The worst ever defence of negative gearing

By Leith van Onselen

The negative gearing ‘whack-a-mole’ continues.

Just as I was hoping that a day would pass without needing to write another ‘take-down’ article on property tax concessions, possibly the worst ever (and that’s saying something) defence of negative gearing was published over the weekend in Fairfax’s Domain, penned by Jamie Alcock, an Associate Professor of Finance at the University of Sydney Business School.

In the article, Alcock presents five so-called “myths” about negative gearing, and provides flimsy arguments in a bid to debunk them. Let’s take a look.

Myth 1: Negative gearing is responsible for the recent house price surges in Sydney and Melbourne.

Negative gearing rules have been in place for more than a quarter of a century and the number of investors taking advantage of them has been stable for well over a decade. The recent price rises are more closely related to supply restrictions and falling interest rates.

Any examination of Australia’s negative gearing rules needs to be considered in tandem with its partner in crime, the 50% capital gains tax (CGT) discount, which was implemented in 1999.

The evidence clearly shows that loans to housing investors surged since the CGT discount was first implemented, as well as recently:

ScreenHunter_8403 Jul. 20 08.44

With the greatest impact in New South Wales (read Sydney):

ScreenHunter_8404 Jul. 20 08.45

And Victoria (read Melbourne):

ScreenHunter_8405 Jul. 20 08.47

Moreover, the correlation between increased investor demand and rising house prices is clear as day, particularly after negative gearing was reintroduced in the late-1980s, after the CGT discount was introduced in 1999, and currently:

ScreenHunter_8406 Jul. 20 08.48

Back to Alcock:

Myth 2: Negative gearing makes property unduly attractive for investors.

All investments, including property, can be negatively geared. Property competes, as an investment, on a level playing field. Abolishing the negative gearing rules for property would cause a market distortion, not cure it.

“Level playing field”? As noted in the RBA’s submission to the House of Representative’s Inquiry into Home Ownership [my emphasis]:

…the interaction of negative gearing with other parts of the taxation system may have the effect of encouraging leveraged investment in property. In particular, the switch in 1999 from calculating CGT at the full marginal rate on the real gain to calculating it as half the taxpayer’s marginal rate on the nominal gain resulted in capital gain-­‐producing assets being more attractive than income-­‐producing assets for some combinations of tax rates, gross returns and inflation. This effect is amplified if the asset can be purchased with  leverage, because the interest deductions are calculated at the full marginal rate while the subsequent capital gains are taxed at half the marginal rate. Since property can usually be purchased using higher leverage than other assets that produce capital gains, property is especially affected by this feature of the tax system.

Moreover, try and get a loan for negative gearing of anything other than property and see how far you get.

With regards to creating a “market distortion”, allowing investors to offset investment losses against unrelated wage/salary income and then allowing them to pay half the rate of CGT is a market distortion. It was also acknowledged as such by former Treasurer, Paul Keating, whose 1987 cabinet submission on negative gearing classified it as a “generally recognised tax shelter”:

The negative gearing measure was introduced [in 1985] to partially close-off a generally recognised tax shelter, a rationale which remains broadly valid…

The three basic features of a typical tax shelter are the absence of a full nominal capital gains tax, the deductibility of full nominal interest expenses, and the mis-match in the timing of the deductions and the recognition of taxable income (for example, because capital tax is payable on a realisations rather than accrual basis).

Rental property investment clearly exhibits each of these features, as do some other activities, and so effectively obtains tax benefits under the current tax system.

Back to Alcock:

Myth 3: Negative gearing pushes aggregate prices out of the reach of average Australians.

There is simply no evidence that prices are skewed out of the range of the average Australian. The RBA made this clear to the Senate inquiry – the current cost of servicing new loans on housing in Australia is significantly lower than the average over the past decade.

Rubbish. According to the RBA, initial costs on servicing a typical mortgage are below the decade average:

ScreenHunter_8408 Jul. 20 09.20

But the deposit required is at its highest ever level:

ScreenHunter_8407 Jul. 20 09.20

Which helps to explain why owner-occupier first home buyer demand is near its lowest ever level, despite record low nominal mortgage rates:

ScreenHunter_8409 Jul. 20 09.23

Back to Alcock:

Myth 4: Negative gearing benefits the wealthy at the expense of the poor.

