Mathias Cormann’s negative gearing lies grow

By Leith van Onselen

Following his shoddy effort on Lateline last month, Finance Minister Mathias Cormann appeared on Radio National’s Drive program last night, whereby he continued to lie about negative gearing’s impacts on rents, as well as wrongly claiming that negative gearing is utilised primarily by middle income earners:

Interviewer: How can you ignore the advice of the Reserve Bank to have a look at this system [i.e. negative gearing and CGT concessions]?

Mathias Cormann: The RBA is responsible for… principally the setting of the official cash rate… Tax laws are a matter for the Government…

Interviewer: So you will not listen to any of their advice?

Mathias Cormann: Well we certainly will not make any changes to remove negative gearing. We’ve been very clear about that and I have actually heard the shadow Treasurer say today that Labor does not intend to abolish negative gearing either.

I mean, the truth is this has been something that has been tried before with bad consequences. If negative gearing… was removed you’d reduce the supply of rental accommodation and all other things being equal push up the cost of rents. And that is not something in our view that is desirable and it is not something that we will do.

Interviewer: This is not an academic or an analyst or a lobby group. But it is the country’s central bank calling for this review. Won’t voters expect you to heed the Bank’s advice given its central role in our economy?

Mathias Cormann: We are obviously quite respectful of the RBA. We’ve got great respect for their independence to make judgments on things that they are responsible for. But our tax laws obviously are the matter for the Government. Now, it’s important to remember that negative gearing… is an opportunity that is being used by middle-income earners to get ahead.

If you look at the tax office data and you look at who actually takes advantage of negative gearing, they’re police officers, they’re nurses, they’re teachers. This is something that obviously is being used by middle-income earners to get ahead.

Let’s first examine Cormann’s claim that “bad consequences” for the rental market happened the last time negative gearing was abolished, between 1985 and 1987.

Sure, real rents rose in Sydney and Perth (see red line):

ScreenHunter_3798 Aug. 15 11.12
ScreenHunter_3802 Aug. 15 11.14

However, rental growth was flat or fell elsewhere:

ScreenHunter_3799 Aug. 15 11.12
ScreenHunter_3800 Aug. 15 11.12
ScreenHunter_3801 Aug. 15 11.12
ScreenHunter_3803 Aug. 15 11.15
ScreenHunter_3804 Aug. 15 11.15

Surely, if abolishing negative gearing caused “bad consequences”, then shouldn’t rents have risen uniformly across Australia, or at least in the majority of jurisdictions?

Don’t just take my word for it. Here’s what the 1987 Cabinet Submission on negative gearing said about rental growth (my emphasis):

“Data for individual capital cities suggest that, as might be expected, rents have risen more rapidly in those cities where vacancy rates have been tightest. In the twelve months to March quarter 1987, rent increases in six of the eight capitals lagged the CPI“.

Moreover, rents only rose in Sydney and Perth because rental vacancy rates were very low at the time in these two cities – as shown in the 1987 Cabinet Submission on negative gearing (see below table) – not because of negative gearing’s temporary ‘abolition’.

ScreenHunter_7192 Apr. 24 07.47

Cormann’s argument that if “negative gearing… was removed you’d reduce the supply of rental accommodation and, all other things being equal, push up the cost of rents”, is also complete and utter bunkum.

As shown below, nearly 95% of investor mortgages are used to purchase existing dwellings. Hence, they are not increasing housing supply, but instead are substituting homes for sale into homes for let.

ScreenHunter_8391 Jul. 17 13.08

If negative gearing was abolished, and some investors sold off their homes, who does Cormann 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 (and rents) unchanged.

This is precisely why there would be no material impact on rents from negative gearing’s removal.

Cormann’s claim that negative gearing is being used primarily by middle income earners is equally devious.

The Tax Office data that he mentions is based on “taxable income”, which is what is left after deductions such as negative gearing are accounted for. Accordingly, the average taxable income in 2012-13 was only $55,228.

If it was true that middle income earners were the primary users of negative gearing, then we would expect to see around half of all rental losses declared by those earning less than the average.

