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The Negative Gearing Thread: RBA Bulletin - Negative Gearing available in many countries
Topic Started: 10 Mar 2011, 12:10 PM (32,794 Views)
earthsta
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Strindberg
31 Mar 2011, 04:41 PM
I really am fucking sick of your shit.
Oh dear....you ARE out of sorts, aren't you!

Better drop around and see your top guy friend and get a little lovin', eh?
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carter
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Link here: http://macrobusiness.com.au/2011/05/nz-moves-to-quarantine-negative-gearing

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NZ moves to quarantine negative gearing

Posted by Unconventional Economist in New Zealand economy on May 19th, 2011 | 13 comments

When it comes to recent banking/housing policy, our Kiwi cousins across the pond have it all over us Aussies.

Back in April, I wrote about three policy actions being undertaken by the Reserve Bank of New Zealand (RBNZ) and the New Zealand Government aimed at reducing the economy’s exposure to the housing market and improving financial stability. These measures included:

the Open Bank Resolution (OBR) Policy, which seeks to protect taxpayers from funding future bank bailouts;
directing the Productivity Commission (modelled on the Australian body) to undertake an examination into housing affordability, with the stated aim of reducing the economy’s accumulation of debt and exposure to external shocks; and
introducing macro-prudential tools, such as loan-to-value ratio (LVR) restrictions and counter-cyclical capital buffers, in order to moderate future credit bubbles.

Now the Opposition Labour Party has pledged to amend New Zealand’s negative gearing rules in a bid to improve the nation’s housing affordability.

Negative gearing is particularly pernicious in New Zealand as the country currently does not levy capital gains taxes on investment property. Accordingly, property investment provides an ideal avenue for Kiwis to dodge paying tax by socialising some of the holding costs of an investment property and then privatising all of the capital gains upon its sale.

Earlier this year, the Opposition Labour leader, Phil Goff, questioned the merits of New Zealand’s negative gearing rules:

“What we are looking at [changing] is ways [now] that people can socialise their losses and capitalise on their gains. It’s wrong that you can write off all the costs for your rental housing investment against other income and then when you finally sell the property you don’t pay tax on it either… So you [those offsetting rental property losses] end up paying very little tax. And anything that people avoid paying in tax – the rest of you have to pay it for them”.

And yesterday, Mr Goff canvassed a range of measures to reduce property speculation, including disallowing property investors from claiming losses against other forms of income [my emphasis]:

The Labour Party would like to recreate a New Zealand where more Kiwis owned their own home by controlling house prices through disincentives for property investment, and by allowing people to build up money for deposits through schemes like KiwiSaver, Phil Goff says…

Goff reiterated Labour’s ring-fencing policy of not allowing property investors to make losses on rental properties and claim that back against other income in order to minimise tax, as another disincentive for property investment that would help control prices…

“The concern that Labour has is once upon a time 80% of New Zealanders could aspire to owning their own home, that was the Kiwi dream. Predictions are that that will now drop to 59%,” Goff told media in Parliament on Tuesday.

“That means that 40% of Kiwis can never hope to own their own home. That’s not satisfactory in terms of what our Kiwi dream is, so we need to assist with that,” he said…

Labour was looking at ways to control house prices in its broader policy platform, which had not yet been finalised, Goff said. Labour has already expressed support for allowing the Reserve Bank to be able to control maximum loan to value ratios, and use further supplementary prudential tools to help control asset price bubbles.

“The [cancellation of the] depreciation allowance has been one factor there, ring fencing would be another factor, for example,” Goff said.

“The real objective has got to be to try to get more Kiwis owning their own home, rather than being forced to rent if their real desire is to have home ownership,” he said.

“That’s the New Zealand that most of us grew up in, that’s the New Zealand that we’d like to recreate.”

Of course, the Labour party will need to win November’s election if it is to implement these measures.

