ABC The Business on Negative gearing

[TomW]

By George; I think he's got it.

Neg gearing has little impact on prices of properties. I keep telling folk here that.

Folk (sooky lala Trolls) here keep saying us greedy specufestors are pushing up prices; we aren't....

Whether neg geared or not.

I said "that a lot less rentals would be available" - this would have an effect on rents.

Would more investors jump on board if the rents went up?

I reckon not; it's still too big a risk and bother for the average pleb; far easier to whack a G on the stocks, or the nags, or the Tatts draw.

Yes of course saying that "a lot less rentals would be available" if NG was removed accords with the position that NG has little effect on price.

Troll apparently equates to anyone who makes consistent arguments or has a modicum of evidence supporting their positions.

 

[wategos]

I said "that a lot less rentals would be available" - this would have an effect on rents.

What happened to the rentals though ?
If sold to another investor - still a rental
It sold to a renter as a new owner occupier - one less renter.

Either way the supply-demand equation remains the same, rents would not rise without NG on existing properties. Prices would drop though, so yields would increase through this mechanism.

So removing NG would actually be good for new investors.

 

[HotRod]

The thing is, with 5% of PI having more than one IP, these are the savvy PIs. They know that to make money you can't be losing money.

If NGing is abolished, PIs with their single IP will drop them in a heartbeat, because they won't be able to beat the tax man anymore. That last bastion for the small man would have been abolished. What happens with those IP remains to be seen.

I'd hazard to say that these properties would be at the lower end of the market and the PIs might need to take a loss to get out as quick as they can.

Not a bad thing as renters would be able to finally buy that PPOR as well as there being less rental stock on the market, pushing yields up (less IP and higher rents on lower priced stock). That would herald the arrival of the savvy PIs to pick up these cheaper higher yielding properties, being quite happy to pay the tax man his fair share in tax every year.

So not such a bad thing. Renters will have their opportunity to buy into the great Australian dream as prices drop for a period, but if they keep on renting, they might be in for a rude shock.

I for one, really don't care either way. It won't effect the way I do things ATM.

The only question I would ask. If NGing is abolished, it would need to be for ALL investments. What effect might that have??? Maybe a better way to go is to quarentine IP losses to offset against future IP positive CF. The same model applies for CGT, why not NGing? This would make it less attractive, but at the same time the benefits of NG are not entirely lost.

 

[Weasil007]

The thing is, with 5% of PI having more than one IP, these are the savvy PIs. They know that to make money you can't be losing money.

I know a lot of PI investors that have more than 1 IP NG and they are clueless, sure some could be savvy but IMO you can't say they all are

This is like saying people who own more than one dog know more about dogs than people who own one dog?? Dog knowledge is not based on the number of dogs one owns?

 

[HotRod]

I know a lot of PI investors that have more than 1 IP NG and they are clueless, sure some could be savvy but IMO you can't say they all are

This is like saying people who own more than one dog know more about dogs than people who own one dog?? Dog knowledge is not based on the number of dogs one owns?

Agreed. Just a generalisation on my behalf.

If you are addicted to NGing there's only so far you can go before you have to start eating baked beans and sitting on wooden floors. I'd put them in the unsavvy category. They are the ones that would get out if NG is dropped.

If you are addicted to CF+ there is potentially no limits. I'd put them in the savvy category. They are the ones that could make a killing if NG is dropped.

 

[HiEquity]

This distortion is pretty unique to Australia. I believe it will play a big part in our own sub prime like price collapse. Speculators losing money (the 19%) will be removed by the banks from the market as their equity diminishes, a process that will feed on itself.

Let me guess - you would prefer the US model where interest on your PPOR is tax deductible - because that's not a distortion and just makes so much sense to help the poor FHB own their own place, as is everyone's right, regardless of how much they do or don't contribute to society? Personally I think everyone actually should have a right to rent an affordable place and right now, courtesy of govt policy, they have that in spades...

