SQM: Forget super, abolish negative gearing

By Leith van Onselen

SQM Research released its free weekly newsletter last night, which slammed the idea of allowing first home buyers to access their superannuation to purchase a home, whilst imploring the government to do something genuine to fix housing affordability: abolish negative gearing.

…if you think about Hockey’s [superannuation] proposal in terms of what it would do for housing affordability, it doesn’t add up. It is, indeed, a “thought bubble” that would promote a property bubble if ever adopted.

The problem is that tinkering with the property market in this way would only serve to artificially inflate demand for property and therefore push up house prices even higher than where they are now.

Such as policy would have a similar distortionary effect as the first home owner grant and exacerbate housing unaffordability.

The problem with the first home owner grant, when it was first brought in, and for subsequent boosts, is that house prices were almost instantly lifted beyond the value of the boosts. While the grants were intended to improve affordability, they had the opposite effect. The chart below highlights the impact of the grants on housing prices…

ScreenHunter_6464 Mar. 11 06.50

With Sydney vendors now asking for over $1 million for a house, a 10% deposit on a Sydney home, if raised through super, would erode almost entirely the retirement savings of most people in that age group [20s to 30s]. Is Hockey even familiar with house prices and average super balances?

We are of the belief that the less government intervention there is in the property market, the better. Governments all round should be doing more to promote housing affordability, not unaffordability.

Reducing negative gearing, a highly distortionary policy, would have a far more beneficial effect on promoting housing affordability. If negative gearing was repealed or altered, investors who are now gobbling up property would back off buying houses, which is what those who are demanding lower dwelling prices want to see. We know Joe was at least looking at negative gearing last year and we strongly encourage him to reduce or eliminate negative gearing. For starts, he would potentially save over $5 billion a year on the budget!

According to the Australian Bureau of Statistics (ABS) first home buyers accounted for just 14.5% of total owner occupied housing finance commitments in December 2014. This compares to around 50% for investors. It’s investors who are doing the heavy bidding at auctions, and with interest rates falling, that trend will continue through 2015.

So, if anything needs to be done, it is to eliminate existing distortions, and not introduce more.

Well said. You can subscribe to SQM’s free weekly newsletter here.

Comments

  1. ResearchtimeMEMBER

    It would be a remarkable combination if people were allowed to dip into their superannuation savings, for a house deposit – and then the inevitable housing market correction was on the 20-30% scale, unemployment rose, resulting in a whole section of young house buyers not only to lose their jobs, their house, but their retirement savings as well. A combination that could put people back decades – possibly stopping some having kids, etc!

    • Oh, people never worry about their super until long after they’ve had kids. They’d sure be upset about the house prices though.

      Not bad thinking though. Reward tax minimisers through super, punish tax minimisers through NG. I’m all for it

      • KlimashkinaSydney

        Timday – sorry to hear that. So from what I can gather: population declines because of low birth-rates of those already living here, because of cost of living (ie housing), which is being offset by high immigration intake.

        Yeah, that makes a lot of sense …

    • (sarcasm) yeah, but think of all those skilled migrants, they practically come at no cost! *NO COST*, not now, not ever! (/sarcasm)

      • That’s really the psychological crux of this whole intergenerational inequity discussion. It’s just human nature to care a whole lot more about losing something than never having had it.

    • someone can have his super wiped out by stock market crash or housing bubble burst – either way it gone to market speculators and bankers

      • The worst thing about Super is the way current investment firms rob you fees for managing it and do a shit job at that. The whole super system in this country is a joke. I was away for 6 years (living abroad) and 1 of my super funds was entirely eaten in fees.

        I’ve since consolidated all funds, but that was 1 fund that was contributed to when I was a low income earner (Student) and it was totally eaten up. How can they do that? What about other low income earners who get screwed because they make it so difficult to consolidate?

        Thankfully the government website makes it easier now. But it’s all a shambles….

  2. What 30yo has 100k in super?!!

    I started off in 2000 as a graduate telco engineer on 45k and over the course of 10 years, got to about 80k through the standard SCG. (Through the GFC obviously with a highish growth allocation)

    • >What 30yo has 100k in super?!!

      One who’s dealing cocaine, of course! What kind of question is that? Get with the times, man! 😛

      Hmm… I wonder if the E-Tax proggy has a “Crack Cocaine Dealer” as “Occupation”…

      • It would fall under a “Miscellaneous” job title.

        Adult workers have their own category.

    • That was the point. Even in the best case scenario super would be wiped out just to scrape together a deposit on a sydney shitbox.

      This is the stupidest policy idea ever…and it’s got some competition.

    • Lol i don’t know on what earth these people are living but its definitely not the same one that i’m on!

    • tmarsh – Not me that’s for sure. Especially when your super gets eaten with mega fees from unscrupulous super funds.

  3. Negative gearing just needs to be quarantined so gains and losses from property and shares can be netted off against each other (as they are now) but not then applied to reduce income from other sources.

