ANZ Bank Tips 2 More Interest Rate Cuts - More Fuel For Positivity

[Graemsay]

I wonder if a better solution would be to rework the tax system so that interest payments are non-deductible for businesses and individuals in all cases.

There was a bit of chatter about this a few years back. The theory is that the GFC was caused by a debt binge, and so removing some of the incentives to borrow would reduce risks in the future.

 

[Lord Shanghai]

functions just fine in every other country that doesn?t have negative gearing. .

Ah, yes. You refer to Peru, Myanmar and Uganda - economic powerhouses that really have a place in the OECD. Not!

 

[wategos]

I wonder if a better solution would be to rework the tax system so that interest payments are non-deductible for businesses and individuals in all cases.

It works that way in some countries, but it would destroy most property investors in Australia, interest deductions are critical. Abolishing NG will not affect this.

Ah, yes. You refer to Peru, Myanmar and Uganda - economic powerhouses that really have a place in the OECD. Not!

Don?t know what you?re on about there. No other countries have negative gearing (except maybe NZ and Canada?). Do you real think Oz has it right and everyone else is wrong ?
Negative Gearing is a disastrous tax policy and needs to go.

 

[keithj]

Myth Alert !!!
As most people know, this never happened. Rents did not skyrocket and were not the reason NG was restored.

If it wasn't sky rocketing rents, then what was the reason ?

I guess it must have been significant enough to cause it to be repealed.

And it seems to have left politicians with the perception that it didn't work last time & wouldn't work again.

 

[plusnq]

Of course it would not be a disaster, renting functions just fine in every other country that doesn?t have negative gearing. The poor would not be disadvantaged. I find it amusing the "concern" some property investors have for the poor regarding negative gearing, come on folks, what?s your real reason for wanting to keep it ?

Freckle described what really happened when NG was removed. Rents went up in 2 cities, but due to other factors as they kept rising when NG was restored. Mathematically it doesn?t make sense anyway that rents would rise, there are still the same number of people and properties.

Removal of NG would actually be good for a lot of aspiring home owners since some competition from speculators would be removed and prices would fall.

From

http://en.wikipedia.org/wiki/Negative_gearing_(Australia)

The view that the temporary removal of negative gearing caused rents to rise has been challenged by Saul Eslake, who has been quoted as saying, "It's true, according to Real Estate Institute data, that rents went up in Sydney and Perth. But the same data doesn't show any discernable increase in the other State capitals. I would say that, if negative gearing had been responsible for a surge in rents, then you should have observed it everywhere, not just two capitals. In fact, if you dig into other parts of the REI database, what you find is that vacancy rates were unusually low at that time before negative gearing was abolished." [1]

While Saul Eslake's comment is correct for inflation adjusted rents (i.e. when CPI inflation is subtracted from the nominal rent increases), nominal rents nationally did rise by over 25% during the two years when Negative Gearing was quarantined. Nominal rents rose strongly in every Australian capital city, according to the official ABS CPI Data. However it has not been proved that this strong rise in rents was entirely a direct result of the Negative Gearing quarantine. [2]


A lot of jurisdictions in Europe and US have rent controls in place that limit rental increases. These rent controls have their own perverse effects with lack of urban renewal, poor maintenance etc etc affecting economic development.

http://www.nytimes.com/2013/07/28/m...s-of-rent-regulation.html?pagewanted=all&_r=0

http://en.wikipedia.org/wiki/Rent_control_in_the_United_States

A long but interesting paper here;

http://www.walterblock.com/wp-content/uploads/publications/RentControlMythsRealities.pdf


There are always many aspects to consider in developing any tax and social policies (and tax is a social policy). The law of unintended consequences usually rears its ugly head.

 

[natedog]

If it wasn't sky rocketing rents, then what was the reason ?

I guess it must have been significant enough to cause it to be repealed.

And it seems to have left politicians with the perception that it didn't work last time & wouldn't work again.

I am thinking the same, what was it that was so bad about the decision to remove it that it was reinstated so quickly?

Honest question, if it wasnt rents increasing, what actually made the government think "well that was a bad idea, lets change it back"??

 

[HeadsOnBeds]

I am thinking the same, what was it that was so bad about the decision to remove it that it was reinstated so quickly?

Honest question, if it wasnt rents increasing, what actually made the government think "well that was a bad idea, lets change it back"??

Same reason Govs always backflip. They where going to loose votes. Lol

 

[Foxy Moron]

I wonder if a better solution would be to rework the tax system so that interest payments are non-deductible for businesses and individuals in all cases.
There was a bit of chatter about this a few years back. The theory is that the GFC was caused by a debt binge, and so removing some of the incentives to borrow would reduce risks in the future.