I fail to see how -ve gearing is a distortion when it's available to every other income producing asset class - shares, businesses etc where you claim your expenses against your income and can offset losses against personal income.

In any case, as an investor, I really don't care either way. It's pretty clear to me that overall prices would drop and rents would rise - you can't have one without the other. There's a swag of the population who can only ever rent due to being constantly underwater in credit card debt and the like. Those people will have fewer properties to choose from as the size of the rental market reduces due to the drop in prices. So for the investor - cash flows increase which will compensate for the reductions in prices - 6 of one or half a dozen of the other. There are still the same number of people and the same number of properties but going forward fewer people will be building new IPs so supply drops until rents rise to compensate and a new equilibrium is reached.

The other reason I don't care is I only buy positive IPs - can't see the removal of negative gearing having any impact on that market. Another reason to choose assets whose returns aren't impacted by the latest fad among politicians, whatever that may be...

 

[TomW]

In any case, as an investor, I really don't care either way. It's pretty clear to me that overall prices would drop and rents would rise - you can't have one without the other.

"You can't have one without the other" this makes no sense. If prices dropped yields would rise but there's no reason rents would rise.

 

[hobo-jo]

Not a bad thing as renters would be able to finally buy that PPOR as well as there being less rental stock on the market, pushing yields up (less IP and higher rents on lower priced stock).

There would be less rental stock on the market. There would also be fewer renters. So why are yields rising in this scenario?

Over a longer term time frame the removal of negative gearing could impact investors constructing new homes, but the link provided earlier in the thread shows most NG investors buy pre-existing dwellings:

Despite its huge taxpayer cost, negative gearing has done little to boost the supply of housing, with over 90% of negatively geared property investors buying pre-existing dwellings:

http://www.macrobusiness.com.au/2012/10/negative-gearing-exposed/

In any case, as an investor, I really don't care either way. It's pretty clear to me that overall prices would drop and rents would rise - you can't have one without the other.

"You can't have one without the other" this makes no sense. If prices dropped yields would rise but there's no reason rents would rise.

+1, there is no need for rents to rise just because prices are falling. Depending on the economic situation at the time, for example if unemployment continued to rise, the market might not be able to sustain rental growth.

 

[HiEquity]

"You can't have one without the other" this makes no sense. If prices dropped yields would rise but there's no reason rents would rise.

There's a swag of the population who can only ever rent due to being constantly underwater in credit card debt and the like. Those people will have fewer properties to choose from as the size of the rental market reduces due to the drop in prices.

.....

There are still the same number of people and the same number of properties but going forward fewer people will be building new IPs so supply drops until rents rise to compensate and a new equilibrium is reached.

Some people will be able to take advantage of the price drops to move from renting to buying. But plenty won't for whatever reason - and they will need to pay higher rents to bring on any new supply. Without new supply of rental and PPOR stock, we all know what happens to prices - if capital prices are dropping then rents must rise.

Another way to make the point is that from where I'm sitting, even if a developer paid nothing for the land, they could not make a decent rental return just on renting new stock on its cost to build without NGing. If NGing was abolished, that developer would have to wait for rents to rise before going to the trouble - so they will.

 

[HotRod]

There would be less rental stock on the market. There would also be fewer renters. So why are yields rising in this scenario?

My opinion?

You can say they'll be decreasing too. You are also correct.

I just think with PIs getting out (and getting out quick) they'll be a lot of cheap stock dumped on the market. Even this being the case, renters will take longer to get into the market that the savvy PI who will be just as quickly buying these up as they come onto the market. Investors always seem to get in before ex-renters.

Renters will be nervous not wanting to rush in as they see this section of the market dropping. Some will buy, others not, still waiting for it to hit bottom. I suspect the savvy PI will be making decisions based on a more technical analysis and buy once the numbers work in their favour this being prior to the correction in prices (that renters will be looking at) but this data would then be 3 months out of date.