Taxation statistics from the ATO show that of those declaring a net rental interest in recent years; approximately three-quarters earn less than $80,000 per annum.

Alcock has confused gross income with taxable income as reduced by negative gearing. The RBA’s submission to the House of Representative’s Inquiry into Home Ownership clearly debunked his argument:

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.

Back to Alcock:

Myth 5: Negative gearing rules make it more difficult for first home-buyers to enter the housing market.

This is one of the most contentious myths in the popular mindset. The reality is that by encouraging investment in housing, the supply of rentals increases which keeps rents low. For example, in inner-Sydney gross rental yields can be as low as 2.5 per cent in some areas. This benefits the renter, not the investor, and allows renters a better opportunity to save for a deposit for their own home. Abolishing negative gearing would, in the long-term, drive rents up and make it much harder for renters to get on the property ladder.

Unbelievable. No mention of the fact that nearly 95% of property investors are buying established dwellings, thus they are not adding to housing supply and are merely substituting homes for sale into homes for let:

ScreenHunter_8391 Jul. 17 13.08

Hence, negative gearing and the CGT discount are not lowering rents, but rather helping to push house prices up. And this increased demand from investors is clearly crowding-out first home buyers:

ScreenHunter_8410 Jul. 20 09.24

But wait, there’s more. Alcock has also tried to debunk the claim that negative gearing did not push up rents when it was abolished between 1985 and 1987:

Some commentators have suggested that rents did not increase during the 1985 negative gearing hiatus. However, housing markets are sluggish to respond to demand shocks. Building new property to address market undersupply or waiting for population growth to absorb oversupply takes many years. Also most leases are fixed for a significant length of time. Observations made in a single year do not disprove fundamental economic principles.

This is desperate stuff. The data clearly shows there was no effect on rents nationally (see red below). Moreover, the highest ever real rental growth was recorded in the late 2000s when both negative gearing and the CGT discount were in effect:

ScreenHunter_3791 Aug. 15 11.02

What does this tell you about negative gearing’s rent lowering capabilities?

The 1987 Cabinet Submission on negative gearing also noted that real rents fell across six out of eight jurisdictions in the year to March 1987, which was around 20 months after negative gearing was first ‘abolished’:

“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“.

In any event, if Alcock is so worried about supply, then why not argue to limit negative gearing to new builds, as has occurred with the first home buyers grant?

Alcock also makes the ridiculous argument that unwinding negative gearing would destroy wealth and lead to unfair transfers:

Even if the opponents of negative gearing are correct, and abolition did reduce house prices, how much wealth would be destroyed? A 10 per cent reduction in average house value equates to a $570 billion wealth destruction. This is people’s life savings and retirement plans, and it would hurt those currently with mortgages most heavily. Destroying wealth in one sector of the community to increase wealth in another is simply a wealth transfer form one group to another.

Similarly, making changes to tax rules that hurt the entire country simply to help a select few in Sydney and Melbourne is a wealth transfer from the regional areas to the city.

So higher house prices = good, but lower house prices = bad?

If it is not acceptable to transfer wealth from property owners to prospective buyers, why is the reverse acceptable? And what are high prices in Sydney and Melbourne if not a wealth transfer from the country to the city?

Also, Alcock seems to have no concept of productivity. That is, channeling capital into unproductive housing necessarily starves the productive economy of funding, whilst pushing up land costs, which also chokes-out the productive economy.

Back to Alcock:

The reality is that abolishing negative gearing on property would create a market distortion, make it more difficult for future first-home buyers to save a deposit, increase rents and create significant wealth destruction and transfers.

“Create a market distortion”. No, it would unwind a market distortion and recognised tax shelter.

“Make it more difficult for future first-home buyers to save a deposit”. No, it would make it easier, since home prices would be lower and rents would be unaffected.

“Increase rents and create significant wealth destruction and transfers”. No, rents would be unaffected, since negative gearing does not add to supply. Moreover, homes would become more affordable. What’s wrong with that? Should Australia really aim to have the most expensive housing in the world?

Alcock then concludes with the following dross (my emphasis):

If the government is serious about improving housing affordability, then it should explore options to increase supply and reduce the cost of inputs. Some suggestions include removing stamp duties, simplify and relax the complex planning system, reduce social housing, tighten trade-union legislation and increase urban infrastructure coverage.

I agree with the supply-side stuff. But how exactly would reducing social housing improve housing supply?