An important area overlooked by both the Government and Opposition, but which is critical to achieving both affordable housing and greater financial stability, are reforms to New Zealand’s highly restrictive land-use policies, which prevent low-cost housing from being quickly and efficiently supplied to the market. As long as policy makers focus only on the demand-side of the housing market, whilst ignoring the straight-jacket placed on new development, their dreams of achieving the widespread and affordable home ownership of yesteryear will go unfulfilled.

That said, at least the New Zealand authorities are seriously examining ways to reduce their country’s macroeconomic vulnerabilities, most notably its exposure to the housing market. This is in stark contrast to Australia, whose authorities are yet to publicly acknowledge that such vulnerabilities even exist, and resist any proposals to change the status quo (e.g. the Henry Tax Review’s sensible recommendations on property taxation).

In this regard, New Zealand is way ahead of the curve in thinking through how to handle the financial stability aspects of housing/credit cycles.

Australian policy makers could learn a trick or two from our friends across the pond.

Cheers Leith
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matthew_50
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wow... like, its a bit different because they don't have CGT (though I'd trade restricting NG for removal of CGT here...)

the point is, they really seem to be talking about it and actively trying to REDUCE property investment so more people can own their own home...


none of this bullshit holier than thou landlord speak "if it wasn't for us, no one would have anywhere to live!!"

in Aus you get the feeling talk like this would be blasphemous.

that kiwi saver stuff is interesting too...

personally, I'm against compulsory super, I want to do whatever I want with all my money. on that front its good that you can use your money to buy your first home...

the problem is... when you have supply problems (which NZ apparently does) you get the situation like here where people will just pay what ever they can for a house. this makes things like grants, stamp duty cuts ect, all pointless... equally, allowing people to use their 'super' to buy a house would be just as pointless - house prices would just go up... the only difference is that you have a lot less of a retirement nest egg...

Edited by matthew_50, 20 May 2011, 04:05 PM.
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http://blogs.news.com.au/moneystuff/index.php/news/comments/tax_is_negative_gearing/

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Tax: Is negative gearing “worth it”?

Jump straight to: Money Stuff, The Barefoot Investor or Smart Investing

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Justine Davies

Monday, May 30, 2011 at 09:12pm

Well, it’s heading towards that time of year that we all love – tax!! So it’s a timely opportunity, I thought, for me to share with you all a reader question:

“Hi Justine,

Thanks for letting me email you. I’m not expecting specific advice, but just some general information would be useful. I have a question about negative gearing and whether it’s worth it?

My partner is property obsessed. She watches every DIY show and has been to several property seminars. She’s decided that she wants a string of investment properties, all somehow paying for each other and which somehow will all magically fund our retirement?!? She’s adamant that she wants to get started by buying an investment property asap. I have grave reservations because a/ we have a huge mortgage of our own ($320k) which doesn’t leave us a lot of money left over after our other bills each month and b/ as I said we want to start a family which means that things would be financially stretched for a few years anyway.

Whenever I try to explain that we can’t afford it (because realistically the difference between the loan and rent means that we’d be out of pocket each month and have to tip in our own money) she talks about negative gearing – that it’s all tax deductible and we get it all back in tax anyway.

I know that we would get some of the loss back on tax, but I also know that it doesn’t work quite the way she imagines. Is there an easy way to know whether negative gearing is worth it or not?

Thanks for your time.

Pete.


Ah, the magic of negative gearing. When I was working as a financial planner, it was amazing how often clients uttered the words: “but it’s a tax deduction!’ to justify all sorts of crazy, crazy costs. Not that I’m anti negative-gearing – it all depends on what you are investing in, and to a certain degree what your marginal tax rate is. Let me be blunt here: for the majority of people, to get the benefit of a $50 tax refund, you have to have actually spent $150 of your own money. So yes, something might be a tax deduction - but that’s only because you’ve had to shell out money in the first place. Negative gearing means that you are paying out more money than you are getting back.

First and most important rule of borrowing for investment: always ignore the tax deduction promises and look carefully at the underlying investment when deciding whether it’s worthwhile. Let’s backtrack though and talk about what negative gearing actually is.