However, the ATO statistics clearly shows that those with taxable earnings below the average of $55,228 claimed only $4,645 million, or 39% of the total negative gearing losses in 2012-13, with those earning above average claiming $7,400 million, or 61% of total negative gearing losses:

ScreenHunter_7923 Jun. 22 14.28

So, based on the ATO statistics, which significantly understate the magnitude of the issue because negative gearing lowers taxable income, the claim that most people who access negative gearing are middle-income Australians is false. 61% of losses were recorded by those with above average income, even after their reportable incomes were reduced by more than the average due to negative gearing deductions.

But don’t just take my word for it. Here’s what the RBA said on the matter in its submission to the House of Representative’s Inquiry into Home Ownership:

Tax data also show that the incidence of property investment and the incidence of geared property investment… increase with income…

ScreenHunter_8352 Jul. 15 16.48

While the incidence of property investment increases with the level of income, the Household, Income and Labour Dynamics in Australia (HILDA) Survey also suggests that most investor households are in the top two income quintiles. These households hold nearly 80 per cent of all investor housing debt…

ScreenHunter_8353 Jul. 15 16.50

That’s right, the top 40% of income earners hold nearly 80% of all investor mortgage debt, according to the RBA.

As I keep saying, if the Coalition was serious about “ending the age of entitlement”, improving the Budget bottom line, and improving housing affordability, tax concessions like negative gearing and its partner in crime, the CGT discount, would be up for review.

Instead, we have the Coalition defending the status quo with blatant propaganda. Australians deserve better.

[email protected]

Comments

  1. Gen Y Home Buyer

    It’s amazing how many times you need to copy and paste the same data in response to the same idiocy. If only the Laboral Parties read MB… If only…

      • “If it was true that middle income earners were the primary users of negative gearing, then we would expect to see around half of all rental losses declared by those earning less than the average” Isn’t the correct version of the comment dropped by Abbott and others that the largest number of NG investors clusters around the middle income bands? There’s a full analysis here from the ABC http://www.abc.net.au/news/2014-09-24/janda-the-myth-of-mum-and-dad-negative-gearers/5766724 . The writer did his best to argue the numbers down, but after all the tweaking couldn’t avoid the fact that the first second and third largest number of NG property owners are in income bands between $25K and $80K. By the lowest possible measure, they represent more than 60% of all NG property owners. Sure higher income earners get a larger slice of deductions,but is anyone surprised that the number of voting individuals are the most important thing for a politician?

      • flyingfoxMEMBER

        By the lowest possible measure, they represent more than 60% of all NG property owners. Sure higher income earners get a larger slice of deductions,but is anyone surprised that the number of voting individuals are the most important thing for a politician?

        Yeah like the property council arguing that investors buy 20% of new housing therefore they are contributing to new house development. Voters too dumb to know the difference anyway….plus we have you and 3d to make sure they don’t…

      • Gen Y Home Buyer

        Gotta keep fighting the good fight!
        But it is astounding that reality seems to have no bearing on our political “leaders”… Except the reality of their own position being maintained

      • “Voters too dumb to know the difference anyway”
        Yes, but beside the point. The facts can’t be brushed aside by pointing to the value of deductions. I haven’t even heard Hockey say middle income earners get the bulk of the deductions.

      • Keep doing it and let us hope that maybe more and more people will read it. They repeat the lies, you reapet the truth. But maybe you should send to ABC or RBA or where it makes sense, the list of itemized argumats and underline the meaning of NG in all other investments – loss can substracted ONLY from the income generated by the investment. Wages and salaries are very different type of incomes and the investors do not make there property investments to generate wage or salary, but ONLY RENT. That is why only the rent can be a source for covering losses from mortgage interest rates and other expenses related to holding an investment property. Anything else is b** s***t and they know it of cause.
        Very rare this argument is used to fight the NG and this is one of the strongets facts, which they cannot agrue, because this is what Bozo Joe insist for – the cost for doing the investment should be substracted from its income. But wages are not income from property investment, they are NOT, e.g. The property investment cost should NOT be allowed to be substracted from wages and salaries. Losses can be substracted only from RENT INCOME.

