demand from negative gearing has not alleviated Australia’s “housing shortage” one iota”

    This is incorrect.

    Strong investor demand is (amongst other things) facilitating the boom in new home construction.

    Housing starts are annualising +190,000. Without investor demand, new home construction (supply) would be much lower.

    • Without investor demand, new home construction (supply) would be much lower.

      If my grandmother had wheels she’d be a bicycle.

    • UE’s “Investment Property Loans” chart above shows property investors borrowing just under $1bn/month for new home construction, and looks to be closer to $500 million by the end of the graph, presumably some time in 2013 – compared to the ABS’s total lending for new home construction, which ran at a seasonally adjusted $5bn/ month during 2013.

      So with zero investor demand I guess new home construction would be a maximum 10% lower.

    • outsidetrader

      Did you not see the charts?

      The level of investor $s spent on new construction is the same now as it was in 1988.

      It’s hard to see how it could be any lower in the absence of this policy…

      • They could make it lower by taxing land purchased by investors for building new houses at 100% of the cost of purchase.

    • The Patrician

      That’s why you retain NG for new builds only BM.

      Watch construction take off then.

  8. arctic explorer

    Would you mind going through a bit more of the logic in your thinking that investors do nothing for housing supply? At face value when an investor purchases an existing property the property owner receives a lump sum of money that they turn around and use for:

    • Buying one or more existing properties (usually with white goods purchases regardless of whether for investment or primary place of residence purposes)
    • Building/buying one or more new properties (with white goods purchases as above)
    • Renting a property (either existing or new build)
    • Investing (whether businesses and/or the stock market)
    • Saving (deferring consumption to the future)
    • Purchasing other consumer goods and services

    On the basis of the above, it would seem that funds from investors do find their way into the construction of new housing assets – as well as providing economic benefits across a broad range of sectors.

    • the graph!!

      seems boomers like wrinkly old orange brick and mission brown houses that are a similar vintage to them


    • • Buying one or more existing properties (usually with white goods purchases regardless of whether for investment…

      Since when do rental properties come complete with white goods?

      You forgot some other increasingly important destinations for those funds:

      – pay off mortgage
      – pay off other debts accumulated by estate of deceased
      – pay off mortgage and other debts of estate beneficiaries
      – accomodation bond for aged care

      • White goods are pretty much all imported adding to our external debt and requiring us to sell resources, farms or established food chain businesses to pay for said ‘white goods’ That’s EXACTLY what is wrong with this whole shebang!

    • You are forgetting that the person who bought the property no longer has that lump sum – which they could have used for the same things you listed above.

      If they borrowed the money they have to pay it back out of their future earnings – so again you need to look at the opportunity cost through the eyes of the purchaser.

      It is known fallacy to look only at what you can see rather than the ‘unseen’. Look up the ‘broken window fallacy’ or read the following essay for the logic.

      http://bastiat.org/en/twisatwins.html

    • I recently rented a house. It did not come with new white goods. The investment property I lived in prior did not come with white goods. In fact the owner refused to even fix the central heating during winter, for which I was successful in obtaining orders from VCAT which were ignored. I was then successful in obtaining compensation to approx the value of a new central heating unit! However the investor merely flipped it to another investor without doing the repairs. The new investors didn’t replace it (no money) and promptly terminated the (9 year) periodic tenancy to chase their yield from a new tenant.

      So tell me, where are these benevolent white-good providing landlords?

      • Good point about IPers reluctance to fix any damn thing – if anything converting a house from owner occupied to rental reduces the cash spent on it.

        Sorry about your experience, which puts my own crap rental experiences of landlord stinginess/incompetence in perspective

  9. moderate mouse

    I was thinking – what happens when all the boomers retire? Won’t the tax deduction that their 10 negatively-geared properties brings suddenly become meaningless once they stop earning anything? They’ll have some rental income I guess, but that will all be going to service the leverage (as best it can). I’m no tax guru (can you tell?)….

    Anyone care to expand?

    • Isn’t the whole point to access your capital gains at approximately that point i.e. sell of your portfolio bit by bit, crystallising enormous profits?

      • moderate mouse

        Yeah that’s my understanding. Just want to confirm that there is absolutely zero to be gained after retirement.

        The ‘portfolio’ will turn from a tax deduction to a flat out loss-maker overnight.

    • Sell properties in retirement one by one each year to repay debt. Move into one of the investment properties to avoid taxation on it altogether for the rest of remaining life.

    • Maybe they will remove the tax-exempt status of pension income for people over 60.

      They might need to keep the property to negatively gear against that!

  10. Let’s just be frank and admit to ourselves that negative gearing is a highly regressive form of wealth redistribution.

    Once that is accepted as plain fact, then we can start dealing with the unintended effects of such a system.

  11. How much will state stamp duty revenue suffer in a state like Victoria if house prices fall 9%?

    States have an interest in maintaining the bubble.

  12. “With low interest rates the impact of the subsidy has fallen from a 2008 peak of 15 per cent”

    Whoa up! This simple maths tripe way underestimates the effect here. The only reason we haver these damned low interest rates is to aid and abet the process. So what we have is a self-reinforcing loop happening. There would have been a time in my distant past when I’d have tried to get something running which might reflect that. Alas my maths is long since lost. Nevertheless it does not alter the fact and surely modern boffins can create some sort of model that reflects this effect. This stupid simplistic straight line thinking, with no loops and no feedbacks, in modern economics should be consigned to the rubbish where it belongs.

