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Negative gearing not so negative: It has served the economy well and been positive for affordability; Disclosure: The author owns one negatively geared and one positively geared rental property.
Topic Started: 28 Oct 2014, 01:48 PM (845 Views)
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Negative gearing is not so negative

October 28, 2014 - 11:31AM
Michael Pascoe

Poor old negative gearing, carrying the can for perceived housing affordability problems, fitted up as a convenient scapegoat, so much easier to blame it than to deal with the myriad factors bearing on housing supply and demand.

The ability to offset losses on one investment against income made elsewhere has actually served the overall Australian economy well and done plenty of positive things for housing affordability as well. (That probably sounds like heresy, but I'll come back to it.)

Anyway, there's no need to expend too much energy attacking negative gearing as the market is in the process of sorting out any excesses – a process that could see recent property investors retreat from buying in the same way that punters flee the stock market when it takes a turn.

Basically, there's a good chance negative gearing the average residential property won't make much sense for most investors over the next few years.

The tip is in the title: "negative gearing" – the investment loses money unless there's a fat capital gain above and beyond capital gains tax. And the tax benefits of the deduction for losing money on housing aren't really that flash on anything less than the top marginal tax rate, a privilege enjoyed by relatively few.

Given increasing supply and flat or falling rents in key investor markets and subdued capital gains forecasts for at least the next couple of years, negative gearing is looking negative indeed, especially when punters can positively gear into equities instead.

Some of the most investor-centric real estate markets are already showing strain. Reserve Bankers have fingered Melbourne CBD apartments as a potential worry, BIS Shrapnel has issued warnings about Sydney CBD units and Brisbane property analyst Michael Matusik has been ringing the alarm bell with increasing urgency over "investor specials" there.

Australia doesn't have a housing market; it has hundreds, perhaps thousands of them. Some of our housing markets get more carried away than most – witness the Gold Coast pre-GFC. For that matter, the Gold Coast every decade or so.

Investors who piled into mining towns have seen prices slashed. Negative gearing won't have done any favours for anyone who bought into a mining town over the past couple of years.

But it's Brisbane that is shaping up as the more general warning to investors just when the Reserve Bank is jawboning investor excess.

Maybe Kelly O'Dwyer's parliamentary committee looking into foreign investors should consider freeing them up rather than further restricting their buying.

There's nothing wrong with an individual losing money on an investment, unless, of course, you are the individual.

Or unless there are a large number of investors losing at the same time, causing a broader economic problem. The one thing worse than sharply rising housing prices is sharply falling housing prices.

Former economic adviser to the Gillard government, Stephen Koukoulas, has pointed to why the RBA and others should not get too excited about hosing down the housing market - or perhaps he has described why the RBA is doing more jawboning than acting on macro prudential means of reducing housing demand.

Roughly two-thirds of Australians own or are in the process of buying their homes and there's an overlapping 10 per cent who own at least one rental property. Rising housing prices have been and are vital for maintaining their consumption desires – the wealth effect – when real wages are falling.

With the economy expected to grow below trend this financial year, the RBA has no interest is further sabotaging consumer confidence.

And then there's the matter of negatively-geared property investors improving housing affordability for those who are most disadvantaged by the high cost of housing: renters.

Negative gearing does increase demand, but in doing so, it also increases supply. Increasing supply is a good thing, but there are many other factors affecting it, ranging from NIMBYs to merely incompetent and gutless state and local governments, plus the decline in government investment in social housing.

And just abolishing negative gearing, if a government could in some future fairy land, would be a poor and inequitable stab at the bigger problem.

There are plenty of ways of reducing demand for property - scrap the capital gains tax concession, boost land tax, amputate the little fingers of every tenth buyer, and so forth. However, in the short-term, parts of the market will do it as a lesson in the cost of exuberance.

Increasing supply, given our population growth, is a much better way of equitably dealing with housing affordability.

Disclosure: The author owns one negatively geared and one positively geared rental property.

Read more: http://www.smh.com.au/business/the-economy/negative-gearing-is-not-so-negative-20141028-11csr4.html
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One solution to make the system fairer, would be to make home loan repayments tax deductible as well.

