REIA parasite injects negative gearing poison

By Leith van Onselen

The property lobby must be worried that the Government is considering winding back negative gearing tax concessions, with the Real Estate Institute of Australia (REIA) and the Property Council reportedly spending $60,000 on a new report aimed at combating claims that negative gearing distorts the housing market. From Perth Now:

Set for release early this year, REIA chief executive Amanda Lynch said the new data revealed mum and dad investors with incomes under $80,000 would be the hardest hit should negative gearing be scrapped…

WA Property Council executive director Joe Lenzo said changes to negative gearing would push Perth’s rental prices up.

“Should negative gearing be abolished it would be very easy for us to get into a similar situation in the rental market we saw years ago when demand was high and prices skyrocketed”…

Property Club WA branch manager Garth Davis said the majority of middle-income club members were heavily reliant on negative gearing.

“They don’t have as much wiggle room when it comes to cash flow, so if it was cut they would be out of the market,” he said.

It appears that the upcoming report will once again trot out the same old tired argument that negative gearing is primarily a middle class affair that assists ordinary families to build-up a retirement nest egg and reduce reliance on the aged pension.

Such thinking is flawed on a number of grounds.

First, excessive demand from investors –  arising in part from negative gearing – has helped to push-up house prices to record levels against income, and forced younger Australians to devote a higher share of their lifetime’s earnings to pay-off a home than would otherwise be the case.

Second, as illustrated beautifully in Saul Eslake’s 50 Years of Housing Policy Failure presentation, Australia’s home ownership rate has decreased over the past 50 years, despite favourable demographics, due to these rising home prices (see next chart).

ScreenHunter_39 Sep. 03 10.37

It follows, then, that the best way to ensure people’s security in retirement is to increase access to first home buyers by making homes more affordable? Surely Australians would be in a far stronger financial position, and would be far better placed to save for their own retirement (and avoid the aged pension), if they were not required to pay-off some of the world’s biggest mortgages, thanks to policies like negative gearing?

The argument that negative gearing is a middle-class affair is also only half right.

While the majority of rental properties are held by middle income earners:

ScreenHunter_2377 May. 12 13.01

The fact remains that property investment is most popular amongst higher income earners, presumably due to the increased tax benefits on offer as one moves up the marginal tax scale.

In 2011-12, 35% of taxpayers earning over $180,000 held an investment property, with 24% negatively geared. By comparison, 15% of taxpayers earning between $50,000 and $60,000 held an investment property in 2011-12, with 11% negatively geared (see next chart).

ScreenHunter_2376 May. 12 12.51

Average net rental losses are also much higher in dollar terms (but less in percentage terms) for higher income earners:

ScreenHunter_2379 May. 12 13.27

Finally, the Property Council’s claim that winding-back negative gearing would cause rents to “skyrocket” is laughable. As has been shown many times before, the overwhelming majority of investors purchase existing housing (see next chart).

ScreenHunter_5742 Jan. 27 13.40

And since investors primarily purchase existing dwellings, negative gearing in its current form simply substitutes homes for sale into homes for let. Accordingly, the policy has done little to boost the overall supply of housing or improve rental supply or rental affordability.

In fact, the last time negative gearing was ‘abolished’ (quarantined) between 1985 and 1987 (shown in red below), there was no demonstrable impact on rents, with periods of higher rental growth recorded both prior to and subsequently:

ScreenHunter_5743 Jan. 27 13.45

Seriously, why would property investors campaign so hard against a reform that would raise rents?

The truth is that if negative gearing was wound-back and a proportion of investment properties were sold, they would be purchased by renters (or other investors that would rent them out). In turn, those renters would be turned into owner-occupiers, reducing the demand for rental properties and leaving the rental supply-demand balance unchanged.

Expect this $60,000 report to be a grand exercise in propaganda and self-interest, rather than a well-meaning public policy discussion paper.

[email protected]

 

Leith van Onselen

Comments

  1. Nevermind. Without an income there is nothing to negatively gear. Prospect of rental increases in Perth in the next few years? Yeah… nah.

    • You’re not suggesting some investors will end up with no job and no tenant are you? Heaven forbid…..

