Will there be a negative gearing reform property boom?

So says Domain:

In the wake of Labor’s landslide victory in the Victorian state election, which followed a string of polls showing federal Coalition trailing Labor, Wakelin Property Advisory director Jarrod McCabe said he had been contacted by a number of prospective investors spurred into action by the increased likelihood negative gearing reforms will become a reality.

“As the proposal includes a grandfathering provision, investors are thinking it would be wise to invest in property soon, to ensure they will continue to benefit from the rules as they stand,” Mr McCabe said.

A spike in investor buying could sharply increase in the period between a Labor win and the implementation date of their proposed changes, he said. “This extra demand from investors could dampen or even negate the current downward trend in prices for investor-focused property,” he noted.

Hmmm, well, one can never be too sure about these things but one person I would never ask is any that works at Wakelin Property Advisory which is yet to ever declare that property will go down.

Are specufestors this dumb? Well…yes. So it is possible.

Indeed, our own Damian Klassen thinks this surge is a decent odds outcome. We all know that Australians love a loss-making asset as long as it comes with a tax-payer giveaway. That’s a profit, mate. I remain skeptical for a number of reasons:

  • the credit crunch is a cap on everything but especially specufestors;
  • you would have to be REALLY stupid to think that buying property as its number one tax subsidy is ripped away permanently would deliver you a capital gain, and
  • wider conditions will be deteriorating next year as well dragging down sentiment.

That said, the last point could be taken another way. I expect a stalling economy to force the RBA to cut interest rates by mid-2019 so if Labor were to put the NG reform date at July 2020, and put an FHB grant in as well, then we could see one final suicidal charge of the specufestor brigade.

We did see such things during the US housing crash.

David Llewellyn-Smith
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  1. Negative Gearing Reform? = Property BOOM!
    Cut to migration? = Property BOOM!
    Asteroid to hit South Yarra? = Property BOOM! BOOM BOOOOOOM!!!!

    The fun times will never end it seems.
    Except that they will.
    And they are.

    • Things Real Estate agents say.
      1. It’s a great time to sell.
      2. it’s a great time to buy.

  2. The ability to deduct costs over and above net rental income is really only delayed (if you don’t have other investment income to NG it against in the current FY), not ripped away permanently, with Labor’s changes.

    In my view the bigger loss for investors is the reduced CGT discount which could mean hundreds of thousands of dollars in extra tax for those investors holding over long periods (assuming prices rise of course).

    Odds are both changes would pull forward investor demand & increase prices or at least stem price declines.

    • They’re going to race to buy something that once purchased will thereafter be less attractive to other investors since subsequent ones will no longer be able to claim the deductions?

      • Many will still be able to NG against investment income (under Labor’s rules).

        NG may be a factor for some, but for very few it would be the sole reason they buy an investment property.

        Most will still be able to claim the deductions, just with different timing.

      • I haven’t followed economics/politics closely for some years now (haven’t lost interest, just a tad busy) so I’m out of the loop but what I’m wondering is what factors might realistically be able to fully offset this, given that a fair % of investment property buying and selling represents horse trading between investors?

        I buy a brand new asset and claim the deductions. However, long gone are the days when holding this asset was a long-term proposition, I bought it because I intend to allow it to appreciate for a relatively short span of time and flog it – probably to a like-minded person. Except that now, that like minded person will not be able to claim the full package that I am claiming from it. Unless prices are booming, that “asset” that I am trying to sell is now an inferior product from the point of view of another like me, since the next buyer will not be able to claim the same deductions.

        Would it’s desirability not depreciate (in the eyes of domestic investors at least)?

      • It is a perversion where the property is worth more to an existing owner utilising the tax incentives, than to a prospective owner that does not have the tax incentives. This implies lower sales volumes of existing properties.

        IMO this a good thing. Existing NG rorters will be holding on to their IP for the duration of the housing crash, rather than passing the loss on to owner occupiers.

  3. yeah everyone will flock into property investments because price fall after removal of NG doesn’t matter – Aussie investors only buy because of ongoing return not capital gains ….
    … wait a minute …

  4. The issue is they want to buy but can’t get approved because of current debt and expenses
    It’s true that investors want to get in quickly but they can’t get approved
    This is what walelin doesn’t understand
    In normal credit times yes but very hard to get that extra loan approved now
    And they’ll backdate legislation to jan 1 2019 to catch them all out

    • Given the reasonable probability the RE market will be crashing by the time labor has the opportunity to implement legislation, there is a high probability that not only won’t they backdate it, it will probably be a “non-core” promise.
      A quick check of https://www.alp.org.au/ shows no mention of Neg gearing at all, so it clearly isn’t a massive priority for labor no matter how much of a wet dream it is for the echo chamber here.

