By accusing the "left" of demanding "cheap (=uneconomic) rents and cheap (= uneconomic) house purchase prices", Col Rouge perpetuates the house/land confusion beloved of land speculators.

Cheap rents and prices of HOUSES can choke supply by failing to give adequate return on construction costs. But cheap prices and rents of LAND cannot choke supply because land has no construction cost.

He accuses critics of negative gearing of being "profoundly ignorant of what the terms means or what the tax implications and investment consequences would be if something were done to change the deductibility of investment property costs". I contend that if negative gearing were allowed for new construction, but disallowed for future purchases of established homes, it would stimulate construction because investors would prefer to build new houses than buy established ones. I invite him to identify the point of which I am alleged to be "profoundly ignorant".

"So who are these `speculators'?" he asks. They're the ones who are more interested in capital gains than current income -- especially the ones who buy vacant land and do nothing with it, or who buy empty buildings and board them up.

It is true that financing ability "roughly" defines the prices of house/land packages (not just houses) because land prices tend to soak up spending power. But how closely the financing limit is approached depends on the intensity of competition. If renters and home buyers didn't have to compete with speculators, competition would be less intense and renters/buyers would not press so hard against their limits.

As for being "left", I support complete untaxing of buildings and plant & machinery, and complete privatization of the provision of health and education, with a voucher system to ensure universal access. How "left" is that?

Yabby you claim: "People put up with dumps in outer suburbs, or they lived frugally for a few years, banked one wage and lived off the other."

If you were talking about, say, 30 years ago, then that was a very realistic option because the outer suburbs were only about 20 minutes drive from the city, and petrol was generally more affordable.

Further, the Australian economy has grown enormously since 30 years ago, and we're all supposed to be so much better off - as Howard was fond of telling us. So it isn't too unreasonable to expect that today's young would have better options available to them than those of 30 years ago. You might as well claim that a hundred years ago people built their own homes out of hand-made bricks, and anyone wanting more today is expecting too much.

At any rate, the housing affordability problem currently applies across virtually all incomes (except perhaps those in the very top 5%). But today, you can spend 8 years in Uni training to be a specialist surgeon, graduate into a job with a salary several times the average, and STILL not be able to afford much more than a "dump in an outer suburb". 30 years ago that was certainly not the case.

Look, the situation won't last - at some point it will start to unravel and there will be a lot of people losing a lot of money. There's probably not a lot that can be done to prevent that now, but I do believe a more sensible taxation regime can prevent the problem reoccuring in the future. And Col, that isn't "more Government meddling" - it's simply better structuring the existing influence that Government policy will always have over markets.

A few more misconceptions back there & the worst 3 are:

1.“First home buyers certainly do gain, they just gain down the track”

No they don’t – for 3 reasons:

Prospective first home buyers where I live in Sydney face a market where a median priced home costs 8.5 times average yearly income whereas their counterparts 10 years ago were paying 4-5 times (déjà vu). The long-term average is even lower. The current situation is unprecedented.

They pay much more than their parents did simple & plain.

This represents an effective (generational) drop in living standards. There is no reason to assume that this trend will continue as house price / income ratios are already exceeding realistic limits & you need only observe the default & foreclosure pattern in Sydney’s West or the U.S. to know what happens when that ratio keeps widening.

They would not “gain down the track” if this trend continued anyway – as owner-occupiers do not realise “gains” per se. The price of their one and only property rises & falls in parallel with others.

If they sell (move house) when the market is down - that tends to be offset by buying into a lower priced market. Overall, the advantage of selling into a higher market is similarly neutralised by the higher cost of their destination home.

Overall, an inflated property market does not realise gains for owner-occupiers it simply increases their capacity to borrow (and accumulate debt).

Go to
http://www.rba.gov.au/Speeches/2007/sp_dg_250907.html
& see how much debt that is.

An owner-occupiers home is a consumer item, a household expense. It is not a business asset or a source of income & borrowing against it is no more a business transaction than hocking your wedding ring (although losing the ring is less traumatic & the bank a little cheaper than the hock shop).

Hence misconception # 2 (continued..)

Misconception #2:

“Home buyers have more preferential tax treatment than investors, in that they dont pay ANY tax on a rise in real estate prices (notice I am avoiding the word profit)”

No - they need the money to buy the next house and “profit” can only be realised by: ‘trading-down’ - to use the industry phrase or borrowing against equity neither of which signifies a real profit or gain.