      • And no house, the trifecta Eh!
        Yep, forget interest rate cuts, having a job will be the main game.
        Love your comments Janet, cheers

  2. “Property Club WA branch manager Garth Davis said the majority of middle-income club members were heavily reliant on negative gearing.

    “They don’t have as much wiggle room when it comes to cash flow, so if it was cut they would be out of the market,” he said.”

    I know it’s un-Australian to say this, but maybe if their cash flow is so tight they need NG then they shouldn’t be in the market in the first place?

    • Exactly. “Investments” funded by NG (or any other external source to the asset’s income) is by definition speculation.

  3. What these con-merchants do not tell mums and dads is that their mortgage or mortgages (if heavily invested) will be the most toxic poison known in their lifetimes in a property downturn. Unlike our comrades in the USA who can walk away with bankruptcy, Australian’s are not able to walk away from failed mortages, they will haunt them and their families for their lifetimes even after they are bankrupt.

    Australian real estate is a gamble of a lifetime with risk that far outlives the transaction cost perspective.

    • Could you explain that further? If you declare bankruptcy that’s a clean slate after 7 years or so right?

      • @Andy! good point and of course buried in the fine print. All I can say is the last thing you would want with no income and facing bankruptcy provisions in Australia is an overpriced house…….the most toxic asset one could hold in this situation:

        From Victoria Law Handbook and other bloggers please feel free to clarify this enlightning topic for all to understand clearly.

        “Trustee’s power to sell property after discharge
        Warning:

        The trustee retains the power to sell the property even after the bankrupt is discharged. The trustee has this power of sale even if a bankrupt had no equity in the property at the time of bankruptcy, but later builds up significant equity, for example, due to increases in land values.
        The trustee has the power to make a claim on any equity that the bankrupt might have in the property for a certain period of time after the bankrupt is discharged (ss 127, 129AA(3) Bankruptcy Act). The length of time available to the trustee to make a claim is:

        ■for property disclosed in the statement of affairs: six years after discharge;
        ■for property acquired before the bankruptcy and not disclosed in the statement of affairs: 20 years from the date on which the person became a bankrupt;
        ■for property that is acquired after the bankruptcy and disclosed to the trustee prior to discharge: six years after discharge; and
        ■for property that is acquired after the bankruptcy and disclosed after discharge: six years after disclosure.
        The trustee can extend the six-year period referred to above by giving the bankrupt written notice within the six-year period. The notice can extend the period for up to three years. There is no limit on the number of extension notices that a trustee might give.”

        The extension period is the danger and one would hope the trustee goes bankrupt themselves, that would be more than likely in the event of Australia’s housing bubble collapse…..

      • Much appreciated, very interesting!

        That extension period is particularly concerning as you’ve mentioned – basically it is a failure of of what bankruptcy should allow (a sh!t credit record but clean slate for the bankrupt, and a potential loss for the lender if sale doesn’t cover the outstanding loan).

      • I think that you are confusing yourself TM. You are talking about bankruptcy provisions that come into play for reasons other than a mortgage default.

        In the event of a mortgage default the lender has the power under the mortgage to take possession and sell as mortgagee in possession independent of any bankruptcy action.

        In the instance you are quoting it’s more likely to have come about due to perhaps a business failure, and unsecured creditors are looking for assets that can be sold off to satisfy ther debt, and the bankruptcy trustee or the administrator would be the one to take that action.

        A bank wouldn’t wait until after discharge from bankruptcy to sell up a house because they don’t need a bankruptcy action to move to recover their loan funds. It would be rare that a bank as a secured creditor would initiate bankruptcy.

        To be honest I’ve seen lots of instances of bankruptcies when people own a home jointly with their spouse. Unless the house has a lot of equity, it is rare for the bankruptcy trustee to move to sell the house, and I have only ever seen one instance where the normal discharge period of 3 years was extended and that was a case involving a very wealthy man and a bankruptcy action that was criminal in intent, initiated by a lender who was completely unethical, not exactly a common occurrence.