Seriously, you cannot make this rubbish up.

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Unconventional Economist
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Comments

  1. “Whack-a-mole” lol spot on. There seems to be a conveyer belt of these shills. I’ve never heard of Allcock before. Anyone know his background?
    Interesting that he does not even attempt debunk the “myth” that NG costs the Govt $3-5bn in revenue forgone each year.
    The “revenue foregone” argument alone is enough reason to kill NG asap.

    • The “revenue foregone” argument perpetuates a common myth too, that removing the ability to NG will result in budget improvements, when all it does is push back when the investor can claim the deduction (it may improve the budget short term, but long term it just pushes out the deduction to be made in a future tax return).

      • Ronin8317MEMBER

        When the bubble burst and the house is sold for less than the purchase price, the tax revenue will be forgone.

      • Many NG investors sell before they ever become positively geared and ‘repay’ their accumulated tax losses. A close relative of mine did this with multiple investment properties he bought and later sold without ever becoming positively geared. Thus he enjoyed big tax write-offs (he was on the top MTR) and then only paid half CGT on the gains.

        It’s a tax shelter, pure and simple.

      • BB, but that view must see the end of NG having no effect on RE investment, or the effect of inflation on the tax deduction.

      • It’s only a tax shelter in revenue terms if the tax foregone from NG was more than the CGT paid. If the investor mentioned by UE received a tax refund of $5K on each NG loss on three properties for five years, he cost the tax system $75K. Therefore if he made any more than $100K capital gain on each property, the tax system is better off, particularly compared to an owner occupier.

      • “costs the Govt $3-5bn in revenue forgone each year.

        It will improve the budget short term, but that’s not a good reason to get rid of it when over the long term the deductions are just pushed into the future. It’s the sort of Ponzi thinking that got us into this mess.

      • @BB

        it’s the CGT discount part that is the problem. NG enables that. Heck you only need the book value to drop (depreciation) to be able to get the tax shelter.

      • It’s only a tax shelter in revenue terms if the tax foregone from NG was more than the CGT paid.

        A tax shelter is a tax shelter regardless of whether one possible outcome means that they pay more CGT. See my comment above.

      • “A tax shelter is a tax shelter regardless of whether one possible outcome means that they pay more CGT” No, I’m commenting on the overall impact on tax revenue. The example I have given is not unrealistic and based on hysteria over the growth of Sydney and Melbourne prices, it would have to be an extremely conservative example. If an owner occupier had bought these properties, there would be no net benefit to the tax system.

      • No, I’m commenting on the overall impact on tax revenue.

        We don’t know what the impact would be under a different taxation system. Say indexation of CGT.

  2. I think we can safely say this Jamie Alcock places value on Vladimir Lenin’s “A lie told often enough becomes the truth”.

  3. GunnamattaMEMBER

    I got to this one on the auction clearances thread earlier……

    Busting the five myths about negative gearing

    Lets look at what the good professor has served up here……

    In a submission to the Senate inquiry into home ownership, the Reserve Bank suggests that it might be time to review the negative gearing arrangements for investment property.
    To be fair, the RBA’s submission called for this review within the context of the entire taxation arrangements of investment property, of which negative gearing is simply one component.
    Nevertheless, the significance of the RBA entering this debate is not to be underestimated.

    Three paragraphs of faff to start proceedings

    The negative gearing rules in Australia allow investors to offset losses on their investment property against other income.

    followed by a statement of the palpably obvious …thanks for that

    Opponents of negative gearing laws claim that this income tax reduction is essentially a subsidy that is not available to owner-occupiers. They also claim that this subsidy distorts the housing market, making housing unaffordable for ordinary Australians.
    Some even suggest that it is responsible for the house price surges in Sydney and Melbourne.

    . …well is it available to owner occupiers? Does it allow claimants to subsidise losses? (at the taxpayer teat) Given it is 95% used on existing housing is it either making housing affordable or not contributing to the Sydney Melbourne house price surge?

    However, a lot of these claims simply don’t stack up.

    Myth 1: Negative gearing is responsible for the recent house price surges in Sydney and Melbourne.

    Negative gearing rules have been in place for more than a quarter of a century and the number of investors taking advantage of them has been stable for well over a decade. The recent price rises are more closely related to supply restrictions and falling interest rates.