      • As I’ve continually suggested : create a landing page or special domain (loads of inbound links = SEO juice, DA, PA, cross promote MB subs!).

        Post the lies
        Rebut with link to domain/landing page

        Domain/landing page has easy to download image pack, text grabs of typical rebuttals, and a list of each lie with a specific rebuttal.

        List of sources claiming need for change.

        It’s really that simple.

        Domain. AU $20/2 years
        Genesis framework + theme (I will donate)
        Hosting – you have
        Add on domain to hosting
        Install WordPress

        Hell I will even build it for you

      • flyingfoxMEMBER

        @stitches

        A correct fact doesn’t make the argument correct. Even the RBA is saying otherwise and they have gross income numbers.

      • @ FF “Even the RBA is saying otherwise and they have gross income numbers”.

        My point exactly. The RBA data focuses on the incidence of investor mortgages relative to income bands and, surprise, surprise, the incidence is higher in higher income bands. Also surprise, surprise, higher income earners receive a proportionately higher share of the deduction “benefit”. But isn’t this MB article about which income bands have the largest number of NG investor individuals?

      • why don’t you provide this stuff as briefing papers to journos? If they’re armed with facts they can call these wankers liars to their face.

      • flyingfoxMEMBER

        @Stitches

        Yes it is surprising.

        The MB article is pointing out what I am saying as well.

        Cormann’s claim that negative gearing is being used primarily by middle income earners is equally devious.

        Just because the fact is correct does not mean the argument is right because by definition we will have more middle income earners than not.

        Similarly middle income earners are the largest group who get super concessions therefore we should not though super.

      • @FF
        I agree that just because it’s correct doesn’t make it desirable or “right”, but the counter argument should at least acknowledge the first fact.

      • ceteris paribusMEMBER

        Keep posting these responses Leigh. It holds them to account for their untruths on each particular occasion. (Just as you cut and paste the case at the bottom, so regular readers skim read a bit. But they are reassured by the testimony. And there will always be new eyes

      • A report like this should be emailed in full to ABC 7.30 Report as well as 4 Corners.
        Labelling Mathias Cormann a LIAR should get their attention ?

      • Tassie TomMEMBER

        Emma Albarici and Scott Ludlum both read it. It might have been the 40th time you posted it that they picked it up – they might have missed it if you’d only posted it 39 times.

      • sheltieMEMBER

        Keep writing those posts Leith. One of the main reasons I and a lot of other people follow MacroBusiness is because we know that you guys are concerned about inequality and unfairness, and know that you will report on it and debunk the lies from vested interest groups whenever you can.

      • Even StevenMEMBER

        Keep doing it, Leith.

        I can skim read it. Happy to skim read. Brings my blood pressure up but you are doing a community service. Just make sure the rebuttals are always open to non-subscribers.

      • @FF ” Similarly middle income earners are the largest group who get super concessions therefore we should not though (touch?) super” – Yes, very similar provided the superannuation argument that you are referring to is for superannuation to be removed, to keep the comparison consistent with the “remove NG” argument.

  2. We are just like the hamsters in that little wheel running furiously and getting nowhere.

    Insanity: doing the same thing over and over again and expecting different results.
    Albert Einstein

  3. Andrew LeesMEMBER

    I heard that interview and was really irritated that the interviewer was poorly briefed and didn’t challenge his assertion about “bad consequences”. For so long as a shoddy press allow politicians to get away with this sort of shoddy behaviour, it will continue unabated. Is there be some means of better educating the press? Perhaps provide a free subscription to MB for a dozen or so potentially useful journalists?

      • darklydrawlMEMBER

        Thanks for leaving this one unlocked Leith. Will share the link. I also agree that the Journo’s should pull these folks up on their BS and spin. A quick retort along the lines of “The evidence does not support those comments. How do you account for that Minister?” would probably suffice and then hold your line.

        Trouble is, halve of these folks go out for drinks together later once the mics and cameras are off. It is *way* too clubby. We need some folks who will hold them to account and challenge their claims. Dreaming I know… sigh.