Basically, when you borrow money to buy an investment (commonly either property or shares or a managed fund) then that investment is called a geared investment. “Geared” just means that you’ve borrowed money to buy it. Now, an investment can either be positively geared, meaning that the cost of holding the investment (the interest on the loan plus any other expenses) is less than the income you receive from the investment (rental income for property and dividends for shares). Or negatively geared, which simply means that the investment costs you more (in terms of interest on borrowings and other expenses) than you receive in income.

As an example, let’s say you borrow $200,000 to buy an investment property. Let’s say the interest costs on your loan are $16,000 and there are another $4,000 of maintenance, etc costs each year. So a total of $20,000 that it costs you to hold that investment. Let’s say the rental income is $15,000 each year. That investment would be negatively geared because it’s costing you $5,000 out of your own pocket each year to have that investment. On the other hand, let’s say the rental income was $21,000 per year. Then the property would be positively geared, because there’s more money coming in than you are paying out.

In terms of your tax, all those figures get included in your tax return for the ATO to work out how much tax you owe/what size refund you’ll get. With property there’s also depreciation, which can boost your tax refund a little bit. The tax office has some excellent information on all things tax-related with regards to rental properties.

So on to your question of whether negative gearing is “worth it” . And it’s an almost impossible question to answer because it depends on the capital growth potential of the specific investment, it depends on your cashflow situation and any upcoming lifestyle changes (such as having a baby and one less income to deal with!) and it also depends a bit on your marginal tax rate and what other financial commitments (such as a mortgage) you have or don’t have.

Again, let’s take the above example of the $200,000 investment property and how it might affect your cashflow. Let’s say you and your partner are both on tax rates of 30%.

So:



Rental Income $15,000
less
Interest costs $16,000
Other costs $4,000
Depreciation etc $2,000


Net loss $7,000
@ 30% tax rate $2,100 refund.




Now: ignoring depreciation, the property has cost you $5,000 out of pocket, but you’ll get about $2,100 of that back in your tax, meaning that it’s actually cost you $2,900, or about $240 per month to hold the investment. If you were both on 45% tax rate, your out of pocket cost would be $1,850. If you were both on 15% tax rate, your out of pocket cost would be $3,950. In other words, the more you earn, the more attractive negative gearing is.

Of course, what you are banking on when you have a negatively geared investment is that it will grow in value (capital growth) at a rate which not only covers your yearly out of pocket expenses but also covers the cost of selling, the capital gains tax that you will have to pay if you sell, plus enough of a profit to make all the hassle worthwhile.

You’re also hoping that eventually the investment will be positively geared (that is, that the rental income will after a number of years be more than the costs of holding the property).

There’s also the opportunity cost of your money. That is to say, what else could you be doing with your cashflow if it wasn’t tied up in the investment? Such as paying down your own mortgage? (This, by the way is a great mortgage calculator)

Borrowing to invest, particularly when the investment will be negatively geared, is something you need to consider very, very carefully, both in terms of the quality of the investment and whether the cashflow arrangement will suit your lifestyle and other financial commitments.

So Pete – to answer your question about whether negative gearing is worth it – I can’t say yes or no. You should get independent professional advice (and by independent I mean your accountant, not the person running a property seminar) and discuss the following questions:


• What is the realistic growth potential of the investment?

• What will be the realistic out-of-pocket cost each year of holding the investment? Do the calculations under a few different scenarios (e.g. 30% tax rate, 15% tax rate, 45% tax rate).

• How long will it take before the investment is positively geared?

• Would you still cope comfortably if interest rates rose by 4%?

• Does the potential net (after tax) gain of holding the investment outweigh other investment options (such as paying the money into your mortgage).
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http://australianpropertyforum.com/topic/8747814

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Bank boss questions gearing

Eric Johnston

June 3, 2011

ONE of Australia's most senior bankers has taken aim at the negative gearing millions of property owners use, claiming the tax break is leading to an unhealthy focus on housing as a way to get rich, while pushing property prices to unaffordable levels.

