Yabby, your last paragraph essentially sums up what I've been saying all along - that government tax policy has had a big impact on housing affordability, by encouraging those with the money to do to pour their money into buying up the housing stock. Because very few are putting their money into NEW housing developments, this has the inevitable effect of leaving less housing available for those without so much money - i.e. the first home buyers.

It's by no means the only thing driving up housing prices, but if you accept that government policy is partly behind it, then I'm not sure why you seem to jump on those of us that suggest better policy is needed to help reverse the trend for supposedly wanting a "nanny state" to look after us - which simply isn't the case at all. OTOH, I certainly object to your effective claim that there's no affordability crisis, because anyone can afford a perfectly nice run-down shack in some outlying suburb as long as they don't mind spending a few more hours in the car every day. Today's generation have every reason to expect a higher standard of living than you did at their age, just as yours was far better than those from 30 or 60 years earlier. And a standard of living that requires being located 40 or 50 kms from jobs, families and friends doesn't give a lot of time for actually living.

Wiz, I think one of Yabby's underlying messages is to stop being so city-centric!! If you buy a house in an outer suburb, dont take ajob in the CBD. Living an hour from rellies is in my opinion a good thing - they dont just turn up unannounced that way. This is a big country with lots of opportunities for people willing to think outside the square. If you are determined to be one of the sheep then no amount of barking at your heels is going to help you.

Yabby, many of these yuppie finance professionals could easily work from home 90% of the time - I do. I work for an employer that located more than 500kms from where I live. It requires a bit of travelling, usually around 6 times a year for 1-2 weeks, but its quite do-able. So I dont buy the location location argument or that its too far to drive to work every day. Work from home and save on some fuel!!

If negative gearing were to be removed from property investors, we should even up the playing field a bit by also removing capital gains tax from the houses/units when sold. That way the investors will be in exactly the same position as owner/occupiers, which is pretty fair. If I have time to run a few figures on this, I will and see whether we would be better or worse off. I have a feeling that it would be worse off, given that there are a large number of positively-geared properties held (negative gearing gets a lot of hype, but I dont see it that often).

Admittedly, when Col Rouge says that:

“negative gearing” actually means “buying a future capital gain from current pre-tax income”
He is technically correct.

I quite like that definition because it illustrates a point being that:
First-home buyers don’t have that privilege.
First-home buyers are buying a dwelling from after-tax (net) income, with no prospect of an actual capital gain.

That needless to say, gives the investor a huge advantage against others competing in the same market. It quite clearly discriminates against the first-home buyer.

The fact that first-home buyers aren’t given the opportunity of offsetting their costs against tax barely begins to indicate the degree of disadvantage that they currently incur in this country.

Not that I would suggest that they are allowed that opportunity. By increasing their purchasing power in a competitive market it would simply add to demand pressures & end up being passed on as higher prices leaving them no better-off & the property market more inflated.

Which is exactly what it does in the case of property investors. Except that it does leave them better-off by giving them an advantage over other buyers & allowing them the prospect of a capital gain while the tax-office covers the costs.

The costs in this case are price of the property, interest repayments, rates, maintenance etc. minus the rental return. Normally the rental return would be the key fundamental determining the price an investor is willing to pay. Where the rental return is low relative to the price (or vice-versa) the costs are greater.
The other key factor is the expectation of a capital gain.

Negative gearing enables some investors to pay a higher price by allowing them to offset rental-income losses against tax on other income. In this way it can distort the market by encouraging prices that are higher than would be justified by rental return.

Negative gearing predates the current surge in house prices which began in Sydney & took-off exponentially after the 50% capital gains tax discount was introduced in late 1999 when interest rates were particularly low.

continues

Country Gal, you are quite correct, many people can and do work from home,
IT etc will assist in increasing that. A lot of tree changers do exactly that.
But there are still one hell of a lot of jobs, where people have to rock up
to work every day.

If you take a city like Sydney, the growth in yuppy jobs has just been
enormous. For instance, just look at the growth of Maquarie Bank in
the last 10 years. Then they had just floated on the ASX, now they employ
something like 11’000 people, a fair few of those in Sydney. That’s just one
company!