      • JacksonMEMBER

        Keep it up Leith, if these idiots don’t eventually work it out whilst in Govt they might just do so in opposition.

      • darklydrawlMEMBER

        Agreed. You’ve been fighting the good fight for many years now. I can imagine it get tiring at time, but you have a lot of support from people as well. Appreciate your efforts.

    • The Patrician

      Send the interviewer ( https://twitter.com/patskarvelas ) a link
      Most of these guys and girls follow twitter religiously.
      MB tweeting has dropped off a bit
      To be fair I have seen worse efforts from less prepared journos
      We should draft up a list of NG questions to assist.

      • At the top of the list of itemized arguments against NG should be that one:
        If NG should be like for any other investment, losses from investment properties can be substracted ONLY from the income generated by the that investment, e.g. Rental income. Wages and salaries are very different type of incomes and the property investments do not generate wage or salary, but ONLY RENT. That is why only the rent can be a source for covering investment property losses from mortgage interest rates and other expenses related to holding an investment property. Anything else is b** s***t and they know it of cause.
        Very rare this argument is used to fight the NG and this is one of the strongets one, which they cannot fight, because this is what Bozo Joe insists for – the cost and losses from the investment should be substracted only from its income. But wages are not income from property investment, they are NOT, e.g. The property investment cost should NOT be allowed to be substracted from wages and salaries. Losses can be substracted only from RENT INCOME.

      • “At the top of the list of itemized arguments against NG should be that one:”

        I think the best argument is that you can’t run a business at a continual tax loss and expect the ATO not to penalise you when you try and deduct that loss from your income. So why on earth should you be allowed to do it for property?

      • At the very least the lose should have an occupancy percentage cap on it.

        I get the impression some of these places are holiday homes that are left empty (convenient for the owner) and the expenses/mortgage are geared to reduce the taxable income on what is effectively a private asset.

    • Denis413MEMBER

      If they ask probing questions, they won’t be granted access to the Nation’s “leaders”. Just like, if the Liberal / Labor party moves to remove negative gearing / reform superannuation, they diminish their chances of getting voted in. Better to spew lies to the public (who have the knack of forgetting what happened last week) than be the first to blink. Cause and effect… I’d love if you did a report Leith explaining all moves / counter moves and non moves. It’d make for compelling reading, you may even get on the Project…

    • The Patrician

      You have to at least acknowledge the merit of this question
      “This is not an academic or an analyst or a lobby group. But it is the country’s central bank calling for this review. Won’t voters expect you to heed the Bank’s advice given its central role in our economy?”

      • Andrew LeesMEMBER

        Well yes, but then he dodged that by saying basically it was none of their business.

        I’d just love to hear them called out on the basic facts – “But that’s just not true is it minister… and then the real facts”. Perhaps we should import Paxman for a while?

  4. surflessMEMBER

    Lets face the problem, this government is rudderless and in complete denial, supported and amplified thru the echo chamber by News Corp. Mathias Cormann is just following instructions from the Prime Ministers Office, just call it the “Nuremberg defence”.

  5. WOW look who we have running this circus, they are all such incredible leaders with great intelligence and insight. When does the next show start?

    • billygoatMEMBER

      @Dr Fixit
      Yes I would ask who is Matthias Corman? One of the weekend paper lifestyle magazines did ahis life story some months ago. All I recall is that he was a normal random backpack from Holland( I think) who met a Perth girl got married. & found himself swiftly moving through ranks of liberal party to current position. I might have some details wrong but do recall being mildly surprised that a person described as a backpacker in his 20 suddenly finds himself treasurer in a foreign country in his 40’s. Maybe I’m naieve, not politically or economically astute however I doubt if situation reversed that some random aussie backpacker would find himself in equivalent role in Netherlands. (George spell in Romd doesn’t count as comparable situation)

  6. As their mentor said:

    “The essential leadership secret does not depend on particular intelligence. Rather, it depends on a remarkably stupid thick-headedness. [They] follow the principle that when one lies, one should lie big, and stick to it. They keep up their lies, even at the risk of looking ridiculous”

    He also came up wit this one:

    “The most brilliant [political marketing] technique will yield no success unless one fundamental principle is borne in mind constantly – it must confine itself to a few points and repeat them over and over.”

