All signs point to a house price hike
- Thread starter Guru1
- Start date
Quarantine the losses against the asset class.
If you rack up losses in property, they are used to offset gains when the property starts to be CF+. Much like CGT, losses are retained until offset by a future gain. If your property does not turn a profit and you sell out, the accumulated losses can be used to offset CGT.
Effectively if you claim non-cash items (depreciation) they are deducted from your cost base so you are taxed at the end anyway.
If you rack up losses in property, they are used to offset gains when the property starts to be CF+. Much like CGT, losses are retained until offset by a future gain. If your property does not turn a profit and you sell out, the accumulated losses can be used to offset CGT.
Effectively if you claim non-cash items (depreciation) they are deducted from your cost base so you are taxed at the end anyway.
Agree with what you said and for initial contributions, eloquently expressed.
Capital gain is the major attraction of NG and recognised by the Howard government as contributing towards funding retirement and alleviating the demand of the ageing population for government pension and care. Of course, capital gain of properties is a logical expectation as it correlates with population growth and inflation. The capital gain from residential properties of private investors is to help reduce or substitute for future dependence on government welfare.
The cost to the tax revenue of an ageing population in net present value has been bandied around in the debate on Labor's proposal to tax the SMSF earning. It is an astronomical figure:
"The cost to the tax revenue of an age pensioner for the full period they are on an age pension is approximately $440,000 in Net present value assets and an additional (based on current life expectancies and care costs) $400,000 for health care. This indicates that the cost per age pensioner is a NPV assets cost of $840,000. This excludes the home." From http://www.taxreview.treasury.gov.au/content/submissions/retirement/Smartsuper_20090227.pdf
So far from being greedy, PIs are being diligent to do extra work and put aside earnings for their retirement years and not having to rely on tax funded welfare. The tax deferred or foregone in NG is just at the federal level, and arguably much less than the federal cost of looking after an aged person, and does not consider the economic multiplication investment properties have generated at the State and local levels. For example, State governments place extra tax levies on residential investment properties to provide subsidised welfare housing.
So to critics of NG everywhere, seen in this light is it a good idea to disincentivise the population from trying to earn an extra buck to fund their retirement?
A credible argument, but would the welfare burden be as great if there were higher rates of home ownership to begin with?
Just like the idea of house price growth that out paces inflation or changes in real wages, negative gearing as in incentive for speculative investment in existing housing stock only makes it more difficult and I would argue, increases the future welfare burden
edit: and yes, there is nothing sinister about modest appreciation in house prices.
In my understanding, I cant see how home ownership would make one iota of difference to how much a pensioner costs the govt. The federal govt does not supply accommodation to pensioners, if anyone receives subsidised housing, it is from the state govts, and only a very small number of pensioners would receive this. The amount given out in "rent assistance" to the total population is a lot of money, true, but it is a drop in the ocean compared to the real cost of supplying housing.
We all know that the govt is not going to build any more public housing, therefore who is going to supply housing to pensioners in the future? Even if a small number of current renters become home owners and pay off their houses before they retire, they will still require healthcare and income support as stated by Francesco. Some current renters will become home owners in the future, but there will still be a massive number of people who cannot afford to purchase no matter how low prices drop. They will require us evil landlords to supply a service to them. There will always be affluent people who choose to rent for various reasons. They will still require the goods and services that a landlord supplies to the community.
A credible argument, but would the welfare burden be as great if there were higher rates of home ownership to begin with?
Just like the idea of house price growth that out paces inflation or changes in real wages, negative gearing as in incentive for speculative investment in existing housing stock only makes it more difficult and I would argue, increases the future welfare burden
edit: and yes, there is nothing sinister about modest appreciation in house prices.
I think there is still a problem that if we're talking about affordability, we are (or at least should be) talking about the lower end (price wise) of the housing market. I believe abolishing negative gearing (existing properties or all), will not significantly, if at all, reduce property prices at this end of the market. Prospective owner-occupiers still have the same buying power, and many properties in this range would be closer to neutral or positive anyway, so it will not be impacting the investors position significantly. Abolishment of negative gearing may be favourable to buyers in the mid-upper price range where negative gearing has a higher impact (either lower yields, or similar yields on a much higher debt).
I'm also not convinced that abolishing negative gearing on existing homes, but still allowing it on new homes is going to make either the existing or new homes more affordable. The assumption is that investor demand for new property will increase for the tax incentive, which boost supply of new property and decrease demand for existing property? Once again we hit the problem that speculative investors are chasing capital growth, not cashflow. Regardless of the tax incentive, new property still depreciates faster than existing property, and you pay a premium to acquire it. Speculative investors will likely still compete for the existing property, because the cap growth is higher. Demand for new property will not increase, and the number of prospective owner-occupiers competing for a property is not going to decrease.
