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The Forum > Article Comments > Turning a negative into a positive > Comments

Turning a negative into a positive : Comments

By Damian Jeffree, published 7/2/2007

We have now had five years of unaffordable housing in Australia: to combat this we should be refining negative gearing to encourage an increase in rental stock.

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Are you qualified to speak or write on property?

An equities trader for an investment bank?

I could say case closed there, but you may want to consider some things you mentioned.

"To help those renting it is more logical and effective to direct subsidies directly to them rather than indirectly through their landlords and a theoretical trickle-down effect."

Would these people therefore be encouraged to buy if they recieved tax benefits and subsidies as tenants? i think not.

and this:

"it also encourages property investors to bid well beyond what the rental yield on a property would suggest was a reasonable price to pay"

Yeah, because the owner occupied market is strong in that area therefore prices are higher and yeilds therefore are lower. You cannot tell me that in this area the investor will outbid an owner occupier as despite your thoughts it still comes down to numbers. the numbers are less important when it is not for investment purposes, it is for physical need.

Investors are never willing to pay a premium like an owner occupier, thats the difference between and business (investment) decision and an emotional (home buyer) decision. You are turning this common sense on its head though, am i correct
Posted by Realist, Wednesday, 7 February 2007 10:51:31 AM
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In all types of property, the quality property generally has a lower yeild ie. Waterfront property will run off lower yeilds but has been proven to outperform non waterfront property capital growth wise. they are the facts.

Do people invest in property purely for tax purposes? No, in fact most are not claiming all their entitled deductions, alot are not using Income Tax Witholding Variations and the like, tax deductions is not the reason people invest, capital growth is. Tax breaks offer an needed bonus and extra borrowing capacity due to the diversion of income tax monies to the property.

and this:

"we should look to target negative gearing to cases where it does add to the rental housing stock without cost to owner-occupied housing."

So if we enacted this theory, as you you have pointed out at the top of your article investors drive up the prices of properties, you are happy to restrict investment in many established areas therefore ruining values in the market for those very owner occupiers you are trying to protect. If the demand drops theoretically the price may drop, therefore equity levels and that is when you will have people realy loosing homes, and with no investors around when selling (according to your logic they put the price up, dispite being less than 1/3 of total purchases)these people are even further disadvantaged.

Leave the property commentary to those with the degrees in it, or the experience. I welcome your thoughts but you are not in the field, nor do you understand the real mechanics behind property investment, or you would not have provided these 'insights'. The alternative to property investment is to have a massive public housing and welfare burden, which in the end costs us far more that a few tax deductions. And if you reduce investment you reduce the flow on of over 60 jobs that 1 new home creates.
Posted by Realist, Wednesday, 7 February 2007 10:53:05 AM
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I think if we are serious about increasing housing affordability we need to break the monopoly. In this case the monopoly is held by the state governments who limit the supply of land. This is basic law of economics - prices will always remain high if demand outstrips supply.

Demographia [http://www.demographia.com] in it's third annual report on housing affordability blamed regulation as the primary reason in unaffordability. Look it up - it is an interesting report - one that put Australia as the most unaffordable housing country, out of places like the US and UK, NZ etc.
Posted by StewartGlass, Wednesday, 7 February 2007 12:06:55 PM
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Amen Damian! Finally a realistic look at the real problems facing potential owner-occupiers trying to get out of the rent-trap. None of this "not enough land being released" rubbish we get from apologists interested only in maintaining the status quo.

Also, a great suggestion to limit negative gearing to new dwellings rather than have it apply to existing stock. This will clearly have the affect of increasing the stock of rentals whilst simultaneously giving new home buyers a chance to break into the home ownership cycle.

Contra "Realist", it is entirely accurate to say that negative gearing as it is currently implemented is artificially increasing housing prices for precisely the reason "Realist" accidently provides: It gives potential investors "extra borrowing capacity" and in so doing the ability to outbid even the most desperate potential owner-occupier.

Of course this will result in losers. Existing owner-occupiers and investors will see a reduction in the potential value of their properties. This is bad for existing investors to be sure, but given the years of tax subsidies they've enjoyed I won't be sheading too many tears. On the other hand, the concern for owner-occupiers shouldn't be so great, since if they realise this reduction in value (by selling their dwelling) it will be balanced by the reduced price they'll pay for their next dwelling.

Winners of this change will be many: long suffering taxpayers being asked to subsidise other people's investment decisions; productive industry that will receive investment dollars that would have otherwise been wasted on unproductive property and the Australian economy for having this market-distorting subsidy removed.

Of course, the real winners will be first home buyers: no longer battling a tax subsidy explicitly designed to keep them locked into the rental market, they will finally have the chance to enter the home-ownership market.
Posted by skellett, Wednesday, 7 February 2007 2:08:47 PM
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skillet, I share your amen. However, I'm not hopeful change will come soon. There are simply too many vested interests determined to keep things unchanged. In many years, as the super changes take effect more investment money should leave speculative property. The market might deflate to an extent where the political situation would allow for these type of changes. But I'm not holding my breath.