  7. He keeps mentioning “The Government’s decision” in regards to Negative Gearing.
    Well, a HUGE portion of the government have investment properties…. there’s your answer.

    All interviewers should always ASK the politician they are interviewing, whether they have an investment property and how many before proceeding to questions about Negative Gearing and Rising house prices.

    • The Patrician

      +1
      Thank you for joining us Mr Cormann
      1. How many investment properties do you and/or your wife own?
      2. How many are negatively geared?
      3. What was the monetary value of the deductions you claimed due to NG in the last FY?

  8. [email protected]MEMBER

    article and thread tweeted to RN.

    Keep it up UE.

    add ABCNews24

  9. I cannot understand why MB keeps pushing this ‘negative gearing is bad for Australia’ argument. It stinks of economics ignorance from people who should know better, The people who write for MB are supposed to be intellectual giants, but they are now singing from the same hymn book as every other uneducated bogan.

    Write a paper to articulate your argument if there is indeed any gravitas to your flippant ranting and raving. Benchmark against every other developed economy. Leave emotion out of it and come to a rational conclusion.

    p.s. The reason mid-income people are the ones receiving the most NG benefit is because the top taxable income earners have very little of their wealth in property. Fairly simple deduction.

    • [email protected]MEMBER

      Nice refutation Dennis, really well argued, packed with facts and original research. Well done. Thought about running a blog have you?

    • “Very little of their wealth in property”?
      According to the Asia Pacific Wealth Report 2014 (Capgemini and RBC Wealth Management), High Net Worth Individuals (defined as those having investable assets of US$1m or more, excluding primary residence, collectibles, consumables, and consumer durables) from Australia have 33.1% of their financial assets in property (excluding their primary residences).
      That’s the highest level in Asia Pacific.

      • And what does that data set say is the percentage of wealth held in property by those that don’t make the HNW category (i.e. with <$1m in assets)?

    • The intelligent person aknowlages the facts and the reality even when they are not conforming according his interests and expectations. Obviously you have an interest in investment property. MB has argued NG with data,facts, logic and well written arguments. The government from other side, doesn’t have even one valid argument, but only self interest.

    • Lol Dennis..

      You have bitten more than you can chew.

      If you cant see the issue with negative gearing in today’s economic environment then you’re either;
      (1) Biased, you have Investment Properties yourself and/or someone close to you that you are benefiting from.

      (2) Not intellectually capable to comprehend the bigger picture. Which is ironic since you call out MB for it’s intellectual offerings. When you yourself dont understand the mechanism from the big picture.

      Politicians have negatively geared I.Ps, these people earn 150K+ and would rather pass the buck to the masses to pay taxes… thats the main reasons Negative Gearing is strongly support amongst them.
      If there was ever a policy that politicians arent allowed to take advantage of policies they CONTROL… Negative Gearing wouldnt be established.

      Its like those competition online or in the media that isnt open to employees/staff of the competition starter/initiator.

      • I have not have any ‘investment’ in property (other than my PPOR which i do not consider an investment).

        Much of the ‘social consequences of NG’, (i.e. pricing out FHOB) that MB goes on about is actually as a result of vast pools of money chasing yield. This has resulted in a simple case of asset price inflation due to excess liquidity. The torrent of cash (from Superfunds, Corporate wealth funds, Sovereign wealth funds etc) will chase yield until most assets return under <1% p.a. Housing is just another asset class.

        For this reason, banks will now offer you 7-8x your annual wage in mortgage debt, not the 3-4x you would have been offered 20yrs ago. In another 10yrs, they may be offering a multiple 15-20x, and house prices grow to that level )(i.e. classic asset price inflation).

        This will continue unabated unless there is a major catastrophic event, such as a world war, that destroys the value stored in these wealth funds and it unavailable to chase ever diminishing yield.

        p.s. Politicians are exactly the middle income demographic that as expected, are taking full advantage of NG. No surprises here.