I re-iterate that speculative investment is driven by growth NOT cashflow. They aren't competing for low-growth, affordable, property.
As others have mentioned, the issue that the writer of the article has is not one of speculative investment, or a lack of affordable housing, it is that he wants to buy in an area that is above his price range (inner-city), and he has less money than others who want to buy in that area. We can only speculate as to whether this is because he and his girlfriend are on a lower income, or a similar income with higher expenses. If he can afford the lower-end of the "underquoted" inner-city properties, then if he was willing to look outside the inner city, he would easily be able to find 2 bedrooms that aren't "dives", and further out, even 3br houses would be affordable. Housing affordability should mean that buying a home somewhere should be affordable for most working people. Not that buying a home anywhere should be affordable for most working people. I also note that interestingly, he complains about "young first home buyers who are somewhat naive, attempting to enter the housing market with huge mortgages", or, to paraphrase "I'm sick and tired of my peers having higher incomes and better saving habits!"
Cheers
I forgot to actually address this. It would be interesting to see statistics on what is preventing non-owners from buying. Lets take a statistic of 30% of households not owning their home.
What is the percentage of households renting as a lifestyle choice? They can afford to buy, but choose to rent as it gives them a wider choice of areas to live in (due to cap growth punishing yields), or because they don't plan to live in the area for long, prefer to not have the debt, have more disposable income etc.
The official unemployment rate is around 5.6%? Take into account also (non-owner) students and pensioners who aren't included in the unemployment rate, we probably have a decent proportion of that 30% being people who would not be able to obtain a loan. Does housing need to be affordable enough that a person on welfare can buy?
At what point is my income enough that I can complain about house prices not being affordable? Is 20hrs a week in a coffee shop enough? 40hr week at minimum wage? (Banks will lend enough for a 1BR 160K on this, a couple on minimum wage without kids would be able to borrow enough for a 3BR house 345K according to online calculators).
Once we subtract who aren't interested in buying an affordable house, and if we can dare to suggest that we shouldn't need to make home ownership affordable for those on welfare or working part time, is the percentage of renters who can't afford a home really that big?
So, I'm not 100% sure I buy the affordability argument. If we actually build more "affordable" houses, will existing renters actually buy them, or is the current market simply meeting current demand? I should mention I come at this from a Melbourne perspective, not sure how well this matches up with sydney, perth etc.
Interesting article and I agree that we need to get back to the topic.
In Kevin Turner's show on 4bc yesterday, the consensus from his state reporters was that buyers for inner city and other well located properties were back in the market in a fairly big way. In the case of Brisbane, this had not yet translated into much price growth yet but this will happen if the trend continues.
Hi Fence
Thanks for posting this.
The market has been rising in Perth, started 8 months ago with multiple offers on properties, I think it will continue to rise.
Cheers, MTR
Indeed, when you are trying to catch and store as much rain when it comes down from the equity fairy juices....best to have lots of buckets out.
Better still, have a bunch of swimming pools and dams out there waiting.
1 swimming pool = 100 buckets.
** Waiting patiently for it to rain **
you are taking tax concessions out of context with the OTHER tax concessions that OTHER countries allow.
the USA - tax break on PPOR. rents are all CF+ though.
are you suggesting that australia have no tax breaks on PPOR (current) AND all CF- rentals? are you then taking the line of reasoning that an investor should "hope and pray" for growth?
i doubt you would be, otherwise you'd have to be a Greens member - in which case my interest in this thread just disappeared.
i don't know about you, but a "hope and pray" kind of housing economy isn't exactly confidence inspiring.
the USA is a classic example of market balancing - they have it the polar opposite to us for roughly the same percentage value of tax concessions.
to say that either rents wont rise or value wont fall if tax breaks are rtemoved (as investors dump stock) then those saying that clearly have never acted within the real market place they are commenting on.
I don't think neg gearing concessions have much to do with price growth at all.
Only a small % of houses are owned by investors in Aus, so their influence on the market is minor.
At certain times in certain areas and pricepoints they will be an influencing factor on price - such as in a regional area where the purchase prices are low and the rent returns are high.
Outside of that window, investors probably won't go into that market.
Tasmania about 7 years ago was one of those windows in time.
At the same time, I reckon neg gearing has a significant influence on how many investors there are/have been/will be.
Why? Because most investment properties are abysmal in terms of rent yields. Most are not pos geared or even pos cashflowed at the start and take many years until they are - for many investors; unless they are buying with significant chunks of cash, and/or can throw lots of extra income at the repayments to smash down the loan in a hurry.
Hardly a widespread practice, I'd wager.
The combined effect of poor rent yield, ongoing holding costs etc make the cashflow for most IP's terrible; putting many off ever doing it.