At the moment the only real option for many first home buyers it to look outside the capitals. I can recommend prices anywhere between Alice Springs and Darwin :)
Posted by eet, Wednesday, 7 February 2007 6:35:44 PM
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What I never understand with the whole issue of house investment, versus any other form of investment, is “negative gearing” is not something which applies to housing especially but is commonly available for all kinds of investment of any sort. The rules for treatment of depreciation, operating costs (including interest charges on borrowings) and income are the same for housing investment as any other form of investment.

Suggestions that “negative gearing“ should be looked at “differently”, if and when its refers to “housing” is An entirely bogus argument and represents the worst kind of cart-before-the-horse mindset.

It is as logical to suggest people who invest in shares for (say) building companies should be treated according to different rules to those who invest in shares for (say) car companies.

All that would happen is the “housing market” would make an adjustment at the weakest point. That means, either rents would rise to afford the loss of benefit from negative gearing or housing investors would exit the market, both eventualities making rental property even less available and causing upward influence on rent (supply & demand) (all as happened in the 1980’s when Keating played with it).

Housing affordability rarely changes beyond 10% +/- of 30% of gross income (=27% - 33% gross income) some change is inevitable due to the time lag effect of between deciding and actually experiencing to buy or sell housing investments.

Change gross incomes, prices will increase or fall. Employment booms or recessions (and thus income increases of decreases) are a leading indicator of housing booms or recessions, as happened in 1980’s.

The “problem” (if that is what you can call it), is we are in a period of extended boom.
Therefore housing prices will increase.
If we were to end up with Labor at the next election, by 2010 housing affordability would be better because house prices would be lower as more and more people lose their jobs as socialist mismanagement pushes the whole economy into recession.

Messing with Negative Gearing is like someone pissing in the Yangtze and expecting the water level to rise.
Posted by Col Rouge, Wednesday, 7 February 2007 7:12:06 PM
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Vaste majority of recent property investors are subsidising tenants.

At current prices, in many, many cases, easily to the tune of $10-$20k EACH year. That'll prolly go on for 7-10yrs before the investor gets on top of the debt and the numbers start to swing.

Free lunches? Who says there's no such thing?

How much of a free ride do ya want anyway?

Do what you suggest and watch rents RISE.

SHARPLY.

oh, they just did that in the last 2 yrs (+20 to 30%). How forgetful of me.
Posted by trade215, Wednesday, 7 February 2007 7:38:59 PM
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Reality: The price of housing construction, in real terms, has been very stable over the past fifty years (in fact there has been a very slight decline). What has increased significantly is land price.

Solution #1: Modify negative gearing to what it should be for - encouraging housing supply (i.e., to new buildings).

Solution #2: More site value rating for local councils and more land tax rather than taxes on buildings or other forms of production. Result is more buildings and more effective use of space.
Posted by Lev, Thursday, 8 February 2007 3:21:30 PM
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Let me understand this better:

>>The consequence of [ignoring the Productivity Commission Report] is that we have now had five years of unaffordable housing in Australia<<

For five years, no-one has been able to buy their own home? I can't believe that, nor have I seen any evidence of it. The windows of every Real Estate Agent I see are full of properties for sale, and as far as I am aware, people are still buying them.

What the writer means of course is that first-time buyers are having to face a higher entry threshold, in terms of a percentage of disposable income, than in earlier times. At that point, and at that point only, does the purchase price of a property become a social issue; at every other point in the trading cycle, buyers have the option to use the sale price of their previous property as their starting point.

So i) "affordability" is a relative, not an absolute term and ii) the difficulties of property purchase are faced by one particular segment of the population - everyone else is benefitting from rising prices.

Given that we have narrowed down the problem to a more manageable, and less visceral level, it becomes far easier to see that selecting one solution - abolish negative gearing - is an entirely blunt instrument, and will have many flow-on effects on the economy (like perhaps, the value of your Pension Fund) that are both unpredictable and unsavoury.

So the proposition remains that we should re-jig a perfectly sound system, designed to accurately reflect a business' right to offset expenses against income before calculating tax, in order to subsidise a small subset of our population.

Sounds a pretty emotional argument to me.
Posted by Pericles, Thursday, 8 February 2007 6:58:57 PM
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In my opinion, all monies going into a savings or investments should not be taxed but when all monies is withdrawn, excluding superannuation which should remain 100% tax free.

With the housing shortage, the only way forward as far as I believe, is to limit private ownership of housing, capped at three. More allowed for business(etc) should they be providing this housing as part of an employees salary, etc.

Realistic immigration numbers that suits Australian's, not solely business and, there is clear need for government built housing for those who need it with an encouragement to purchase the home like a home. Not in the same failed method by the NSW Greiner government.

Large expensive programs are necessary but with foreign big business required to pay honest tax and other suitable programs and stoppage of government wastage, money is there to pay for such essential infrastructure.
Posted by Spider, Friday, 9 February 2007 4:55:58 PM
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Col Rouge, glad to hear a voice of reason! There is no reason why someone risking their capital and income on housing investments should get different treatment to someone risking their capital and income on any other form of money-making venture!