    • Agreed, they are losing equity on their existing portfolio so can’t redraw to fund new purchases, plus banks won’t touch them when they disclose their other properties unless they are not negatively geared

    • Correct. No quick and easy approval process slows investors. The drive to buy remains, however. I work with a number of new contractors, and am always intrigued by how much time and money they will spend in order to get a tax concession. I sometimes try to explain that this is merely a case where the ATO is gracious enough to admit that one actually spent the money. The money remains spent and not saved. This is taken as clear evidence that I don’t know what I’m talking about.

      In technical charting some markets are at a point where a small bear market trap could see a temporary rebound, but it all looks pretty dead to me. I’m not seeing even a dead cat bounce – just dead.

      • AB
        I think at some point investors will realise that negative gearing only works on the way up
        Even very smart people high end lawyers doctors and engineers think that this dip in property prices is a buy the dip because in fairness that’s what’s happened for 50 years
        They have said to me when prices are double in 10 years
        I’m not sure when that belief changes
        I think it’s going to take a Great Depression like 1930s to change that view
        Even a 20% fall I don’t think will change
        It’s pschological warefare thd Martin and John showed via that KGB guy
        The info is there that we’ve seen the high now but most people have block mania and banana in their ears and cucumber on their eyes

  5. IF not Property Than What?
    That’s about as complicated as the equation needs to get, at least in my mind.
    The problem is that our economy is not (at the moment) in a tail spin, so plenty of punters are creating lots of “savings” just looking for a home (excuse the pun) .
    Where will this excess capital flow too, what asset class will attract this excess capital?
    (Maybe it’ll all be absorbed into higher interest rates servicing existing property portfolios, but I suspect that’s not the case)
    Than there’s the question of first time buyers and Property Ladder aspirants, where will their deposits go? what asset will they invest in?
    It’d be naive to assume that banks would simply be kind of gifted this excess capital to store at some pathetic return determined by the RBA…I just don’r see that happening, the money will burn a hole in the savers pocket and they’ll buy something. For some it’ll be their dream car but for most it’ll be their dream home or dreamed of IP. Unfortunately RE is the only class of assets that average Aussies really understand and in times of strife they’ll stick with what they understand (even if it loses money).

    • Exactly. Asked the same here recently and on Twitter with little response. The most substantial change (to the capital gains tax discount) is across all asset types. So what will investors run to?

    • Won’t much of this capital ultimately evaporate from existence if real estate does not rebound but continues down?

      • Yes, this RE based home capital will simply cease to exist.
        but “savings” are something entirely different and with the RBA needing ZIRP savings are only a way of preserving capital, preserving it for what? preserving it for use when?
        For the last 60 years the asset class that best preserved the value of savings has been Aussie RE, nothing else comes close. That’s a fact that is now imprinted in the DNA of all Aussies, a small downturn, that only returns two years of outsized returns, is not enough to change investment preferences formed over a 50 plus year time frame.
        Nop not gunna happen, average people will need to get burned bad, real bad before RE becomes a toxic asset class.
        In the mean time it’s the only sensible place to park your money.
        The prices paid for desirable Sydney RE will simply reflect available cashflow, leverage ratios and lending patterns….I suspect that everywhere else in Australia derives its prices proportionally from Sydney’s prices…at least that seems to be the way it works.

    • There’s not much spare cash Fisho. A lot of people buy not with a cash deposit but drawing on equity from the house they are selling (homeowners) or another investment property (investors).

      That equity is disappearing by the Day.