    Notice how he addresses the most plausible part of a question rather than the full issue – a bit part bullshitter rather than a big picture man. Has anyone said negative gearing alone is driving housing prices? Or is it that many argue that housing prices are driven by a range of factors including Negative Gearing, particularly in conjunction with Capital Gains Tax Concession rates introduced by Costello in 1999, supply and planning constraints, the advent of widespread SMSF investment into residential real estate (including SMSF’s negatively gearing), Foreign buyers, long term low interest rates to make speculation the investment du jour

    Myth 2: Negative gearing makes property unduly attractive for investors.

    All investments, including property, can be negatively geared. Property competes, as an investment, on a level playing field. Abolishing the negative gearing rules for property would cause a market distortion, not cure it.

    ‘Property competes as an investment in a level playing field’ is complete bullshit. Property competes as an investment backed by government taxation (and other) policy because it is a social good. The ostensible reason it is backed by government policy (at a range of levels) is to push supply. 95% of negative gearing goes into existing residential real estate – so by definition is not adding to supply. Other government policies (eg FHOG) have done little other than drive prices. The Federal Government would be better off taking the 8 billion claimed out of last years budget by negative gearers and building the houses itself

    Myth 3: Negative gearing pushes aggregate prices out of the reach of average Australians.

    There is simply no evidence that prices are skewed out of the range of the average Australian. The RBA made this clear to the Senate inquiry – the current cost of servicing new loans on housing in Australia is significantly lower than the average over the past decade.

    How many charts and datasets is there showing Australian residential RE having gone from 3x average incomes to circa 10-12 times in 30 years? What the RBA made clear to the Senate is that because interest rates have plunged the cost of servicing debt (per se) has decreased, but what they (and countless others) have noted is that the amounts of debt being taken on have grown to staggering levels, and that the amounts of debt required to buy into Sydney (in particular) is driving Sydney housing aspirants further and further from Sydney

    Myth 4: Negative gearing benefits the wealthy at the expense of the poor.

    Taxation statistics from the ATO show that of those declaring a net rental interest in recent years; approximately three-quarters earn less than $80,000 per annum.

    This old canard. The taxation statistics from the ATO show that while by number of claimants most of those negative gearing are earning less than 80K, they show that by volume of deductions (ie chunk of the circa 8 billion claimed off the revenue side of the budget last year) the vast bulk was claimed by people earning more than 100K. How many times does this bullshit keep getting aired? Don’t editors (or edit bots) check facts anymore?

    Myth 5: Negative gearing rules make it more difficult for first home-buyers to enter the housing market.

    This is one of the most contentious myths in the popular mindset. The reality is that by encouraging investment in housing, the supply of rentals increases which keeps rents low. For example, in inner-Sydney gross rental yields can be as low as 2.5 per cent in some areas. This benefits the renter, not the investor, and allows renters a better opportunity to save for a deposit for their own home. Abolishing negative gearing would, in the long-term, drive rents up and make it much harder for renters to get on the property ladder.

    The ‘reality’ is that by encouraging investment in existing housing Negative Gearing encourages speculation on rising prices by those with access to the funds with the public (taxpayers), while at the same time operating as a drain on revenues at a time of massive budget holes, to turn what could be owner occupied housing into housing which owner occupiers are outbid on and which the public subsidises the outbidders to do so.

    The reality . . .

    Some commentators have suggested that rents did not increase during the 1985 negative gearing hiatus. However, housing markets are sluggish to respond to demand shocks. Building new property to address market undersupply or waiting for population growth to absorb oversupply takes many years. Also most leases are fixed for a significant length of time. Observations made in a single year do not disprove fundamental economic principles.

    and all those – Treasurers, Assistant Treasurers and prime Ministers included – fraudulently pointing to some rental spike in Sydney in 1987 as indication of the evils of removing negative gearing? Can they work off one year in one city?

    Even if the opponents of negative gearing are correct, and abolition did reduce house prices, how much wealth would be destroyed? A 10 per cent reduction in average house value equates to a $570 billion wealth destruction. This is people’s life savings and retirement plans, and it would hurt those currently with mortgages most heavily. Destroying wealth in one sector of the community to increase wealth in another is simply a wealth transfer form one group to another.

    as opposed to a generations worth of tax policy which has transferred wealth – and houses – to babyboomer property speculators. Should we continue that policy? How sustainable is that wealth without the policy? Does that policy impose costs on other segments of Australian society (let’s call it the future shall we) who will also be more heavily taxed for pensions for the benefit of the same generation of people most heavily negatively gearing? The real question is do we (as a nation) go for the short sharp shock or the slow gradual shift (and the competiveness costs of not doing so), it is not whether we remove negative gearing of residential real estate or not.