        I guess my point is summarised as “why would a lender wait years after a bankruptcy was discharged when they don’t even need bankruptcy to foreclose on a mortgage”

      • It’s not all sh$ts and giggles declaring it
        Got a mate who had to (a business that owed him significant $$ closed shop and put him in the shit, paid out his employees and then flicked the middle finger at banks/ATO).

        Been tough

        I mean, it’s not hard to duck a bit — transfer the Haines and dirt bikes into a mate’s name etc.

        But still, hard yakka

        Most Aussies will clench the sphincter to avoid it like the plague <– this makes me think we won't have a crash

    • Very few places in the USA were non-recourse. That’s largely a myth to explain why “it’s different here”.

  4. Someone’s already pointed out the negative gearing battler featured in the story moonlights at the mentioned Property Club.

  5. “Property Club WA branch manager Garth Davis said the majority of middle-income club members were heavily reliant on negative gearing.”

    Always a wise strategy…

  6. Very appropriate pic there, UE. And as everyone should know about the ticks you get here in Oz, they can be fatal if allowed to remain attached and engorged for too long. Get them off you as soon as you can. Ditto negative gearing … that tick has been attached so long that removing it will be a delicate job and fine tweezers required. 😯

    • As a young un i was told that a tick removal process was to cover the area in petrol or kero and wait.
      The tick deprived of air would eventually make its way to the surface for extraction.

      I’m wondering if the use of petrol in this case would be a solution to extracting the property ticks as well…

      • Best advice these days is to spray the tick with ether (to freeze it and kill it before removal), as found in wonderfully-named Australian products like “START YA BASTARD!”.

        In this case, we need a product called “STOP YA BASTARDS!” 😉

      • They will start using the petrol on the properties that ‘aren’t moving’ when cash gets tight

        Like all the boats that ended up becoming the property of Club Marine Insurers in 2008. It was truly a boom year for dangerous sandbanks and submerged shipping containers that year

  7. Government can’t pass simple budget measures, what is the chance of government implementing tax reform.

    Zero probability!

    There will be no change to NG.

    • +1 Labor are as wedded to this appalling waste of revenue as the other lot.

      Fiscal, monetary and regulatory policy in this country are captured by debt peddlers and real estate agents

    • You’re right. Let it burn, I say. It’s the only thing that will drive real change. I don’t want it, but we have to live in the real world.

  8. Tassie TomMEMBER

    I had a chat with a friend the other day.

    Her husband’s union (which will remain nameless) is in pay negotiations, and one of the proposed “benefits” to employees is to allow them to salary sacrifice into an interest-only loan.

    She was asking me about the benefits of buying an investment property to take advantage of this should it become part of the final pay agreement.

    I explained the potential risks as I see them of 1) an employment shock or 2) a current account crisis leading to a final common pathway of our heavily geared banks getting into trouble, leading to credit becoming tighter, hence house prices falling.

    There were way too many new concepts for her to take in all at once, and she said “How do you know about all this stuff?”

    • thomickersMEMBER

      Lol. For these types of people, i just link them to this site before they fire up into sky high leverage.

  9. WA Property Council executive director Joe Lenzo said changes to negative gearing would push Perth’s rental prices up.

    In that case I would expect that the ending of negative gearing would be strongly supported by established investors (cashflow positive) and by all real estate agents who manage property for a fixed percentage of rental income.

    Perhaps I should take a petition around to real estate agents asking them to sign their support for the ending of negative gearing!

  10. According to an old SMH article, Nick Xenophon owns 8 properties, Clive Palmer owns 12, and Turnbull about 12. The average Fed Pollie owns 2.5 investment properties.
    So what are the odds they would cut their own entitlements, look at the chart, over $250k gets the biggest bang for negative gearing.

    • Opinion piece by Nick X in August…

      And while you are at it, why not tweak negative gearing to encourage affordable new housing. It’s crazy to have a blanket tax code that rewards debt over equity.