    The net losses claimed in 2010/11 were $7.8bn. So at the top marginal rate the revenues forgone would be about half that. Mind you with Sydney/Melbourne running at gross rent yields of just 3.6% now, the net losses in 2014/15 will be substantially higher.

    http://blog.corelogic.com.au/2013/05/there-were-1213595-individuals-with-a-negatively-geared-property-over-the-201011-financial-year/

    • Just wait ’til interest rates rise. With the debt load constantly building, the interest deductions will completely rape the budget so badly that the events of Nanking will look like a peaceful negotiation.

      • no need to wait for interest rates to rise, vacancy rates will rise sooner and rents will fall so …. but with unemployment going up for many there will be no much of “other income” to offset loses against.

      • You really think rates will rise?

        Based on what? A strong economy?

        The problem is the high level of household debt, not sure about your area but in mine every third car now seems to be a Lexus, Audi or BMW.. and I’m not in Malvern

        Cheap car credit, cheap home loans and finance for renovations have left the masses liquored up on debt, a 50 basis point rise will knock any stream right out the economy

        Bring on QE in 2017!!

      • “a 50 basis point rise will knock any stream right out the economy”

        Hit the nail on the head OMG. Will be very hard for rates to rise now given debt levels. Baby boomers always harp on about 18% interest rates. What people need to realise is that if you take the average house price back then at 18% it’s cheaper than getting an average house now at 5% interest rates, such is the level of debt that is required. Politicians in this country, and all other Western countries have completely lost the plot!!!! The major parties here will be last on my ballot sheet for a long time to come.

      • flyingfoxMEMBER

        @OMG

        You really think rates will rise?

        Based on what? A strong economy?

        Based on the fact that we need to have a rates differential between us and the US,UK etc. If the US raise rates and that is a big if, we ill have to sooner or later.

      • The major parties here will be last on my ballot sheet for a long time to come.

        Excellent. That is the only way to vote. Spread the word.

  4. BuyHighSellLow

    I honestly believe it is too late to amend negative gearing now. If it is changed and the property market crashes, the the reforms will get the blame. It will be reinstated and never touched again for several generations.
    We need to let this beast go out on it’s own terms, once it is done we can come through with reforms to prevent it happening again.
    The majority of people who negative gear are akin to a cult, they think that by losing 10-20K a year, they are saving 10-20K a year in tax. You cannot convince them otherwise. It is poorly understood as it is not explained in the seminars

      • BuyHighSellLow

        I think you may have misunderstood me, the highest marginal tax rate is 49c on the dollar if you lose $20K, you are paying 9,800 less in tax. You still lose 10,200, many people who negatively gear cannot grasp this fact.
        Granted depreciation is a non cash outflow that should not be deducted against an individuals non related income, however it is taken into account in the capital gains calculation.

      • No, BuyHighSellLow, you haven’t understood. You have the actual cash outlay each year, which you actually pay, but then you add on the “depreciation” from your depreciation schedule, which can easily be tens of thousands of dollars. You haven’t paid that in the year, it’s just a notional amount based on the capital value of the place, quality of fittings, year of construction. People with high depreciation can come close to saving 10-20k in tax while only outlaying 10-20k of their own cash income in that year.

      • flyingfoxMEMBER

        @bourkl

        If your investment plan is to rely on depreciation and NG to be cash flow positive, you have some serious problems.

        Remember, depreciation is there for a reason … not a easy tax write off.

    • ResearchtimeMEMBER

      I agree – the political imperative has now gone. Liberals will want this bubble to continue until after the next election – and Labour will be sweating it won’t bust on their watch (although easier to blame Liberals maybe?). After which, macro prudential, and negative gearing will be seriously examined, and I suspect implemented. But the great irony is, if history is any guide, the scrapping and the implementation of both measures will not improve affordability for the poorest. So the great debate will continue…

      Its going to be a serious correction in Oz this time around… very serious indeed.

  5. Whatever happened to the Senate Inquiry into Affordable Housing. I made a submission and have been following it, waiting for the results. It has been postponed SO MANY TIMES !. It was due for sometime in March and now its postponed again to April 14th.

    It is really a Joke… All the people and institutions who spent time making a submission should be grilling the government for postponing something so important !

    Does anyone else feel outraged about this or is it just me ? why is this not reported in the media or anywhere else ?

    • “On 12 December 2013, the Senate referred an inquiry into affordable housing to the Senate Economics References Committee for inquiry and report by 26 June 2014.

      On 17 June 2014, the Senate granted an extension to the committee to report by
      27 November 2014. On 2 October 2014, the committee was granted a further extension to report by the first sitting day in March 2015.

      Following a further extension granted on 2 March 2015, the committee is now due to report by 14 April 2015.

      Submissions closed on 25 March 2014.”

      http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Affordable_housing_2013

    • Frustrates me. An email I received from Nick Xenophon said:

      “I am working on a series of proposals, whilst obtaining feedback from as many people as possible (both individuals and organisations) that I hope to release in the next 4 to 6 weeks.”

      That was on August 27th last year. 28 weeks later, I’m still waiting.

    • That’s the problem now isn’t it foreigner. So many formal reviews drawing so many reasonable policy conclusions on tax or NG, yet the govt. of the day is in complete parlysis and won’t implement any of them.