    Similarly, making changes to tax rules that hurt the entire country simply to help a select few in Sydney and Melbourne is a wealth transfer from the regional areas to the city.

    huh? Well are not houses across Australia massively bubblicious? Are not the Sydney and Melbourne markets circa 2/3 of the Australian market?

    The reality is that abolishing negative gearing on property would create a market distortion, make it more difficult for future first-home buyers to save a deposit, increase rents and create significant wealth destruction and transfers.

    Huh? How does he figure that out. Removing negative gearing of existing residential real estate would remove a market distortion. Removing negative gearing on existing residential real estate would remove the likelihood that first home buyers would be outbid at auctions by heavily leveraged babyboomer specufestors sucking on the public teat to support their habit. They may get more for their deposits! Rents may slump as demand for rentals subsided and erstwhile renters headed on out to buy. Significant wealth destructions are someone elses problem for the young (in particular) who are being treated as a host by the sort of parasitism that negative gearing induces

    If the government is serious about improving housing affordability, then it should explore options to increase supply and reduce the cost of inputs. Some suggestions include removing stamp duties, simplify and relax the complex planning system, reduce social housing, tighten trade-union legislation and increase urban infrastructure coverage.

    I’d buy much of this, but he could also add, removing all tax distortions – including capital gains tax concessions on residential property, and the ability of SMSFs to leverage into existing residential real estate. How social housing adds to reduced housing affordability is anyone’s guess – I suspect magic mushrooms on the professors part – and off the top of my head I don’t think Unions are a significant factor on most residential building sites. When I paid my way through Uni in the industry we were all contractors and never a union man was seen on site

    Jamie Alcock is an Associate Professor of Finance at the University of Sydney Business School and specialist in the housing market.

    He is also a tosspot. Busting a property spruikers wet dream with five strokes of property porn bullshit which others will need to clean up more like it

  4. Forrest GumpMEMBER

    Jamie Alcock, an Associate Professor of Finance at the University of Sydney Business School.

    He needs to relinquish his certification. This guy is an embarrassment to the University.

  5. Worst Ever – Pretty, pretty impressive! I think MB should have an annual award ceremony similar to the Razzies – for economic incompetence. Would pay good money to attend!!

  6. I constantly but up against the argument, “But negative gearing is a fundamental tool for small business and investment. Why should investing in housing be any different to any other business?”

    • The tax system is not consistent. If it was, then somebody would be allowed to deduct their travel expenses to/from work against their labour income. They would also be allowed to fully deduct their educations expenses, rather than have caps placed on them.

      The argument about deducting other business income is also suspect. As noted by Joe Hockey last week:

      TREASURER:

      “We are addressing the entire taxation system. The ones that you mentioned, negative gearing, we have some inbuilt structural challenges in the system that we inherited. For example, you’re allowed to negative gear a million-dollar, forty-year-old unit in the middle of Melbourne. But you, depending on your income, may not be able to negatively gear a business that is employing ten people that is exporting and engaged in productive activity. The question is, do you address the issue of negative gearing on that million dollar property, or do you address the negative gearing on the business?”

      That is, there are no limits on negatively gearing a property/shares, but limits on almost any other productive activity.

      Besides, my preferred approach is not for NG on property to be abolished in isolation. But rather, that losses from one source be ‘quarantined’ and only applied against income from the same source, as occurs in most other developed nations (e.g. USA, UK).

      • I admit I don’t have a good understanding of taxation laws around these issues. Trying to get a clear understanding of it both to discuss and exploit it is not something I’ve managed to do. Time for a better accountant, perhaps?

        I also see that the issue isn’t just an economic one, as anything that causes a distortion of price on basic human need, i.e. shelter, should be treated with great caution. In a leveraged property bubble, sure the speculators will get badly burnt, however the poor bastard fighting to pay the mortgage on their own home is going to have their primary “asset” greatly devalued. They cop it from both end.

  7. Worst part is this:
    Jamie Alcock is an Associate Professor of Finance at the University of Sydney Business School and specialist in the housing market.