      • flyingfoxMEMBER

        @Dennis

        For this reason, banks will now offer you 7-8x your annual wage in mortgage debt, not the 3-4x you would have been offered 20yrs ago.

        Not related in the way you think it is. Banks don’t need the savings to lend…

        Edit: And if what you say is correct, property would be returning the on or above the savings rate….

      • Even StevenMEMBER

        Wow, Dennis. Just… Wow.

        Your denigration of the intellectual capacity of MB and its contributors is classy.

        You don’t have an investment property (apparently) but did not address whether you have an interest in this matter. Real estate agent? Developer? (My sneaking suspicion is researcher/ academic based on the snarkiness of your response). Care to share?

        Regardless, your comment that rising property prices are a function of money chasing yield has a lot of truth to it. But wouldn’t you agree that providing an (unfair) helping hand to investors through NG exacerbates this inequality (for FHBs) even further? If not, why not?

    • Dennis, may I suggest you go back to the top of the article and actually READ it.

      Then please supply us with citations and proof for your contrary opinion, because without facts, that’s all it is, opinion.

      And as we all know opinions on the Internet are not worth the ether they are written on.

  10. Jake GittesMEMBER

    Some academic from Sydney University was on the news this morning saying the same old tosh on neg gearing. Looks like Reusa has funded a university chair.

  11. SoMPLSBoyMEMBER

    Wow is right, Doc!
    Imagine these ‘officials’ employed by a Fortune 500 firm and sitting down to the annual performance review and being shown the upward feedback. It would be time to update the resume no doubt.

  12. PantoneMEMBER

    Notice the language. No more mention of rent increases, now it’s “bad consequences” and “rental market will be destroyed”. They’re right. Scrap NG and thousands of little land lords week fall over each other to sell.

  13. In my opinion the only way negative gearing to going to be abolished to to “compensate” those who would lose from it’s abolition (which includes a large number of our political class). This “compensation” would involve massive income tax cuts in the high income brackets.

    • Torchwood1979

      Why use the tax system? Why not just take “direct action” and pay them not to NG? 🙂

      • haroldusMEMBER

        PM Tony Abbott today announced an audacious plan to fund negative gearing via a “Gearers Fund”. The 8 billion fund invites investment property owners to tender for IP credits, which in turn will lower their taxable income. Mr Abbott pointed at the success of his Direct Action plan for carbon emissions as evidence of the LNPs expertise in controlling intangible markets. (I’m cracking myself up here)

  14. 2big2failMEMBER

    Leith, your patience and dedication on this issue (and other issues) is commendable. Wondering if MB joins forces with others who share similar views on this issue (Grattan institute, LF economics, etc..) and try to organize a forum where these issues can be debated directly with the politicians live (sort of town hall meetings). Ever thought of that?

  15. In Cormann’s dreams, he traipses through the Belgian countryside holding hands with Josef Goebbels, filling in rabbit warrens with cement and throwing rotten eggs at peasants. Sometimes the themes from these dreams leach into his increasingly confused reality. He is a simple, hard working man, doing his best in a complex world.

  16. Well Costello is now pushing back to the RBA to raise Interest rates to double what they currently are.

    Who is more right lol.

  17. Mmmm, Super draw downs since 2007 are no longer report as gross earning on the tax returns and this throws the stats out I think.

    • 2big2failMEMBER

      Because this issue is based on economic data and documented history. However, the people you refer to as having a “different opinion” see it as a religious quest (based on a delusional belief).

      From Wikipedia:
      A delusion is a belief held with strong conviction despite superior evidence to the contrary

      … and it’s toxic when combined with politics. Unfortunately, it’s wide spread around the world and not limited to this country.

    • Well, Mr Cormann’s statements are at variance with the facts.

      What would you think people should call someone whose ststements are consistently at variance with the facts?

    • What is truth eh? Something that is clearly factually wrong is a lie. It would be opinion if he agreed the previous data did not support his position but didn’t agree it would play out the same way this time.

