Negative gearing is yesterday’s problem

The AFR reported that the proportion of landlords negatively gearing rental properties fell to 58.6% in 2018-19, according to the latest Australian Taxation Office (ATO) statistics. This was the lowest level on record and well down on the peak of 69.6% in 2007-08.

There were also 19,113 fewer negatively-geared landlords than in 2017-18, representing the first fall in five years.

The next chart shows how the decline in negatively geared landlords matches the structural decline in mortgage rates since the Global Financial Crisis (GFC) hit in 2008:

Negatively geared landlords

Falling mortgage rates means less landlords negatively gearing.

The data from the ATO is only current to 2018-19 and is very lagged. Therefore, the proportion of negatively geared landlords has likely fallen substantially since then reflecting the ongoing decline in mortgage rates.

Since 30 June 2018, the average outstanding standard variable mortgage rate has plunged from 4.51% to 3.59%, whereas the 3-year fixed rate has fallen from 4.13% to 3.59%:

Existing mortgage rates

Existing mortgage rates have fallen sharply since 2018.

Rates for new mortgages have fallen even lower, as illustrated by the next chart from CoreLogic:

Average mortgage rates

Average rates on new mortgages have plummeted.

As you can see, new investors can obtain mortgages for 3% or less which, when you view against gross yields above 4% across most Australian markets (i.e. except for Sydney and Melbourne houses) alongside fast growing rents, opens the door to neutrally or positively geared investment opportunities.

Australian rental yields

Gross rental yields above 4% are widely available across Australia.

Thus, thanks to rock bottom mortgage rates, negative gearing is fast becoming yesterday’s issue and has faded in importance from a housing policy perspective.

Unconventional Economist
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Comments

  1. MathiasMEMBER

    The damage is already done.

    I’ve never met a more arrogant generation in history then the Baby Boomers.

    I’ll just be glad when they all die. They have no value or worth to this country what-so-ever.

    They are worth more to Australia dead then alive. There existence is meaningless to this nation.

    They are nothing more then a burden and a drain on this nation.

    • The FNG.MEMBER

      I love my morning exercise but it’s become so much less enjoyable when every day is a reminder that this country is spiraling into farce. I know a lot of my neighbors and the neighborhood well because we’re outside people who always walk everywhere. Where I live all the 2 story houses with yards are occupied by single old people and all the young families with kids live in the units that are meant for old people.
      My morning starts well, fresh air, a new day, but by the time Im home Im ready to tear someone’s head off because of what I see.
      This is madness.

      • Fabian AlderseyMEMBER

        What carrot and stick approach do you suggest in terms of forcing old people out of the homes they’ve lived in for decades?
        My wife and I are well away from retirement, but our plan is to die in our current (large) house. How do you propose that we are told “look, you’re going to die soon, let’s formalise that fact and move you into one of heaven’s little waiting rooms”?
        Of course, my thinking might be very different when I’m in my 80s, who knows…

  2. AndynycMEMBER

    They need to stop the ability to use your equity to purchase a new home. That is the real hallmark of ponzi financing. You should be forced to sell your home to get the cash for the next one.

    • Not quite. It would be sufficient to #leveltheplayingfield if we just agreed that investors had to meet the same “genuine cash savings” rules as first home buyers.

      Can’t have existing owners using phoney equity to out bid fhb’s using savings. This is just wrong. It’s also an easy concept for financially illiterates to grasp and therefore an easy policy sell.

      #leveltheplayingfield

    • drsmithyMEMBER

      Borrowing and/or refinancing against the increased value of your home should trigger a CGT event. That would put a big brake on things quick smart.

  3. pfh007.comMEMBER

    “.. Thus, thanks to rock bottom mortgage rates, negative gearing is fast becoming yesterday’s issue and has faded in importance from a housing policy perspective….”

    That is a strange conclusion.

    It never was the main problem.

    That it was attractive to lose money betting on excessive capital gains was always the main problem.

    The main problem remains …..people using debt to bet on excessive capital gains.

    The only difference is that fewer of them are now losing money while they do it. That is the objective of the lunatic RBA policies. Give a huge an inequitable freebie to property speculators by extending them cheap and easy credit to punt on existing housing assets.

    The best solution remains to target a buffer stock of vacant housing and to encourage investment in new construction to get there. Removing capital gains tax for the investor in new housing construction will do that.

    But there remains a strange aversion to simple and politically practical policies to achieve more affordable housing.

    https://theglass-pyramid.com/2018/10/27/alp-and-negative-gearing-why-risk-it/

  4. kannigetMEMBER

    While having lunch yesterday a friend explained that he gets roughly $150K back in tax refunds on the 8 investment properties he owns. While he doesn’t want to buy another property this year he said he normally puts the refund down as a deposit on the next acquisition.

    I love how its OK to depreciate the structures on the property and take this off your taxes, but not count the increased land value at the same time….

    • I find those numbers very hard to believe. That implies $300k of deductions (after taking rental income into account) and an annual cash shortfall after tax in the low to mid $100s.

        • kannigetMEMBER

          He is in tech sales, salary of over $200K + commissions that approach $300K + rental income + other investments…. easily makes up the amount needed.

          Personally I dont know why he is so fixated with tax deductions though…

          • drsmithyMEMBER

            Personally I dont know why he is so fixated with tax deductions though…

            Because he’s on a very high income and tax minimisation has been the primary marketing strategy of investment property spruikers for probably twenty years now ?

            Guarantee you that one of, if not THE, top reasons any random property investor will give you as to why they invest in property is ‘reduce my tax bill’.

          • Still doesn’t add up. The tax refund is after the rental and other investment income is taken into account.

            My scepticism is that 8 properties can generate that level of net loss.

          • kannigetMEMBER

            I dont doubt there is “other” stuff mixed up in this if his quoted figures are not exaggerated, It was more the mindset behind the investment strategy that I was focused on.

            I know quite a few people with reasonably large investment portfolios, Most have at least 15, he has the smallest I know but only really started just over 10 yrs ago. They all seem to focus on the same thing, that while on paper they appear to be losing money to get the tax break, its only on paper they lose as a result of the NG calculations.

            Another interesting thing for me is that He is the only one of the investors I know who thinks things are still stable enough for it to keep going up. All the rest are considering consolidation strategies.

  5. Negative gearing gets the headlines, but the bigger issue has always been Howard’s CGT concessions brought in late 1999. We had negative gearing prior to this, but the CGT concessions put a rocket under house prices. CGT should be indexed by CPI which in this environment is small and hence will bring in more tax revenue.

  6. mikef179MEMBER

    Well, as long as interest rates stay at rock bottom and rents stay where they are or keep going up, everything is fine. All righty then. Nothing to see here folks.

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