ANZ Australian chief executive Phil Chronican also cast doubt on property as an investment class, saying housing looked ''weak'' compared with other forms of investment and that the substantial gains in property prices over the past two decades were unlikely to be repeated.

Negative gearing provides billions of dollars of tax breaks, and economists have often blamed it for pushing up property prices. But it is unusual for a banker to enter into the debate, given that investment property often makes up a large portion of banks' lending. Because it is widely used, negative gearing remains a thorny issue politically. Tax Office figures show that about 1.7 million property owners used negative gearing last financial year, claiming rental losses as a tax offset. This generated a $6.5 billion net loss.

Mr Chronican said he was not trying to take on the ''sacred cow'' of negative gearing, rather he was trying to highlight that property was a poor investment for most people.

''Governments might want to look at whether the current extent of negative-gearing tax breaks are fostering an unhealthy focus on housing as an investment vehicle, thereby compounding affordability issues,'' he told a business lunch in Sydney.

Real estate should not be regarded as a speculative investment vehicle to get rich, but as ''a place to live in, sleep, eat and raise your family''.

Mr Chronican said that because of tight supply in the Australian housing market, he did not subscribe to the view that it was a bubble waiting to burst. But with the Reserve Bank still tipped to increase interest rates this year, Australia was facing a sustained period of low growth in house prices, he said.

As an asset class, it offered ''poor income returns and high transaction costs, and a lot of volatility in prices - particularly in the slower-growth environment''.

He also highlighted housing as an ''excessive concentration risk'' for the economy, as Australians had up to 60 per cent of their total wealth tied up in real estate. This is one of the world's highest rates - more than double the US rate.

Mr Chronican's comments come after figures released this week showed that Australia's housing market had softened since the Reserve Bank's interest rate rise in November. Auction rates in the main cities are well down on a year ago.
Edited by Admin, 3 Jun 2011, 09:58 AM.
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http://www.apimagazine.com.au/api-online/news/2011/06/negative-gearing-debate-continues

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Negative gearing debate continues

Posted on Friday, June 03 2011 at 10:25 AM

Suggestions the Federal Government should consider winding back negative gearing overlooks the findings of the Henry Tax review just 12 months ago, according to the Urban Taskforce.

Chief executive Aaron Gadiel says around 70 per cent of individual owners of rental properties depend on negative gearing to support their investment.

"Small investors are an important source of funding for new home construction," Gadiel says.

"Investor activity in the residential housing market boosts housing supply, by funding the construction of new homes that renters cannot afford to own outright.

"Policies that try to force down home prices, without also reducing the cost of supplying new homes, will only kill off new home construction."

Gadiel's comments come after ANZ Bank’s Australian chief executive Phil Chronican reportedly told the media, "governments might want to look at whether negative gearing tax breaks are fostering an unhealthy focus on housing as an investment and compounding affordability issues".

Gadiel adds the Henry Tax review found negative gearing for rental properties should be retained and the current tax benefit available for negatively geared properties may place downward pressure on rents. It also recommended stamp duty be abolished.

"Given that our national undersupply of housing now exceeds 200,000 homes, public policy should focus on allowing more investor participation in the residential property market, not less," he says.
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matthew_50
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yeah... except do they? really? I thought the vast majority bought existing houses??

I understand that investors ditching their existing housing investments would force down prices and make development harder though...

(though I still think its really unlikely that the cost of construction really has genuinely increased at the same rate as house prices...)


but it is what everyone can seem to agree on, more needs to be done to make building new homes easier. above all else.
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When negative gearing backs over your house

August 9, 2011

There's a certain irony that one of the key villains in the great financial meltdown of 2008 once again is creating economic havoc.

It was Standard & Poor's, along with fellow ratings agencies Moody's Investor Services and Fitch, that in the early part of the century conspired with caffeine- and cocaine-fuelled Wall Street bankers to flood the world with trillions of dollars of worthless junk masquerading as rock solid, risk-free investments.