    – Associate professor of finance at the University of Sydney:
    So he’s teaching garbage to his students (based on his analysis in this article)

    – Specialist in the housing market:
    I like the use of the word “specialist”, like “expert”, etc.. Wonder what his specialty is about?

    • surflessMEMBER

      Bit like that other soothsayer, Judith Sloan, now serious question these so called ‘economists’ in the University sector.
      Serious, these people are now part of the problem and are not part of the solution.
      Shame on Fairfax Media, ‘In dependant..always’, what a load of crap!

  8. It’s too late to turn back the clock. Negative gearing is entrenched into SMSF’s and the government is not going to trash the super balances of the growing SMSF industry. Even if were grandfathered there would be whining from future investors that they were cut out of the market….I can hear the blah blah now.

    Housing policy could be tweaked to a “more” level playing field by removing the CGT discount and implementing stronger macroprudential rules to cool down the speculative component thereby returning housing as an investment to compete with other investments which qualify for negative gearing. Finally, if NG is off the table then change taxation law to permit personal tax deductions on the interest component of the PPOR .

    And before anyone starts on about loss of taxation revenue and bullshit about budget deficits consider that the main purpose of federal taxation is to support the fiat currency – taxation doesn’t fund anything.

    Have fun!

    • If NG is predominantly a tax play then why on earth would SMSFs be doing it when they barely pay tax anyway?

      • SMSF’s barely pay tax? SMSF’s pay 15% taxation – are you saying they don’t regard NG as a benefit? I don’t understand the argument Jason. A tax break is a tax break.

      • But spending a dollar to save 15c in the hope you make a capital gain which is taxable at 10% makes little sense.

      • Right, SMSF’s don’t aim for negative gearing of property, the aim is to use annual super contributions, (concessionally taxed at 15%), to pay debt down inside the fund.

      • SMSFs directly invested 78% of their assets, mainly in cash and term deposits and Australian-listed shares. http://www.superguide.com.au/comparing-super-funds/smsf-inside-story-diy-super-funds …..franking credits are the key vehicle to tax minimisation, not necessarily property investment, although undoubtedly they invest in RE because of NG – dumb if they didn’t spread the portfolio.
        Nonetheless, government won’t do anything to hit the 540,000 SMSF’s – IMO if they do it will be a bloody mess, so all I’m saying is that there are ways to tweak the market with housing/taxation policy to cool speculation as opposed to turning off long term investment. BTW in 2013 the median age for SMSF were under 50 years old, so fairly soon the SMSF boomers in accumulation phase will be the minority which blows away the grey gouge theory insofar as SMSF’s are concerned at least.

      • “If NG is predominantly a tax play then why on earth would SMSFs be doing it when they barely pay tax anyway?”

        Pretty well spot on Jason ! The bottom line is that the % of SMSFunds with property in the portfolio is relatively low – especially with borrowed money. Its a fairly onerous journey to borrow in a super Fund.
        As it should be!

      • AUrules…..as at 2014 SMSF’s had $9.2 billion in the space of ten years….previously very low.
        The rules have been changed with LRBA’s so this will be a growth factor.

  9. ” Associate Professor of Finance at the University of Sydney Business School.”

    Whats that expression ?
    Those who cant, teach instead.

    • MichaelMEMBER

      In status hierarchies, “Associate” means “not really a” as in “Associate Director”.

      So, Jamie Alcock is not really a professor – and it’s easy to see why.

  10. ceteris paribus

    I prefer not to get tied up in the esoterics of negative gearing as a taxation principle. The salient issue is that the domain of housing is bedevilled by market failure. Functional housing, for ownership and rental, is an essential social service- housing was made for man, not man for the great housing complex.

    Housing needs to be fixed. It is no accident that neoliberal governments have virtually off-shored housing as a privatised responsibility, when in essence it is vital social and productive infrastructure. You don’t have to be a commie to see that.

  11. To say that property is special because it is the mostly highly gearable asset class is patently incorrect.

    I can easily get 100% LVR on shares in the current market if I have some other security. Mortgage lenders don’t give you that sort of flexibility.

    And quarantining losses just for real property and not for other asset classes would clearly create a market distortion.

    • I can easily get 100% LVR on shares in the current market if I have some other security.

      Not really 100% then is it?

      • Most margin lenders will do 65% at a borrowing rate of 4.77%. Banks won’t lend 100% on an IP either without independent security. It’s not so much the unavailability of credit to leverage shares, it’s the average Aussie’s (investors included) unflinching belief in bricks and mortar.