      • Yes, but Cormann’s comment has about the same factual basis as some of the overly enthusiastic claims made about NG on MB. For example, MB treads the same shaky ground as Cormann by referring to rental data from the mid 1980s when one of MB’s key arguments is that NG “exploded” post 1999. Surely if there are now exponentially more NG landlords in the housing market “because of Costello”, we are now in unchartered territory in relation to potential impacts on rent from it’s removal. Also, MB points out in this article that rent increases only occurred in two capital city markets between 1985 and 1987 and therefore Cormann is an idiot and a liar, yet rampant house price growth post 2012 has also only occurred in two markets (Sydney and Melbourne) despite the availability of NG nationally.

      • Even StevenMEMBER

        House price growth has occurred in all states – it is just most crazy in Melbourne and Sydney.

        I don’t think anyone on MB is saying that removing NG will ‘solve’ the problem. It will, however, ‘help’ the problem.

      • @evensteven “I don’t think anyone on MB is saying that removing NG will ‘solve’ the problem. It will, however, ‘help’ the problem” – I beg to differ, the vast majority of posters on MB clearly think NG IS the problem. “House price growth has occurred in all states – it is just most crazy in Melbourne and Sydney”. Yes, but why wouldn’t house price growth occur when you look at the fundamentals; a decade of the fastest increases in disposable income in history followed by the lowest mortgage rates in history. Add in the fact that Sydney prices went nowhere between 2004 and 2011 and the spike in the last three years is more understandable. The strongest argument for removal of NG is tax revenue, not house prices.

      • Even StevenMEMBER

        I think by far the biggest driver of rising house prices has been availability and cost of credit. Many other factors also contribute – foreign purchases, constrained supply, speculation (based on extrapolation of past property price increases). And to these I would add Negative Gearing.

        I believe removal of NG should be but one leg of a broader strategy to improve housing affordability for those who need a house most.

        At the moment, investors have a tactical advantage over those who want to own and live in that property.

      • Sweeper, I understand the argument and that you are talking about revenue, but your argument relies on the assumption that NG is an “aim” or “the aim” of property investment when it clearly isn’t, or it is only when the investor (assuming they are acting rationally), is confident the after tax capital gain will exceed the investment phase losses. I would liken this to investing in growth-orientated shares (eg emerging technology companies) where there is no dividend income, which is allowable as a negatively geared investment in the same way as property.

    • Even StevenMEMBER

      So if I said the sky was bright green, what would you consider my statement to be: A lie? Or an opinion?

      • If you know it’s Blue and call it Green, you’re lying. Of course, no one has any idea what colour you actually see it ( your blue might be my green) but whatever colour you see it as, you have a word that calls it Blue. To call it otherwise, is a lie.

    • Correct @goodie he’s no liar – disingenuous with the truth, yes – selective with facts, yes – conflicted with interests, yes – but a liar, F***ING YES!!!!!!!!!!

  18. http://www.news.com.au/finance/real-estate/more-first-home-buyers-investing-in-affordable-areas-and-renting-where-they-want-to-live/story-fnd91nhy-1227445859067

    “THE Australian dream of owning a home is still alive for young buyers but many are getting creative to get into the heated market.

    A recent white paper study by LJ Hooker showed the most common trend has been ‘rentvesting’ — buying where affordable and renting where you want to live.”

    Never keep a good specufester down. Always looking to gouge using the latest trend.

  19. Willy wonkaMEMBER

    The LNP have their heads buried in the sand , supporting rent seekers, all the while selling the future of forthcoming generations down the gutter. Where is the vision , eg harbour bridge , snowy hydroelectric. I thought the next project was to turn some rivers inland , with a willing labour force to create a sustainable inland Australia. Why are foreigners allowed to buy our land , in a lot of other countries , Thailand, philipines, can only rent or buy condominiums. Even advance Australia fair says we have golden soil , imho if they want it calculate the mass and value it at the spot gold price. We need to preserve our domestic housing policy. Ng for new builds quarantine deductions to the ip only. The vision for this country should exceed the ballot date. It is tantamount to treason.

  20. @AB “I think the best argument is that you can’t run a business at a continual tax loss and expect the ATO not to penalise you when you try and deduct that loss from your income” – Not true, businesses can offset losses from previous years against future taxable profit. This has been enshrined in tax legislation for decades.