By dishing out thousands of AAA ratings - for a handsome fee of course - the agencies ensured that governments, banks, and financial institutions across the developed world were loaded to the gills with toxic time bombs, all loosely based on high risk loans over marginal American real estate.

Having man-handled global finance to the precipice, forcing the US government into a massive and prolonged bailout of Wall Street and the economy, S&P, in a breathtaking display of arrogance and denial, has sagely concluded that America is a credit risk.

Of course, America and Europe, along with Japan, are afflicted by a range of other quite fundamental problems.

But the disaster formerly known as the Great American Property Boom still looms large over the collective psyche of the northern hemisphere's richest nations.

Read more: http://www.smh.com.au/business/when-negative-gearing-backs-over-your-house-20110808-1ijad.html
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http://tunswblog.blogspot.com/2011/08/negative-gearing-is-not-your-friend.html

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Negative gearing is not your friend

On this day 38 years ago, a gunman walked into the Kreditbanken branch at Norrmalmstorg Square in Stockholm, Sweden, to hold up the bank. Police were called, the gunman took hostages, and a six-day siege ensued. When the police finally took the bank and the gunman and his associate, there was observed amongst the hostages a feeling of solidarity with their captors. A criminologist dubbed this feeling 'Stockholm syndrome.'

In the Brown Couch's never-ending quest for elaborate extended metaphors by which to describe the Australian housing system, Stockholm syndrome sounds like an appropriate diagnosis for our relationship with negative gearing – that is, Australia's almost unique tax arrangement that allows landlords to deduct interest payments from not just their rental income or capital gains, but from all their income, thus reducing the amount of tax they pay.

Talking with tenants, we occasionally hear them mutter ruefully about how their negatively geared landlords are making out like bandits, but then say, 'oh well, I wouldn't be able to afford to live here if it wasn't for negative gearing.'

Our political leaders feel captured too, repeatedly refusing to countenance any changes to negative gearing and, furthermore, positively supporting it. Politicians of otherwise such divergent points of view as John Howard and Tanya Plibersek have defended negative gearing, claiming that if it were ever changed, rents would go up.

That's the claim: that negative gearing makes renting cheaper than it would be otherwise.

We need an intervention. Negative gearing does not make renting cheaper. On the contrary, negative gearing pushes rents up. Tenants, policy makers: negative gearing is not your friend.

First, let's be clear: landlords set the rent at what they can get. If you really think that because of negative gearing, a landlord will accept less, try this experiment: pay your rent $50 short, and tell your landlord that you're helping him reduce his tax. Observe his angry reaction. Note his insistence that you must pay the going rate and if you don't, he'll find another tenant who will. Try another experiment: offer to pay more rent. See if your landlord doesn't take you up on it.

The committed negative gearist who finds themselves faced with the prospect of actually making money – that is, their revenues are greater than their costs – is not going to cut their revenues just to keep posting a loss. They are going to refinance, take on more debt, and buy another property.

But, we hear you say, negative gearing works to reduce rents by expanding the supply of rental housing.

Well, it certainly has expanded the supply of landlords. The popularity of negative gearing saw the number of Australian landlords grow by almost 50 per cent over the last decade-and-a-half, and the proportion of them posting a net loss grew similarly.

Posted Image

But look what they've spent their (borrowed) money on: established dwellings, not new construction.

Posted Image

So they've expanded the supply of rental housing, but only by turning dwellings that might otherwise be owner-occupied into rental. In other words, along with any expansion in the supply of rental housing goes an expansion in the supply of renters.

This is reflected in the declining rates of home-ownership amongst younger households (25-44 year-olds) – and, for that matter, middle-aged households (44-65 year-olds).

Posted Image

These households are in the prime income-earning years of their lives, and many would be owner-occupiers if they weren't priced out by big-spending negatively geared landlords. Instead they are renting – alongside the low income households who have always rented. AHURI researcher Maryann Wulff and her colleagues have charted over the period 1996-2006 the rise in the number of renters who are in the higher segments of the income scale:

Posted Image

Wulff et al explain: 'overall, the number of private renter households in the lowest seven income categories (Y1-Y7) stayed relatively stable over the three census years [ie 1996, 2001 and 2006]. The growth in private renter households occurred in the top five income segments.'