      The Grattan Institute estimates that $2 billion could be saved if negative gearing was slowly phased out. In the interests of full disclosure, I should say that a phasing out of negative gearing would impact on me personally, given the four properties I own. But if it means a balanced budget and a more affordable housing market for young Australians to enter into, then that is a price I am very willing to pay.

      http://www.adelaidenow.com.au/news/opinion/nick-xenophon-budget-bottom-line-needs-repairing-without-hurting-the-most-vulnerable-in-society/story-fni6unxq-1227036221219

      FWIW, I think Nick X is ok. Certainly infinitely better than Palmer, Ricky Bobby, Lambie, the mad Libertarian (who wants everyone to have guns), and the DLP reject.

      • Hmmm yeah whatever Nick.
        If NG is grandfathered that won’t affect current arrangements. The current NG issues eventually expire[ might take a long while tho]
        That is all I’m asking for.

      • Lambie, the mad Libertarian (who wants everyone to have guns), and the DLP reject.

        What’s wrong with citizens owning guns ? Should only criminals have guns? With Police taking as long as they do to get to an incident by the time they get there you & your family could be dead.

        Is that OK ? Well for my money it’s not OK.
        It’s all BS about Guns = another massacre

        Ban all knives , Ban all hatchets et etc FT !

      • What’s wrong with citizens owning guns ? Should only criminals have guns? With Police taking as long as they do to get to an incident by the time they get there you & your family could be dead.

        So anyone should be able to walk into a corner store and walk out with a shotgun ?

      • What’s wrong with Muir?
        Lambie?
        Why do you say that?

        Because they’re different?

        DrSmithy I don’t think anyone is advocating you can buy firearms with no license, PTA, license etc.

        I think the point is people (some, not all) should be allowed to own them.

        On my property, it’s necessary: protect livestock from wild dogs. Animal welfare purposes etc. And what if you have many 00’s or 0000’s of acres with pigs/goats/dogs?

        City dwellers don’t really need guns (especially semi/fully auto pistols) but some people have a real need, and in a properly managed regime, most people can be responsible owners.

        The question is: where are crims getting their guns. Auto handguns, auto long arms etc. How do they get them?

  11. As I mentioned before, it is a joke that cancellation of negative gearing will push up the rent….

    The reality is NG has pushed up the house price…and then your landlord will charge you more due to higher house price….

  12. ceteris paribus

    Quick Leith, post a copy of this article to the REIA and Propert Council. It might save them $60,000.

    • Townhouses and farms comparison.

      Anyway,negative gearing is purportedly meant to increase supply and therefore home ownership so the state is already trying to fix it and failing.

    • Peter,
      Do you have any ideas where the biggest abuses are in the current NG arrangements?.
      what simple changes would you make to NG, maybe that would help long term renters, the taxpayer and FHB’s ( that want an established doer upper) ?

      • I’ve mentioned it before – the removal of NG won’t make much difference. It’s a myth that it will change the world.

        It would however change the nature or type of residential investors.

        I don’t think that’s what you wanted to hear.

      • I bought in 2003, a main rd property (Adelaide) because i wanted to stay close to city, and got compulsory aquired by govt 6 months ago. Started reading MB then and like many thought i should wait ( thought about now would start looking better), but the combo of living with mum,not wanting to miss out altogether and eventually the right property led me to buy in Cheltenham ( 100 yr return verandah gem, 10% below council evaluation).

        A second question would be, if a character house in character suburb is worth 2 x two bedroom apartments ( in lesser suburb) now, would you expect it to be worth more in future. In that they aren’t building old homes anymore but apartments are going to keep going up?.

    • Sorry Peter, did reply, but using phone on the couch , ended up replying to myself!, see below.

  13. If NG was quarantined to renatal income my expectation would be ceteris paribus an increase in ‘rental yield’, and not necessarily an increase in ‘Rental prices’.

    I think the REIA probably know this all too well.

  14. Great forensic analysis of negative gearers! Tax stats not much use here. If taxpayers are ranked by taxable income, neg gearing will distort the rankings. Also, if they invest thru private trusts (which high earners are more likely to do), income or losses likely to be recorded as trust income/losses.

    Prof Judy Yates (at http://www.ahuri.edu.au/publications/download/ahuri_judith_yates_research_paper) used ABS data to get around these problems, found that neg gearers are concentrated in the top quintile.

    Peter Davidson (ACOSS Senior Advisor & tax blogger at pagdavidson.wordpress.com)