    • AB is right, losses on NG rentals should not be deductible on revenue account under the non-commercial loss provisions. It is only because rental property is specifically exempted from the non-commercial loss provisions that it happens.
      If you think that is wrong, explain to me how the avg. NG investor can possibly be considered to be making commercial losses when 1) they have no plan to improve the property to increase earning power 2) they have taken out an IO loan, so plan on maintaining the same gearing while the asset is held and 3) they plan on recouping rental losses against the eventual CG.
      The easiest way to fix the NG problem is to reverse the exemption rental property has under the non commercial loss provisions.

  21. @sweeper No, that’s incorrect. The carve out in that part of the legislation relates to property investment by a business. Investment property for individuals is treated the same way as shares, or investments in bonds and derivatives. If you borrow to invest, the difference between the investment return and interest is deductible.

    “1) they have no plan to improve the property to increase earning power” Are you sure? But why wouldn’t they if it meant they make more money? “2) they have taken out an IO loan, so plan on maintaining the same gearing while the asset is held” This has no relevance to whether or not the investment was entered in to with a view to generating a profit. If they maintain that gearing, they must be confident that the higher level of investment loss will be offset by the taxable capital gain on sale. If not, they are plain stupid and should have donated money to charity. “3) they plan on recouping rental losses against the eventual CG” That’s right, and that’s exactly why property investment expenses qualify as deductible for tax purposes. No property investor, apart from the illogical ones, would enter in to a property investment unless they thought they would generate a profit, meaning the present value of after-tax investment losses is less than the present value of the expected after tax gain on disposal. Most NG’ers actually aim to be positively geared, for the very basic reason that they are better off than if they were negatively geared.

  22. Stitches, the question is whether the losses should be deductible on revenue account. If an individual invests in gold (above the taxable threshold) I’m fairly sure the acquisition, holding and finance costs (if there ever were any) are added to the cost base. That is because the aim is to generate a capital profit. NG property should be treated exactly the same. Saying that you hope to eventually turn a profit isn’t good enough for the ATO; if there is no plan to increase earning power and your explicit plan is to recoup losses through CG then all costs should only be deductible on capital account.

    In terms of the PV of the CG exceeding the PV of losses; this perfectly summarises the problem I have with property investors investment strategy. On a cash flow basis the expected CG can only be driven by growth in earnings. Assuming no change in the discount rate, P grows at the same rate as E. Saying the PV of the CG will exceed the PV of losses makes no sense. Because you are imposing an unrealistic CG into your valuation which isn’t supported by cash flow.

    • Sweeper, I understand the argument and that you are talking about revenue, but your argument relies on the assumption that NG (or revenue phase losses) is an “aim” or “the aim” of property investment when it clearly isn’t, or at best it is only when the investor, acting rationally, is confident the after tax capital gain will exceed the investment phase losses. I would liken this to investing in growth-orientated shares (eg emerging technology companies) where there is no dividend income, which is allowable as a negatively geared investment in the same way as property.

  23. @Sweeper “Saying the PV of the CG will exceed the PV of losses makes no sense” It makes perfect sense because property valuations include an implied estimate of future capital growth which is often (if not usually) independent of actual cash yield, as is the case with shares. So, if the investor believes that with no increases in rent yield and say 5 years of $10K pa after-tax losses, he will make a post-tax capital gain of $100K, he will invest. That is, the PV of the $100K after tax gain exceeds the PV of the rental stream losses.

    • SweeperMEMBER

      In shares, assuming the shares aren’t in a bubble (so P = fundamental value), the expected CG is always based on a realistic estimate of cash flow. By that I mean, if you were able to hold the shares forever the PV of cash flows would be equal to the PV of cash flows plus PV of CG, if you were to sell instead.
      With property, investors just invent an expected CG which isn’t supported by cash flow, to justify their valuations. Even Tulip did this when he inserted the post 1950 CG (really post 1980) into his model independent of expected growth in rents – and then excused it by saying it was “common in the real estate literature”.