Its also very true, that rising numbers of Aussies are becoming very city
centric. ( I call it the rats in a cage effect) :) They want everything
convenient and within walking distance if possible and will pay big
money to achieve that. Lots of them feel strangely uncomfortable,
if they ever head out to the bush. They become quite nervous in such
unfamiliar territory. City life is all that they know, like the rats in their
cages.

Wiz, your generation already has far more opportunities the we did,
but its up to you to take them and make them happen. Society does
not owe you life on a plate. Some of you will thrive and some will
fail, that’s really up to you. Opportunities abound like never before.

Yes Govt policy does affect people and their behaviour, but the carrot
usually works a lot better then your big stick approach. This is the
problem with Govts, they think that they can predict how people
will behave and usually get it wrong. People just dodge the stick
in extremely creative ways and the unintended consequences are
often far worse then the problem was in the first place.

AFAIK Keating did some experiments with negative gearing. The
result was less investment in the housing industry, so nobody built
any. So rents skyrocketed. It’s the octopus effect. Those many tentacles
will behave in ways that govt beaurocrats have not even dreamed of!

Mr Smith

To correct your statement re discrimination

“First-home buyers are buying a dwelling from after-tax (net) income, with no prospect of an actual capital gain.”

I would note

An investor benefits from a capital gain upon disposal, assuming the sell price exceeds the buy price + costs. However, he incurs capital gain tax liability accordingly.

If that investor had been an owner-occupier the capital gain would have been the same however, there would be no capital gains tax liability (something which effectively, under your definitions would “discriminate” against the investor).

I would note first home buyers have the same opportunity to purchase multiple homes, provided they are prepared to accept the market risks.

My ex-wife presently owns two investment properties, one our old matrimonial home plus another which she has owned for some 10 years, since she bought a new property recently. She does not earn a massive income but managed to buy the investment property in a market which was open to everyone else.

My elder daughter signed up for a mortgage on her first O/O property at aged 21.
Now aged 27, she told me she is ready to buy an investment home, I told her exactly what I said about current income used to purchase a future capital gain. Her view, she had just received a promotion at work and sizable pay increase and could afford to cover the current negative gearing costs.

So if a divorced woman, earning a very modest income (I doubt she even benefited much from NG tax deductibility) and a single younger lady can see the potential and handle the risks of buying investment properties, why should they not benefit from their chosen form of saving?

I would further note, the negative gearing loss is generated from the costs of ownership of the investment property exceeding the income earned.

Thus the tenant is being “subsidised” by the investor for their occupancy of the investment property.

This is the real hurdle to FT Buyers, the immediate extra cash outlay between renting and buying because no investor is there to subsidise their tenancy.

Yabby wrote, "One could excuse Daggett here, for making a bad investment decision in the 1980s, ..."

Firstly, I didn't make the post in order to be judged as an 'investor'. I was only attempting to obtain a secure roof over my head, the provision of which I consider should be a basic human right.

As I have already made clear, I consider property investment to be essentially about deriving one's income at someone else's expense. I would prefer to earn my living in other ways.

My point is essentially that ordinary people get burnt whether housing prices rise, or suddenly drop.

For Yabby, that's OK, if they lose out. He would have us think that it's all their own fault for not knowing as much as he does about the pitfalls of the property market, or for not being prepared to commute 3 4 or more hours per day and pay for the necessary petrol.

He shows no concern for the sheer desperation and fear of housing insecurity which drives many to gamble recklessly, and to lie, in order to obtain the necessary loan to purchase a house.

All of this was entirely unnecessary. As I have pointed out many times on OLO, the housing Trust of South Australia for years made good quality housing available to all levels of South Australian society and never cost the taxpayer a cent.

The example of the HTSA confirms absolutely that Australians could do very well without the private property market. By having run down the public housing sector since the 1950's when Menzies began the process of privatising it, Australian governments were only doing the bidding of the private property sector to the detriment of the rest of society.

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Another excellent resource is Sheila Newman's 2002 masters thesis "The Growth Lobby and its Absence" (2.6M pdf, 248 pages+notes,index,TOC,etc) It is downloadable from http://candobetter.org/sheila

It contrasts Australia and France. Australia has a sizable growth lobby which derives it income by unsustainably constantly increasing population in order to drive up the value of their investments, which is not the case in France.