      • Well you could get 105% not too long ago for property if you had adequate security.

        Was easy enough to get 95% until the end of last year, 80% is no issue now. Margin lending will get no where near that!

      • Margin lending is usually based off a portfolio LVR. So if I have a stock that has risen over the last little while, that would reduce my overall LVR potentially allowing me to borrow 100% to finance something else.

      • So if I have a stock that has risen over the last little while, that would reduce my overall LVR potentially allowing me to borrow 100% to finance something else.

        Stop skirting around the issue. No other way you can get the same amount of leverage for given equity whether it be cash or otherwise. Commercial RE, shares, bonds, anything….

      • You can get 80% LVR on shares, even 100% if it’s protected.

        But that wasn’t the point of my original post. The myth that there is some magic about property because it is highly leveraged needs to be called out.

      • “The myth that there is some magic about property because it is highly leveraged needs to be called out” Agree. The fact that credit for property is slightly easier to obtain without collateral isn’t grounds for arguing that the tax treatment for property is “special”.

      • The myth that there is some magic about property because it is highly leveraged needs to be called out.

        Is it not highly leveraged ? What are the chances of you getting 95% with LMI for buying shares at an interest rate of 4.77%?

      • Jason, people can’t live in shares, but they do need to live in a property of some sort. Even if negative gearing did distort the price of shares, one doesn’t have to buy or rent a share. Having a policy that deliberately distorts a basic need in favour of those who already have, is just wrong.

      • “People can’t live in shares, but they do need to live in a property”…..yes, but they don’t need to own a property to live in it. If they put their money in to shares, history shows they will be better off compared to property.

  12. Leith. Re the operation of our tax legislation and the “fairness” of NG and claiming the deduction against other income.
    Check out the non commercial loss provisions and the inability of people with incomes greater than $250000 to claim business losses. Why is it “fair” to claim rental losses when business losses are quarantined for high income earners? The inconsistency is mind blowing and, to be blunt, riddled with stupidity.

    • Arguably the business loss rules should be abolished for lack of fairness.

      The reality is though, it is much easier to stuff private expenses through a “business” than it is through an investment property.

      • Yep. I get that argument. But that doesn’t make it right or consistent. Better targeting of audits and how the ATO employ their staff would help. As someone who works in tax…it isn’t that hard to work out who isn’t complying.

      • “I can’t understand why rental losses are specifically exempted from the non-commercial loss provisions” – This is a mis-quoting of the legislation and has nothing to do with negative gearing of residential property, or shares or anything else. Owning a commercial property (a business premises, not a residential property) worth more than $0.50M is a qualifying criteria that the ATO accepts for the definition of a “commercial business”.

    • SweeperMEMBER

      Absolutely, I can’t understand why rental losses are specifically exempted from the non-commercial loss provisions either.

  13. I love the circularity of the argument. The fact that rental “yields” are as low as 2.5% proves that EITHER renting is cheap OR buying is expensive. To figure out which is which, you need to compare rents against wages, and compare Austrslian wages against those in other advanced economies.

  14. @UE

    You guys seem to have pissed some people off. The comments sections are being invaded by paid shills the other side.

  15. The most simplistic questions a rational (and average) person should ask (putting aside all the economic arguments if they prove too challenging for some) are these:

    1) Why Australia, along with a handful of other countries, 3 in total I believe, continues to support a policy that 98.5% of other countries do not have? (talking about unrestricted use of negative gearing for investment properties here)

    2) Why do we have to rely on foreigners to increase our housing stock for us? Are we that incompetent that providing basic shelter to our citizens needs to be outsourced to other countries?

    • 1) How many other countries have kangaroos? Proves we are different.

      2) Now, don’t be racialist.

    • 2big2fail, these are the questions that need to be asked of our government, no matter who’s in power. No doubt they would duck and weave, but they need to be pressed to answer. Surely we, the great unwashed, deserve some sort of serious response?

      • The sad part is that we’ve been having this debate (about the merits or lack of of negative gearing) for years when we really should be debating more pressing issues. So much energy wasted… Instead we should be debating how this country is going to exist in a very competitive world in the future and what are we doing to make our kids’ future better than ours? Very sad indeed.., debating the stupid negative gearing for years says so much about us as a country..