      • Yep Positive Feedback (control systems perspective) always has that direction reinforcing perspective That’s why Proportional feed back systems use “Negative feedback” to stabilize systems.
        That’ said nothing changes.
        Think about Sydney for a moment.
        Sydney’s GDP is something like $450B with over 15% of the population employed in the Financial Services sector.
        This is NOT sustainable, not in any sense of the word is this state Sustainable. at its present size. Now that does not mean that this sector can’t still find growth opportunities, after all it’s our largest single sector so our future depends on us finding a way to maintain sector growth (percentage wise) and sector revenue growth wise as well.
        If you go back and study any good book on Economic Fundamentals you’ll arrive at the conclusion that the Financial sector has a maximum size of something like 3% of the economy. This size restriction exists fundamentally because Financial services act as a sort of tax on any Productive system, if the tax is too high we strangle Productivity and all suffer as a result of our reduced collective efficiency, it’s Marxist theory 101. However, that fundamental say’s nothing about the system Dynamic’s, there’s nothing stopping us constructing an economy where 50% of us are employed in Financial services matter of fact there’s every reason to believe that we’ll continue down this road and continue inventing ways to make this journey individually profitable while simultaneously Collectively Impoverishing us.
        Think about the last 20 years: with the exception of a few mega mines and NG/LNG facilities what Productive capacity have we created, how much of this Productive Capacity is housed within the Sydney valley?
        Yet Sydney’s GDP is almost 1/4 of Australia’s combined GDP, we’re all reinforcing this strangle hold that Sydney has on the nation and we’ll continue doing this
        Collective stupidity or Individual brilliance…all depends on how you view the situation, but one thing is certain it’ll continue much as it has been if for no other reason than the simple fact the real change is real difficult.

  6. There will be no negative gearing reform boom because there will be no negative gearing reform.

  7. When i look at any market cycle chart, there is ofcourse the bull trap. We are fast approaching the bull trap moment, so for me, the labor win, negative gearing reform (combined with a rate drop, FHB initiative) will give us the bull trap.
    What do they say about history repeating?

      • I tend to agree. 2015 it plateaued and then surged again. This time a lot has changed. No China men out buying in force, credit restrictions, royal commission, heavy losses already, negative gearing reform almost certain, Labor to likely win and no more lower teh rates, global shock, stock markets volatility etc..boom times over.

  8. DefinitelyNotTheHorribleScottMorrisonPM

    Leaner dreams and fantasies of falls and crashes, in the MB feedback loop. Owning property takes sacrifice. Only lifters and MPs understand this.

  9. I think it’s called a bull trap. It will temporarily halt declines, but it won’t make new highs. No doubt there will be stories about how the worst is over and how the property market is back on track.

  10. you would have to be REALLY stupid to think that buying property as its number one tax subsidy is ripped away permanently would deliver you a capital gain

    Well, taking that into consideration, a charge into property seems inevitable then.

  11. Whatever the outcome of this ridiculous drive to panic buyers into going into more and more debt to keep feeding the monster I will say this – My husband and I own 1 negatively geared property which was supposed to help fund our retirement. Unfortunately we made the mistake of buying in the town we have lived in for the last 25 years. In 2011 we built a new house in Mackay Qld. Yep, I will understand if you a laughing now at our stupidity to buy in such an unstable marketplace, we are not experienced investors. I do believe there should be restrictions on owning negatively geared properties which are really just an added tax burden for those who can’t, or who don’t want to buy one themselves. My thoughts would be to allow 1 negatively geared property per person, or 2 in the name of a couple, and no more. It should only be offered to private individuals and not to businesses, organisations, trusts etc. It should not be limited to new builds and when one property is sold on another can be bought to replace it. What are your thoughts on this?

    • My thoughts, There are very few cases where good policy was created by only examining what just happens to be optimal in my (or in this case your) particular situation. I understand that it is always difficult to look beyond ones own financial horizon but I strongly suspect that there are much better (for the whole community) policies possible than what you’re suggesting.
      I think any good long term equitable policy will begin with a plan to expand our asset base and move our collective vision of “investing” into the 21st century.

  12. Anecdata: My friends father passed away earlier this year and the family home was inherited by the adult children in equal share. They cleaned it up and it went to auction Saturday fetching $2.12M. They were hoping for $2.2M but are still pleased with the result.

    This is it here: https://www.domain.com.au/4-bent-street-altona-vic-3018-2014746241

    Developer bought it. Negotiated a 15 month settlement. I congratulated him on the windfall but didn’t dare explain the concept of “settlement risk”.

    • Did the developer pay a deposit? Are they going to rent the property out for the next 15 months?

    • Oh god. 15 months? They better keep mowing the lawns and painting to be ready for the next sale campaign. Hope the deposit covers rates, insurance maintenance and any incidentals because you can put money on that falling through.