      It’s the same everywhere. Europe, with it’s sh*thole EU in Brussels i can assure you is much worse and far more ignorant. Let’s not even discuss the USA!!!

  6. Where is SQM’s misplaced morality coming from? This isn’t consistent with other property spruiking publications. Dare I say, I’m impressed?

    • Phil the engineer

      It seems to me that Louis has always been one to tell it how it is. If he predicts a boom (eg Sydney), then it’s based on fact not a spruiktastic agenda.

      • “There are no facts, only interpretations” – this is nowhere so true as in finance and RE

  7. Why not phasing out NG on established property over several years or a decade and immediately abbolish the NG for not-rented-out properties?

    In my layman’s view, this would make tax concessions only for investment property that adds stock to both the markets – building and renting.

    • Why not phasing out NG on established property over several years or a decade and immediately abbolish the NG for not-rented-out properties?

      Pretty sure you can’t claim losses on a property unless it’s rented out.

      (How well this is policed is a different matter.)

  8. Has anyone looked at the effectiveness of NG as interest rates fall?

    In a low interest rate world loan repayments are weighted more to repaying the principle than interest. This would suggest the relative value of interest tax deductions should be falling as interest rates keep falling. Could it be that NG will just die a slow death as its value diminishes?

    • +1 Kristian,
      most NGearers rely on it to reduce their losses(in the hope that Equity and Capital gains will cover the losses plus some yield on top) but in the current environment with low IR’s it doesn’t help much so any investor(not speculator) who actually knows his numbers would know that NG isn’t doing much…
      Actually speculators should notice that too so hopefully it will fade away as you mention…

      • I’d guess that quite a few are expecting rents to rise to make the property positively geared and a great little earner. They probably indeed to keep it, never sell, and use its income stream to gear into more property.
        It has worked that way for decades.

  9. I think this whole national debate and conversation about affordable housing has gone off on a tangent.

    NG, can be argued, increases the availability of affordable housing by providing cheap rentals, well, cheaper than it would cost to mortgage the same property because the investor can negatively gear and effectively, the govt subsidises the rental for the renter.

    The root cause of the current housing affordability crisis is that supply has not been elastic enough to meet demand. Demand has grown exponentially due to immigration, overseas buyer demand etc, and supply has not kept up. Plain and simple.

    Any govt initiative or policy proposal that addresses the demand side will not work. Making additional funding available with the existing demand, through access to super, FHB grants etc will only boost house prices, as people will spend every dollar they have available to them bidding up the prices.

    Supply, is predominantly a state govt and local govt issue, and that is where people should be directing their energies to address affordability. Infrastructure, land releases, zoning regulations etc, these are the ‘key words’ that should be mentioned in this national debate/conversation, not negative gearing, FHB grants, cheap loans.

    • NG, can be argued, increases the availability of affordable housing by providing cheap rentals, well, cheaper than it would cost to mortgage the same property because the investor can negatively gear and effectively, the govt subsidises the rental for the renter.

      Landlords already charge as much as they are able.

    • The commonwealth government certainly has the ability to reduce immigration with the stroke of a pen. Some people have suggested that the reason they don’t -now the mining construction boom is over and there really are no skills shortages- is they believe that doing so would negatively impact house prices.
      They could also stop O/S buyers if they were motivated. So far their motivation seems pretty low.

    • I agree this has gone off on a tangent, but not in the way you describe.

      Frankly we are talking about policies and solutions before rigorously defining the problem.

      If the problem is housing affordability, for policy to be effective we must define what that means.

      At the moment you hear many forms of argument, all with separate definitions of affordability. I’ve seen measures based on repayment ability, ability to access debt, total cost of the house, etc etc.

      Maybe it’s the mathematician in me, but shouldn’t we all agree what we are trying to solve before coming up with solutions?

      Affordability must be rigorously defined, and then you can have a coherent policy objective around it eg goal of median price/median income ratios of x. Then and only then do you appropriate determine policy to achieve your goal.

      Otherwise we just have noise!

      • +1 “Housing Affordability” has become so corrupted by the FIRE lobby as to make the term useless.

        The issue is “high house prices” or more even more specifically “high serviced residential land price per sqm”

    • The root cause of the current housing affordability crisis is that supply has not been elastic enough to meet demand. Demand has grown exponentially due to immigration, overseas buyer demand etc, and supply has not kept up. Plain and simple.

      Yes. That is the simple truth.
      The simple solution is to reduce immigration and/or increase supply of quality housing.

      However, if government is not going to solve it, then tax rorts like negative gearing can act upon the existing problem and make the situation worse.

  10. Change.org seems to be a petition site where we could try and drum up enough support to remove NG couldn’t we? It seems to be working for other changes at the moment.

  11. include principle place of residence in the Aged Pension Means test if you want to make housing more affordable !!!! boom!

    I mean, should we hand money to a couple in the way of a pension if they live in a house worth 5 million dollars and have $900,000 in shares and other assets? me thinks not, but fuck maybe I’m wrong…