Continued

Then the rot set in and exposed a major flaw in yet another poorly implemented scheme. Home equity re-draw!

You see, that same house was worth another $100K in less than 12 months and, many owners thought they should reward themselves for being 'so clever' and take out some of the equity for a holiday, a boat, car, jet ski, or, perhaps, all of the above.

The banks loved the idea, as they were all of a sudden 'gifted' with all these borrowers who previously were 'unqualified'.

Now the banks took the view that so long as the loan to equity rate stayed at 80/20, they were safe because they had 'mortgage insurance', so, as long as property values increased, which they did, they continued to allow for re-draws as this meant more profits for the banks and made the bank johny the home owners new 'best mate', which meant they were less likely to change banks, so long as he/she said 'yes'.

Now, some ten years later, these homes are worth $500K and many of the owners now owe $400K and have little to show for it other than a few photo discs and some memories.

Their once $250K mortgage is now $400K and their property values are slipping.

This is why a 'hand out' should be reconfigured to become a 'hand up' which can be used time and time again to benefit many, not just one.

But, like most things confronting our politicians, it's all a bit to hard so they just bury their heads in the sand and focus on being re-elected.

BTW, I have long held the view that today is the first day of the rest of our lives, so it is never to late to change.

Dear Saul,

I have a little more sympathy with your issues with negative gearing than the FHBG. The figures on home ownership rates for lower age groups may well be the result of decreasing home affordability of those without years of solid savings or investment.

Negative gearing however, the last time I looked at the figures for housing investment (from memory) results in $5 Billion collected in taxes for $8 billion given in tax deductions. Or in other words $3 billion a year to middle and upper class welfare.

The FHBG at least assists those who may never be in a position to own an investment property.

As an aside I am one of the few who view our stamp duty rates as a significant handbrake on overheating housing prices. What would happen if they were abolished is a frightening prospect.

The capital gains deductions of 50% for an individual and 33 1/3 % for Super funds in 1999 to me seemed to be a substantial contributor to the house cost to average wage ratio doubling in my capital Melbourne from 2.3 in 1995 to 4.6 in 2010.

Directing favourable negative gearing and capital gains deduction regimes at new housing only would to me have a far greater benefit than removing FHBGs.

'csteele', I agree with you entirely about the adverse consequences of 'negative gearing'. Most Australians don't realize that this is a phrase that people from other English-speaking countries don't understand - because they don't have it. In the United States, for example, investors in rental property (or indeed in any other asset) can only claim interest expenses as a tax deduction in any given year up to the level of income generated by it (in the case of an investment property, rent net of expenses); any excess has to be 'carried forward' against the capital gains tax liability crystallized when the asset is sold.

Particularly after the Howard Government's 1999 decision to halve the rate of capital gains tax (one supported by the then Labor Opposition), negative gearing has become a vehicle allowing those who use it (overwhelmingly, upper income taxpayers) to convert wage and salary income taxable at their marginal rate, in the year in they earn it, into capital gains taxable at half their marginal rate, in a year of their own choosing. No wonder, therefore, that since this change, 70% of property investors report 'running losses', amounting (in 2007-08, the latest year for which figures are available from the ATO) to $12.8 billion in aggregate.

This subsidy to property investors has, like other forms of assistance to buyers of properties (including First Home Owners' Grants) has been capitalized into prices, thereby making housing affordability for those whom governments profess to be concerned more, rather than less, difficult to achieve (continued)

While the idea of restricting negative gearing to investors who purchase new properties has some intuitive appeal, that would be open to criticism from property investors that it discriminates against them in favour of investors in other assets (such as shares - unless negative gearing were available only to investors in IPOs - taxi plates etc.). Better, in my view, to eliminate negative gearing altogether and use the increased revenue to lower tax rates across the board.

I would, however, support the restriction of FHOGs to purchasers of new dwellings (as indeed was the case with the scheme originally introduced by the Menzies Government 38 years ago), if it can't be abolished altogether (which would be preferable).

Incidentally, I note that 'skeptic' hasn't apologized, as Graham Young suggested he should, for his unfounded and cowardly attack on my credibility. Other readers should bear that in mind when considering how much credibility to attach to his posts.

Dear Saul,

Since investors outweigh the first home buyers and tend to compete for much the same segment of the property market I still feel safe in flagging negative gearing as producing the bulk of the market distortion we experience.

As a relatively young couple seeking to buy our first house the assistance we received back then allowed us to purchase a good 12 – 24 months earlier than we might have done so, not a bad thing I hope you agree. For others it may well make the difference of ever getting a chance to own their own home.

Rather than directing money saved through eliminating negative gearing going toward lowering tax rates I personally would like to see it rebuilding our community housing stock.

My wife an I have availed ourselves, in a limited fashion, of opportunities in investment properties but not without some disquiet. I recall one year an estate agent we were talking to related how most of his sales in a rather poor, ex-commission house suburb were investors. One buyer drove from Sydney and bought 14 of the 15 homes he was shown without getting out of his car.

He of course needed to recruit 14 families, some of whom could well have been priced out of the ownership market buy his actions, to help pay his loans until he could realise the capital gain several years later.

It was a constant though the early days that neighbours would come up and ask if we were going to live in the house we had just purchased. Their concern was if it were to be rented out the residence would have the minimal upkeep most often afforded to leased properties. Home pride came with ownership was the sentiment, one that was hard to dismiss.

Cont,

Cont,

Fifteen years later the suburb is a mess with plans to raze whole sections of it.

Although we have only retained one property in the area, and that is leased to a drug offender and his young family (great tenants BTW), I still have real unease about having been part the problem.

Therefore I would not support FHOGs going to new dwellings only. Remember it only goes to owner-occupiers. I would argue it would have a community building dividend in places like the suburb I discussed. Instead I would like to see full grants restricted to the bottom 25% of houses in an area tapering out at the 75% mark.

Finally to 'Skeptic'. Should he apologise? Probably, but I feel that he was mostly generic rather than specific in his comments. They did however give the rest of us a chance to hear Graham and yourself defend your record and I personally hold you in higher esteem (for an economist :)) having been made aware of it.

The boil that is negative gearing must be lanced and the first pollie with the gumption to do something about it gets my vote.