 

[HiEquity]

+1, there is no need for rents to rise just because prices are falling. Depending on the economic situation at the time, for example if unemployment continued to rise, the market might not be able to sustain rental growth.

Yes but we are talking about this particular policy, ceteris paribus, are we not? Otherwise we may as well talk about what happens if the economy booms as well... the state of the economy should be irrelevant to the discussion.

 

[tom32]

Some people will be able to take advantage of the price drops to move from renting to buying. But plenty won't for whatever reason - and they will need to pay higher rents to bring on any new supply. Without new supply of rental and PPOR stock, we all know what happens to prices - if capital prices are dropping then rents must rise.

Another way to make the point is that from where I'm sitting, even if a developer paid nothing for the land, they could not make a decent rental return just on renting new stock on its cost to build without NGing. If NGing was abolished, that developer would have to wait for rents to rise before going to the trouble - so they will.

Agree. It is about that simple.

I think though it does add more weight to the argument abolishing negative gearing will not have any positive / negative impact on rents in the short term.

This flow on impact to less new stock would only occur if you were to first accept that prices would fall off the back of negative gearing being abolished.

I guess the cycle would be:

1. Negative gearing abolished.

2. Prices fall.

3. Less new stock is built as prices do not exceed costs.

4. Rents rise.

5. Prices rise.

6. New stock gets built and the market again reaches equilibrium.

The real question IMO as to where prices end up longer term is whether costs fall around new development as a result of the lower level of activity.

I expect that they would to a degree but it would depend how much the government pulls back its claws around taxing new builds as to what extent costs can fall.

Edit: and around taxing new builds if they do not pull back the claws much, I expect this resurgence in building everyone expects (well RBA / Treasury anyway) is not going to happen...

Edit2: and that above cycle is not going to happen overnight. I don't see rents rising immediately off the back of abolishing neg gearing. It would take significantly more time than was allowed last time they abolished it.

 

[BayView]

What happened to the rentals though ?
If sold to another investor - still a rental

A lot of these would not necessarily be onsold to another investor - until such time as the yields were fantastic. This would mean either a massive drop in the house prices (which wasn't the case after NG was removed in the '80's - there were drops, but not world-ending ones), or a massive spike in rents would need to occur. As each lease expired you could be the existing IP owners would be moving them up for the next lease.

Despite all the current knowledge, help form MB's, low interest rates, seminars, buyers agents and so on, there are still only a handfull of investors with multiple IP's. Would more new ones jump in because of sudden increased yields? I reckon not a lot. Property investing is hard work and takes a lot of application that many don't want to be bothered with, or fear.

It sold to a renter as a new owner occupier - one less renter.

Isn't this what you want?

Wouldn't anti-property trolls be happy then; no-one getting NG handouts and affordable housing?

 

[Peter_Tersteeg]

Despite all the current knowledge, help form MB's, low interest rates, seminars, buyers agents and so on, there are still only a handfull of investors with multiple IP's. Would more new ones jump in because of sudden increased yields? I reckon not a lot. Property investing is hard work and takes a lot of application that many don't want to be bothered with, or fear.

Take away negative gearing and there would some initial sales, but I don't know that the market would take a massive nose dive. Some of the highly geared investors would certainly want out, but a lot would be reluctant to sell at a significant loss.

Many investors would be more likely to try to 'ride it out' and try to increase rents to make up for the losses. At the same time, other investors that weren't are reliant on negative gearing would also adjust their rents if there was a reasonable upward trend in rental prices.

None of this would take place overnight, it would likely take months or possibly even years to eventuate.

Many of those who did sell, would be selling to those who are well cashed up and not heavily geared in the first place. Removing negative gearing is likely to simply shift wealth further from the middle class to the wealthy class.

 

[MrCrumbpacker]

Without wishing to step on any toes, perhaps I can give an outsiders perspective

The insularity of this discussion reminds me a little of the ‘pokie’ debate, whereby the received wisdom of those states with pokies is that pubs and clubs simply could not exist without this revenue, meanwhile the rest of the world, and parts of Australia carry on as normal running businesses based on selling booze, food and good service.