What they can’t do use the combined facility of tenant (rental income) & the tax office (negative-gearing) to cover the cost of the property. This scheme works best for high net-worth investors on the highest marginal rate of tax. Hence wealth begets wealth.

Nor can the homebuyer deduct interest payments as a business expense. The ‘home buyer’(occupant) actually pays for their home.

Misconception # 3

“whilst you have cities with rising populations and more people wanting to live near the centre, supply and demand suggest” (etc etc.)

House prices in Sydney have risen 200% in recent years. Fortunately the population has not. Regardless of location, population as a factor doesn’t come remotely close to explaining it.

Classic supply & demand law relates to consumer markets & consumer markets do not generally experience 200% inflation within a few years.

Historically, the stock market has often experienced such rises. That sort of increase is synonymous with investment markets especially during a speculative boom.

In a speculative bubble-market, demand is driven by the expectation that other investors will continue to bid up prices regardless of intrinsic value (& the hope that the bubble doesn’t burst before you sell).

‘Irrational exuberance’ to coin a phrase.

Households are not directly affected by cycles (booms & crashes) in financial or commercial property markets. Housing is different.

The speculative boom in residential property took root in financial deregulation (loose lending) & low interest-rate monetary policies at the turn of the century. It was fuelled & ignited by Australia’s unique negative-gearing laws in combination with the (disastrously timed) 1999, 50% capital gains tax discount.

- Mr Smith

Mr Smith, of course owning your home is a business! Its your largest investment
and living where you do, has a market value. If you choose to live in a palace
along the coast, its going to cost you more then living in a dump in a slum. In Europe,
in some countries, the rental value of your house will in fact be added to your income
as taxable earnings, for you could rent it out at anytime and live far more cheaply elsewhere.

You are free to stay home and work on your house, which increases its value, whilst
I go out to to work and pay tax on every Dollar. You pay nothing.

If you make some capital gain, due to inflation alone, you pay nothing, I still pay.
That’s exactly why capital gains tax was reduced. They lowered the rate,
but removed the ability to compensate for inflation, which is a given every year.
Now you complain about lower capital gains tax, to compensate for inflation,
whilst homeowners pay zilch!

Of course homeowners are cashing in big time, all tax free. Look at the many
tree and sea changers. They no longer want/need to live near city central, so
are buying cheap country places and banking huge amounts for their retirement.
with no tax ever paid., as distinct from investors.

Wiz, 30 years ago there were no highways into the city. Today, in a place like Perth,.
they are everywhere. So today, with speed limits of around 110km, you can reach
the city in far less minutes then Km. If this is not the case in Melbourne, well then
it’s a Melbourne problem, not an Australian problem.

Yup things have improved in 30 years, but one thing has not changed. There are still
people who earn huge amounts, who spend more then they earn and who cannot cope.
Then we have people on pensions, who have also saved a few pennies, who
cope wonderfully and are quite content with their world.

Its all very relative to our experiences.

Grputland” I invite him to identify the point of which I am alleged to be "profoundly ignorant".”

When you take an open statement and narcissistically presume I am talking to you, personally, it shows an ignorance to other peoples existence beyond yourself.

“if negative gearing were allowed for new construction, but disallowed for future purchases of established homes, it would stimulate construction”

Displays the crass ignorance to the differing roles of different types of “speculators” (investors)

Some speculators are called developers, they take existing buildings or green fields, carve them up and develop new buildings, then they sell and move on to something else but

who do they sell those properties to ?

they sell them to “investment buyers”, who hold the property and rent them understanding negative gearing currently applies (= a tax treatment basically in line with every other form of investment, except things like say, movies which get special breaks).

If the tax implications of negative gearing did not apply, two things would happen

1 the developer would have not make as much return either from
A no investors buying his houses
B those investing, adjusting the price downward to maintain an acceptable level of financial return.

This would slow the new house development cycle and probably mean some developments would not go ahead because the developments were non-viable.

2 with a reduced supply of rental houses and those remaining in the rental property investment market needing to adjust rental rates to maintain an acceptable level (return on risk) of investment return -

Rental rates on residential property would go through the roof.

As for “who buy empty buildings and board them up”

If you own a car, you decide if to drive it or garage it.

If you own a house, you decide to rent it out or if the risk of tenant damage is too high, to lock it up.

Your property, your risk.

Re "I support complete untaxing of buildings and plant & machinery”

I am an Accountant. I don't know what that means, not sure a registered tax agent would either.