    The low interest rates we create are not ‘REAL’ We sustain them by putting zero value on our resources of all kinds including established businesses. If we were not selling those resources to fund this stupidity our interest rates would need to be much higher. So it is silly to include low interest costs as some sort of offset in this. It is only an offset if we include all the other very real costs!
    This is, if you like, the other side of the coin, (or loop!) that UE flips when he says “funds that could instead be used on any number of worthwhile projects.”

    • GunnamattaMEMBER

      I am with you here flawse, but for a slightly different reason

      I suspect the impact is considerably more but that (especially if you note the increasing amount of comment about negative gearing of RE in recent months – since the Torynuffs came to power) that there is a general awareness that something is going to have to be sacrificed and that NG on residential RE may be it, and that what recent reports concerning the impact of NG and the degree to which real estate is overvalued [and the mantra that it isnt yet but is on the verge of becoming so] are sort of like an ambit claim – a starting point for negotiations.

      So effectively the FIRE world is telling us that real estate is barely (if at all) overvalued and that NG builds in about a 9% impact. The old negotiations man inside me is crooning into my ear that the real impact of NG is likely a whole lotta more and that the overvaluation of RE is up towards nosebleed levels.

  13. I can remember Mark Latham Questioning NG in the early 2000s , just before I brought in Syndey.

    Nothing any politician had said resonated with me more at that time.

    The owner of the property I had rented for 5 years wanted to sell and said I could have it for 300k.
    I came up just short on the required deposit.

    Cut a deal giving me 12mth lease In return for letting her do the place up for sale. ( also giving me first bite of the cheery at sale time)

    14 months later I pay 385k for the same place! After watching every third house in my area (Ermington) sell within 2 weeks and immediately go up for rent!

    Those NG [email protected] cost me 85k extra on my home and I hate the pollies that backed it. At least the private sale cut out the Realestate agents theft.

    Anyway Latham got immediately Crucified by all sections of the media (including the ABC)
    And within 24 hrs the Labour Party , quickly stated Mark was only concidering comments made by others about problems faced by first home buyers.

    Labour made clear after that media furore that it was “hands off NG”

    • DodgydamoMEMBER

      Thanks for sharing the anecdote, and yes, both sides of the political duopoly are against the removal of NG.

    • Well , when it’s the only Gig in town , what are ya gona do?

      And anyway as for ponzi’s, what was it George Kastanza says.

      “It’s not a lie , if YOU BELIEVE it’s not a lie”

      😉

      • Yes, indeed. And when two or more ponzi worshippers come together, watch out! Delusion is displayed in full force every weekend here in the west

  14. Uranium GeoMEMBER

    Kohler was on ABC news opining that the tax foregone was money well spent. I couldn’t believe it.

    Dirt bag.

  15. The Patrician

    Moodys says AUS house prices 2% overvalued
    The Economist says AUS houses 28% overvalued against income and 49% overvalued against rent
    Why the massive difference?

    • Artificially low IR’s; huge natural resources that we are prepared to sell to maintain our lifestyle; all to support a ponzi scheme based on a large, and monumentally insane, migrant intake and negative gearing.

      P.S. I didn’t see how Moody’s calculated the 2% number?

      • The Patrician

        You miss my point flawse

        My question is….Whose measure is more accurate? Moodys or the Economist?

      • Sorry TP I did indeed miss your point. I doubt there is an answer eh! FWIW IMO It depends on what you believe. If low interest rates are the benefit we get from decades of productive work and are therefore our just desserts…Moody’s might be overestimating at 2%! If on the other hand low IR’s are the result of financial repression necessary after decades of profligacy and wasteful resource sales to pay for trinkets then the Economist might be optimistic!
        They might both be right along different time frames?
        Why teh difference between income and rent measurement…again I reckon purely interest rates. Funnily enough I reckon NG is NOT the real problem. False IR’s are the REAL problem. If we didn’t have artificially low IR’s then the house price appreciation wouldn’t be happening and negative gearing would not be a proposition.
        Frankly it doesn’t alter the fact that it is all total BS!
        Just my two bob’s worth and that’s not worth much!

    • GunnamattaMEMBER

      I went off Eureka report circa 2010 or 2011 with Gotti and his right wing nuttery finally getting the better of me, but always rating Kohler…..

      But somewhere along the line his views and mine went completely different ways. He seemingly really does think that good.

      • Alan doesn’t understand maths at all. He’s witty talking about what happened on the markets today. Leave it at that!

  16. Crouching Tiger

    This government will not get rid of NG. It forms part of their plan to break the power of the union super funds and get more people self managing their super.

    The ALP wont get rid of it because the CMFEU are under the misguided belief that it is the driving factor behind the building industry.

    The RBA stats should signal a huge warning to the ALP and the CMFEU that this is unsustainable.

    Heaven help the ALP if This shocking government is booted out of office before rates rise and everything goes pear-shaped..

  17. So NG adds 9% to the price

    Could we hazard a guess as to what cheap money from Chinese buyers is adding to Balwyn, Glen Waverley in Melbourne and Surry Hills/ Eastwood in Sydney?

    Say 30-40%