Take away the neg gearing incentives, and many would-be investors will simply never eventuate, and many current ones who rely on that tax break will not be able to still play, and have to sell.
There would be a short-term sell-off as the cashflow challenged investors have to offload, but this happens when there are various other things to upset the apple cart anyway; interest rate rises, periods of no cap growth, periods of no rental yield increases etc.
The result will be a massive increase in rents after a time as rental properties decline in number.
Why? Because even though the prices may drop as a result of no neg gearing benefits, not everyone will rush out and buy...look at the last 2 or so years - lower interest rates, lower prices, yet fewer buyers....
Roughly the same number of renters overall will occur, but fewer properties to rent..
Only a small % of houses are owned by investors in Aus, so their influence on the market is minor.
At certain times in certain areas and pricepoints they will be an influencing factor on price - such as in a regional area where the purchase prices are low and the rent returns are high.
Outside of that window, investors probably won't go into that market.
Tasmania about 7 years ago was one of those windows in time.
At the same time, I reckon neg gearing has a significant influence on how many investors there are/have been/will be.
Why? Because most investment properties are abysmal in terms of rent yields. Most are not pos geared or even pos cashflowed at the start and take many years until they are - for many investors; unless they are buying with significant chunks of cash, and/or can throw lots of extra income at the repayments to smash down the loan in a hurry.
Hardly a widespread practice, I'd wager.
The combined effect of poor rent yield, ongoing holding costs etc make the cashflow for most IP's terrible; putting many off ever doing it.
Take away the neg gearing incentives, and many would-be investors will simply never eventuate, and many current ones who rely on that tax break will not be able to still play, and have to sell.
There would be a short-term sell-off as the cashflow challenged investors have to offload, but this happens when there are various other things to upset the apple cart anyway; interest rate rises, periods of no cap growth, periods of no rental yield increases etc.
The result will be a massive increase in rents after a time as rental properties decline in number.
Why? Because even though the prices may drop as a result of no neg gearing benefits, not everyone will rush out and buy...look at the last 2 or so years - lower interest rates, lower prices, yet fewer buyers....
Roughly the same number of renters overall will occur, but fewer properties to rent..
Fortunately, we don't need to postulate and speculate regarding negative gearing this, withdrawing that etc etc etc.
The lefty Labor Fed Govt back in 1985 went through this malarkey and we have definitive proof of how bad it was for just about everyone....including the Fed Govt.
Despite it going against all of their philosophies and ideals, it only took them 2 years of practical economy wide application to finally realise what their opponents had been saying all along. Removing negative gearing was a recipe for disaster. They reversed their decision and brought back negative gearing in 1987.
Egg over both Hawke's and Keating's face.
Any lefty who still wants to argue and bang on about how unfair it is, they really are an insignificant little vocal minority that is now thoroughly ignored.
Removing NG - forget it fellas, it just ain't never gonna happen again.
The lefty Labor Fed Govt back in 1985 went through this malarkey and we have definitive proof of how bad it was for just about everyone....including the Fed Govt.
Despite it going against all of their philosophies and ideals, it only took them 2 years of practical economy wide application to finally realise what their opponents had been saying all along. Removing negative gearing was a recipe for disaster. They reversed their decision and brought back negative gearing in 1987.
Egg over both Hawke's and Keating's face.
Any lefty who still wants to argue and bang on about how unfair it is, they really are an insignificant little vocal minority that is now thoroughly ignored.
Removing NG - forget it fellas, it just ain't never gonna happen again.
not that I am waiting for it to happen - we are looking to buy at the moment - never say never... with an aging population and ballooning health care and welfare costs, the government already has its hand in your pocket for your super (even if it is marginal now) and they will only be looking for more ways as the years wear on to fund these costs.
i would argue that if rates of home ownership continue to decline (and statistically, they are according to the recent census) then the proportion of the population impacted by a decision to wind back ng concessions would be less and it would be less controversial for the government.
i would argue that if rates of home ownership continue to decline (and statistically, they are according to the recent census) then the proportion of the population impacted by a decision to wind back ng concessions would be less and it would be less controversial for the government.
Indeed.
As stated previously....Any lefty who still wants to argue and bang on about how unfair it is, they really are an insignificant little vocal minority that is now thoroughly ignored.
I would have thought with ownership declining and thus the number of investors growing the proportion impacted by negative gearing would also be growing and thus more controversial.
FYI here are the 2001, 2006 and 2011 census stats on home ownership.
2001
Fully owned 963,231 41.1%
Being purchased 546,195 23.3%
Rented 645,319 27.5%
2006
Fully owned 820,540 33.2%
Being purchased 745,336 30.2%
Rented 700,654 28.4%
2011
Owned outright 820,006 33.2%
Owned with a mortgage 824,292 33.4%
Rented 743,050 30.1%
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