and Subsidise Home Owners Mortgage Government Pay 25% of Interest on the Loan Negative Gearing must be terminated and the Federal Government must use that money to subsidise Home Owners Mortgage Interest Payments by 25%. Reason for this is because I see Investors racing to get in to pay the price of the Land or Property before potential Home Owners can make a bid. Rudds New Shadow Spokesperson on Housing is just not with it and her views are no different to the Howards Government on assisting investors those who already have a number of properties to the detriment of house seekers. immoral and obscene pass the sick bucket.

Bronco, all you will do is squeeze those that are in the rental market without much hope of ownership, even harder. Landlords will have to raise rents in order to compensate for lost income. There are plenty of people that will be subject to renting for many years before they could think about buying, whether negative gearing is abolished or not. You abolish it, you'll just hurt those people more.

I assume that to be fair, you would prevent the income from those properties that are positively geared (ie generate more income than they cost) from being taxed. That is, no deductions for expenses, but no tax on the income either.

Bronco Lane

Negative Gearing for what?

House investments? Share Investments? Option Trading ? Commercial Businesses?

I presume from the rest of your spate, you are referring to negative gearing on house investments.

Negative Gearing on housing no different to any other negative gearing arrangement, as it be it another investment or commercial undertaking. Namely the benefit can only be utilized or offset against an existing tax liability, just like any other operating loss on investment.

I would further observe, should the existing and historic practice of offsetting negative returns against other tax positive incomes be abolished, presumably for housing investment alone several things are likely to happen

1 Housing investors will sell up and invest in other areas. This may produce a small momentary windfall for owner-occupier house buyers.

2 As a consequence of 1, the availability of rental housing will plummet. This will immediately impact with increasing rental rates due to unsatisfied demand being serviced by a diminished supply of investment housing.

3 As a direct consequence of a no-negative gearing policy, rental rates will be further increased to ensure those who remain in investment housing, turning a negative into a positive return (or at least to a neutral return to stabilize against a later capital gain).

We saw how Keating tried it in the 1980s and the effect it had on housing rental rates. Proving that fluffing around with negative gearing is the first thought of the intellectually bankrupt.

Whilst Bronco Lane is being overly simplistic in blaming the 'evil' negative gearing investors for high property prices, he has hit on what I think is a real issue and that is the disparity between investors and home buyers. The fact they both have very different tax issues does distort the market in a way that adversly affects people's ability to buy their first home.

The answer I would advocate is to get rid of the discrepancy by ensuring that negative gearing should apply to all land purchases. This would even up the playing field in a way which ought to keep Bronco Lane happy, whilst maintaining the rental market. Of course, this might substantially impact on the government's surplus because of lost income tax revenue on all those first home buyers.

Lost Income tax revenue could in turn be offset by applying GST to all real estate, which although controversial, would have a couple of other advantages: 1) it would simplifying the GST system which at present is IMHO overly complicated (and market distorting) when it comes to newly developed land; and 2) would prevent such new rules from causing an instant boom in the housing market which the proposed tax advantages to home buyers would likely cause.

Just a thought.

Kalin, I take your points as fair. I do suggest though that by making home-owners interest tax deductible, that you risk inflating house prices further (even with the somewhat compensating GST increase). Why?

1. GST is 10%, most people have a personal marginal rate of 31.5% (including medicare levy), therefore there is still greater benefit to be had from the deduction.

2. Making available a tax deduction for non-incomeearning expenses will further encourage people to buy homes that are beyond their true affordability by way of seeking to minimise tax.

3. This deduction is available in the US (although I am not 100% sure of all the conditions surrounding it), and no doubt has contributed in some part to the current crisis that that market is now facing.

Perhaps the answer is in the modification to the interest-deductibility rules for investors. Income tax laws generally state that expenses are deductible so long as they are not of a private or capital nature. It might be argued that if a loan is interest-only, or there is not reasonable expectation of profit within say 10 years (given a set expected increase in rental income), then the interest payments are of a capital nature rather than revenue, and add to the costbase of the investment for CGT purposes, rather than being deductible on a yearly basis. This would still allow for investors to deduct interest where they are positvely geared, or where they expect to eventually be positively geared (encourages long-term investment), discourages speculation as these purchases are often done on interest-only terms, AND encourages the retirement of debt by investors to get to a stage where the investment is cashflow positive - a good thing in a tight-debt environment.

We often hear these simplistic solutions to complex problems but they don't work. The Labor government under Keating tried to abolish negetative gearing and it was a disaster. Rents went through the roof in Sydney as did the number of homeless. They had to bring it back.