Now, these higher-income renters can afford to pay more than their lower-income competitors, so their presence in the market helps push up rents. They also out-compete the lower-income households in terms of risk and general attractiveness to landlords, so if they want to save a bit of money and live in a relatively cheap rental dwelling, they very often can – which means a lower-income household, who really needs the lower rent dwelling, will have to look at renting another, more expensive dwelling.

We can put some number on this problem, thanks to the National Housing Supply Council. As of 2007-08 (the latest figures), Australia has 814 000 low-income households (that is, in the bottom 40 per cent by income) who are renting in the private market... and the private rental market has 1 410 000 dwellings that would be affordable for these households. That's apparently more than enough affordable rental dwellings... except that fully 1 089 000 of those relatively cheap dwellings are occupied by households above the 40 per cent line. That leaves 493 000 low-income households paying a higher rent.

And it is not just a problem of how the relatively low-rent properties are shared around, because the number of low-rent properties is declining, too – thanks to negative gearing. As a strategy, negative gearing depends on the prospect of capital gains: the negatively geared landlord makes a profit only if the (lightly taxed) capital gain at the end of their speculative adventure is more than the total income lost to interest etc along the way. So negatively geared landlords will go for properties where there's strong expectations of capital gain... and pass on properties that are not so blessed. The latter properties, as economists Woods, Ong and Stewart point out (in a paper for the Henry Review), are the relatively low-value, low-rent properties that low-income renters seek out. Over time, as properties are bought and sold, these sorts of properties drop out of the rental sector, and as they become scarcer, they become less cheap.

We can put numbers on this too, again courtesy of the National Housing Supply Council. Between 1996 and 2006, Australia's private rental stock grew by 234 000 dwellings. All of this growth was in dwellings that rent for more than $200 per week – and mostly more than $300 per week. Over that period, we lost 125 000 dwellings in the $232 or less price range (and all those dollar amounts are 2006 dollars, so we're comparing apples with apples). The Council provides a graph to illustrate the changing shape of the rental market, under the influence of negative gearing. Notice the bulge in properties around $200 flatten down and push up further along the scale of rents at $300 per week, $400 per week....

Posted Image

To recap:

negative gearing does not cause an individual landlord to charge less rent;

negative gearing does not create net additional rental housing;

negative gearing has contributed to more higher-income households renting, which both pushes rents up, and pushes lower-income households out of lower rent properties;

negative gearing has contributed to low-value proprties dropping out of the rental market, which pushes up the rent for those that remain in rental; so therefore

negative gearing is not your friend.
Edited by Admin, 27 Aug 2011, 07:20 PM.
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Thatguy
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Thank you. The above information certainly syncs well with my thoughts on negative gearing on existing properties.

The term "existing properties" is a bit too broad though. Selfishly I would like to see the chart be broken down into say properties under and over 10 years of age as this would relate more to my idea below.

My thoughts are to put a time restriction on negative gearing, such as 10 years from any improving investment (initial land purchase, building, renovation, etc). The time frame would need to represent a more than sufficient time for the investment to become cashflow positive. This should be transferable to new owners but the time-frame remains the same upon changeover (eg. investor builds a new house and rents it for 6 years, sells and the new owner can negative gear for another 4 years).

I've only gone through this in my head and I'm no expert economist but I can't see many flaws in this idea as far as improving the efficiency of negative gearing - so I'm wondering if there is an obvious error in my idea.

My thoughts are this would increase investment in construction (new houses) and help to limit increases in existing house prices beyond that supported by rental income (capital speculation). It would also help to restore tax revenue. Obviously this would only occur for new purchases and would ideally be communicated to market several years before implementation (to minimize market shock on existing house prices).

But anyway - am I crazy for thinking this idea would even work?
Edited by Thatguy, 19 Sep 2011, 03:06 AM.
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