Apart from Canada which has a diluted version of NG, no other country I have been involved with has a similar system. In the UK you can have a property company, and offset losses and gains within it , but you cannot carry losses across to your personal income (say 400K a year from working at Mcquarie Bank)

When interest rates were 8% in the UK, I would expect a rental return of say 12%, otherwise why bother, similar in Germany. Hertz don’t rent out cars for a loss after all.

The problem I see here, is how ever well intentioned NG was in the first place it has attracted a particular type of investor to the market, with an eye (though not always) to capital gains, who can afford to bid up the market in order to ameliorate their tax bill.

Genuine (not nominal) capital gains are not sustainable in the long term with established housing (see the Herengracht index).

Housing is a utility, and a house requires maintenance, something wilfully neglected in many Australian cases due to the poor returns.

The net result is a mindset that accepts the idea of a loss making business, supported by the less wealthy tax payer. The cost is growing and becoming more entrenched every year, and no one has the political will to tackle what has become a sacred cow, unique to Australia.

Rents are set by the market, not landlords, I don’t buy the idea of benevolent landlords not charging pretty much what the market will bear, I didn’t, why would you? And consequently I don’t see landlords being able to raise rents at will if things changed.

It is in my view a silly and potentially dangerous system, but hey, maybe the rest of the modern world has something to learn from Australia on how to meddle in a market.

 

[Aaron Sice]

the trouble is, that to remove negative gearing would have an adverse effect on

1) rents (will rise)
2) values (will drop)
3) politics (you ain't gonna be the country's leading political party anymore)

considering most people in this country would be affected greatly by either of those three options, i see the status quo remaining for some time.

however, i completely agree with the above.

 

[HotRod]

the trouble is, that to remove negative gearing would have an adverse effect on

1) rents (will rise)
2) values (will drop)
3) politics (you ain't gonna be the country's leading political party anymore)
considering most people in this country would be affected greatly by either of those three options, i see the status quo remaining for some time.

however, i completely agree with the above.

That is the key.

There's 5% of the population that own an IP, with 95% of these probably NG.

You don't want to **** those people off and let those votes walk out the door.

 

[MrCrumbpacker]

the trouble is, that to remove negative gearing would have an adverse effect on

1) rents (will rise)
2) values (will drop)
3) politics (you ain't gonna be the country's leading political party anymore)

considering most people in this country would be affected greatly by either of those three options, i see the status quo remaining for some time.

however, i completely agree with the above.

For the reasons mentioned, I don't think rents can rise much, but certainly to what the market could bear.

I too think it highly unlikely that the status quo would be challenged in the present circumstances. Modern politicians do not act if they don't have to, and certainly not to rock any boats.

It would take both a huge political mandate, and a big change in economic conditions to challenge NG.

Also, although there are doubtless those that would revel in the consequences of removing NG, it would be both stupid and unfair to act without caution. in a staged and managed way, with relevant incentives and compensations.

It was government policy which has led to this situation after all.

 

[VYBerlinaV8]

I suspect that the only way NG could ever be realistically phased our would be to set up a grandfathering system which could run for a number of years, for existing property owners (much like was done with CGT). Given than rents rise over time, the number of NGed properties being grandfathered would reduce over time anyway.

The real question to answer is what would happen to the property market. Although plenty of people (including myself) believe in positive gearing, many people still don't. Perhaps this could be addressed by allowing losses to be carried forward to offset future yield, thus as rents rise you wouldn't be paying tax on the income until that income exceeded the total losses claimed.

 

[Aaron Sice]

For the reasons mentioned, I don't think rents can rise much, but certainly to what the market could bear.

until it can bear no more, and its still not enough for those in outlay shortfall, so they sell - leading to point 2.

point 2 leads to point 3.

point 3 leads to the re-instatement of NG, just like in 1985.