Remember guys, any housing investor getting a negative gearing deduction, is only getting at MAX 46.5% of his expenditure back as a tax offset. Ie, to get $1 of benefit, you have to spend $2.15. And this doesnt take into account the additional costs of maintenance, commission, rates, insurance etc. Negative gearing refers to your interest costs being more than your income. These people are losing money on revenue account to try to make it on capital account. There isnt a scam going on here, there are no artifical tax deductions.

As for those investors that arent claiming their full deduction entitlements, I am happy to provide my business card!!
Posted by Country Gal, Sunday, 11 February 2007 10:31:46 PM
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Country Gal explains exactly why negative gearing is such a rort. And with such self-interested people determining policy, I fear eet may be correct that we'll never be able to correct this travesty.

It just does not make sense that people know they can only get back - at most - 46.5% on the dollar invested, yet still do it! They are investing precisly to *lose* money! There is obviously some whacked-out government policy going on here to induce such perverse investment decisions.

It is simply a fact that the combination of negative gearing, the halving of the CGT plus low interest rates has forced housing prices up, encouraged un-productive investment in *existing* housing stock and put a generation of youngters in the rent-trap. Deny this and you might as well deny the existance of the sun.

Col, I've got no problem limiting gearing on other forms of business. Why should the taxpayer subsidise a loss-making business? If the business-owner isn't good enough to turn a profit, they should go into another line of business.

Creative descruction, I believe you capitalists call it.
Posted by skellett, Tuesday, 13 February 2007 8:25:21 AM
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My fiancé and I are prospective first home buyers. We haven't yet saved up enough for a deposit (saving for a wedding etc). We are currently facing a dual threat. Threat #1 is that by the time we have our deposit saved up, interest rates will be on the up. Threat #2 is that when we are ready to buy, house prices will be beyond our reach.

House prices are rising because wealthy investors are locked into a relentless pursuit of MORE wealth. Whether they’re seeking negative gearing or capital growth or both, let's face it. It’s greed. We're talking about people who are already earning a reasonably high income, and who probably already own a fairly high-priced home. It is these people who are not satisfied. Their (your?) greed is the root cause of the affordability problem. Call it negative gearing, call it investor demand, whatever. It's greed, pure and simple.

The question was raised earlier, why change a system that is working perfectly well, just for the benefit of a small proportion of the population [i.e. first home buyers]?

Are the baby boomers having too much fun winning at the casino to think of their kids who are trapped in the car? This "I'm alright Jack" attitude betrays a general unwillingness to consider the plight of today's young people. We, who have inherited climate change, peak oil, the water crisis, the population crisis, and the general culmination of limits to growth. Greed is the root cause of all these crises too, and now my generation has to tackle them from the comfort of our rental homes.

To quote the Flying Pickets:
Let me ask you one question
Is your money that good?
Will it buy you forgiveness?
Do you think that it should?
I think you will find
When Death takes its toll
All that money you made
Won’t buy back your soul.

This post will doubtless be dismissed as "too emotional". That in itself will be quite telling: we are no longer allowed to be emotional. We must all be rational.
Posted by James Ward, Saturday, 17 February 2007 10:07:29 AM
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James, i like you have looked at the housing market in absolute despair. Affordablility is not an issue for me and my wife we are both in out mid twenties and earning a combined income of $110,000Pa. We chose not to committ ourselves to the average mortgage of $2300 a month for 30 yrs as well as combat all the incrimental costs, insurances, medicines (ihave a cronic illness) petrol etc to have some sort of financial freedom as we currently have no outstanding debts.

We were happy to see housing for what it is, a grossly overvalued and artificial form of proftiering. We had concluded that eventually the situation would get so out of control that the whole thing would come tumbling down like a deck of cards. That tumbling point technically should have come and gone around 18 months ago, but it hasnt. The reason for this, the whole system is designed for inevstors to keep on investing and rewards them for doing so.

I hate the Howard government for allowing this to happen. It served a political purpose for them, along with the boom from the west it allowed our economy to explode. No one seems to care that this explotion has happened on artificial terms, nor will they until it effects them. What they need to realise that one day it will, one day there won't be another investor standing there willing to pay an extra 30, 40, 50k because "Johnny" will pick up the shortfall. Heaven forbid this does all come crashing down, then again what will they care, by that time it will only still impact the younger generation like me and you James

Until then i will have to be content in raising my kids in an apartment or unit because your portfolio was much more important than me affording to give them a backyard to play in.
Posted by Reluctantrenter, Tuesday, 3 April 2007 9:57:50 PM
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Reluctant + James,

I can really sympathize with your anger at the unaffordability of homes - good poem. I was in the same boat about 2 years ago, and now that I have a home (in Adelaide) I probably paid about $90,000 more than my home should cost. This is a debt that I am stuck with even if affordability improves.

I have always expected people (and companies) to try to make money whenever they can. What ticks me off is how the state government (primarily) has set up an uneven playing field by zoning land and restricting it's supply. People a generation ago didn't have this - it meant homes (relative to the current incomes then) were much more affordable. This is not to mention the astronomical stamp duties.
Posted by StewartGlass, Tuesday, 3 April 2007 10:47:42 PM
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