Considering property is over taxed. The median Sydney house price is now $800,000. For a newly constructed median priced Sydney dwelling $280,000 of that $800,000 is levies and taxes charged by the three tiers of government.

Property taxes are one of the largest sources of income for all levels of government in Australia.

The excessive taxes charged on new housing have definitely created a lost generation. The exorbitant taxation of new housing rig the market against youth, restricting supply and forcing up prices. It is amazing there isn't more anger among young people about this intergenerational tax rip-off.

The tax 'war on youth' is well underway. A young person purchasing a median priced new dwelling in Sydney pays $280,000 in government taxes, levies and charges. This is the equivalent of nearly 5 years of average earnings, just to pay the tax component of a new median priced Sydney home.

Past generations never had a GST on new housing and had upfront infrastructure taxes amortised over time into the rates, land taxes and stamp duties, relieving the tax burden on young people trying to access the housing market by reducing the price of new housing.
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Disclosure: unfortunately for vested author, most readers have things called brains!
After a bubble has burst, no one denies that it existed. But before it does, the popular refrain is that though bubbles existed elsewhere in the world, “there’s no bubble here”. So housing bubbles are admitted to have existed in Japan, the USA, Spain and Ireland – because they’ve already burst.
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Pascoe’s piece is a shocker!

The critics of NG are not calling for it’s wholesale removal to prohibit the offset of stockmarket or business or even commercial RE losses, merely tempering the deliberate structuring of debt on residential!

The ratcheting of resi RE by investors outbidding FHBs to – class vs class – oblige them to rent, has been a significant contributor to the boom in land prices and has serious social and economic consequences!

People remark on how well young adults accept their second-class status, denied full citizenship in a property-owning democracy!

Their main options are tainted: buy, assume the extreme risk before us and submit to debt-slavery; or rent and enrich a ‘Gearer!

This is the stuff of revolution – or emigration!

Don’t Buy Now!
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Let's end the madness of negative gearing

Lindsay David | 28 October 2014

In recent times there have been a lot of arguments in the public domain on whether Australia should get rid of the negative gearing tax tool for property investors.

Negative gearing is a valuable tax tool in any economy to help companies that make investments reduce their risk-burden by allowing them to make tax deductions against losses incurred where the revenue of the investment does not cover the loan costs.

In other words, allowing the investor short-term tax relief in the investment they make, or long-term relief when an investment does not turn out to be as rewarding as anticipated (a lousy investment).

However, in Australia, negative gearing has unfortunately been used as a speculative tool to help property investors cover their losses throughout the time of holding a particular asset so they are able to eventually flip the asset for a profit.

There are two key problems with this mindset:

Using negative gearing in pursuit of capital gain only works when the investment appreciates in value greater than the overhanging costs involved in maintaining the liabilities of the asset whilst under ownership.
If there is a market correction, those who hold negatively geared assets in pursuit of capital gain generally get burnt.

Unfortunately with so many Australian property investors incredibly negatively geared, it would be economic suicide to get rid of this tax tool overnight. Getting rid of negative gearing today would simply burn too many property investors at the same particular time causing mass damage to the Australian economy.

With the majority of negatively geared property investors earning less than $100,000 per year, it would simply send too many Australians into bankruptcy too quickly. In economic downturns, negatively geared property investors would progressively suffer which would slow the pain burden.

If anything, they should keep negative gearing for property investors, however introduce resourceful tools to mediate property investors from taking advantage of a tax law where they are willingly prepared to take excessive risk where it is all but mathematically certain that they will incur losses for a very prolonged period of time. This forces investors to invest responsibly whilst reducing tax losses.

My recommendation is property investors with loan to value ratio (LVR) greater than 50% void from making any tax deductions against the first 2% of rental yields (or equivalent to property price paid).

This would force property investors to shift their focus from speculating mode to yield-hunting mode. It would also push those who are taking an abnormal amount of risk in the name of capital gain to offload their properties to reduce fiscal losses which increases tax revenue by billions of dollars. Furthermore, this approach would reduce the risk profile of property investors in a downturn.

Read more: http://www.propertyobserver.com.au/financing/tax-and-legal/37216-let-s-end-the-madness-of-negative-gearing.html
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