Hmmm. Everytime negative gearing comes up people debate the present tax treatment but never enough discussion regarding why investors NG in the first place. Rather a major oversight IMHO. The reason of course is the scandalous sliding tax scale we have on individuals in this country. ie If the top marginal rate aligned much closer to the corporate tax rate I guarantee most people investors would lose significant interest in pursuing the activity and these silly discussions would be put to bed overnight. The tall poppy syndrome is alive and well and as a nation this will never change whilst the media is dominated by the left side of politics. So until the population becomes mature enough to be weaned off their socialist entitlement mindset and have that discussion about flattening personal tax rates the debate will just focus on the bottom end issue of present NG tax treatment. Ho-hum.

 

[euro73]

Another interesting correlation is the explosion in private credit growth around that period.

Govt effectively exchanged public debt for private debt and scooped the tax windfalls that were used to reverse this position. Australia's (and the worlds) boom time was essentially a debt fueled spending spree.

You betcha- absolutely linked. It's no coincidence that all big growth cycles have corresponded precisely with big rate cuts or credit expansion - although now that credit expansion ie 80% LVR's to 90% to 95% is exhausted, only rate cuts fuel capacity in a significant way - and the "run" gets shorter each time. First big boom 90-2002 - 12 years...then growth slowed. 2nd big boom immediately after the GFC - lasted 2 years and was fueled by HUGE rate cuts . came to a screeching halt as soon as rates started climbing. Latest boom - 18 -24 months - but only in 2 cities this time and again, fueled by HUGE rate cuts. More rate cuts will see this run go on a while longer. No more rate cuts will see it start to peter out - in fact, it's already started to do so.

On a separate note - ME Bank and AMP have potentially started a 3 and 5 year fixed rate war. If a couple more mid tier lenders to go to 4.65% and the majors follow , the 3- 5 year rates will be irresistable for investors looking to lock in fantastic yields.

 

[battler]

If it wasn't sky rocketing rents, then what was the reason ?

I guess it must have been significant enough to cause it to be repealed.

And it seems to have left politicians with the perception that it didn't work last time & wouldn't work again.

I think it was because the Government (Vic at least) was trying to sell a lot of their public housing due to the massive costs of maintenance etc, mostly to investors.

The stopping of negative gearing removed the incentive for those investors so the process sorta ground to a halt. Eventually they woke up and they allowed it again.

Keep in mind that there was a fair amount of government assets being bumped off at the time.

 

[Cruskits]

You betcha- absolutely linked. It's no coincidence that all big growth cycles have corresponded precisely with big rate cuts or credit expansion - although now that credit expansion ie 80% LVR's to 90% to 95% is exhausted, only rate cuts fuel capacity in a significant way - and the "run" gets shorter each time. First big boom 90-2002 - 12 years...then growth slowed. 2nd big boom immediately after the GFC - lasted 2 years and was fueled by HUGE rate cuts . came to a screeching halt as soon as rates started climbing. Latest boom - 18 -24 months - but only in 2 cities this time and again, fueled by HUGE rate cuts. More rate cuts will see this run go on a while longer. No more rate cuts will see it start to peter out - in fact, it's already started to do so.

This does not have much correlation to the Perth market. I mean yes Perth did go up and down around the same time in a general sense but you are talking specifically about the Sydney market. There are I don't know 18 million people that live outside the city of Sydney (approx 80% of the Australian population) I reckon people that live in Brisbane, Adelaide, Darwin and Hobart would also disagree with your ups and downs of the property cycle you describe. i.e. Perth has had huge growth in the last 24 months. Perth had massive growth 2002 - 2008.

And Freckle there is a property forum that you would really fit into and it's not this one. Australian Property Forum it is called, I reckon you would be a platinum member in no time

Thank you for warning us about the impending doom that we all face. Thank you. You are obviously a very intelligent person and read a lot more than all of us. However, we are just having a crack and trying to build a better life for ourselves. To do this we have to take risks, if you know how we can get to our end goal in a no risk, full proof way, please share. I am all ears.

Have a good day sir, looking foward to your next graph.

 

[Freckle]

The stopping of negative gearing removed the incentive for those investors so the process sorta ground to a halt. Eventually they woke up and they allowed it again.

Incorrect..

see...article

further...

In July 1985, the Hawke/Keating government quarantined negative gearing interest expenses (on new transactions), so interest could only be claimed against rental income, not other income. (Any excess could be carried forward for use in later years.) What is less appreciated is that Hawke/Keating introduced negative gearing only six months prior. Previous to their initial decision the Income Tax Assessment Act 1936 (As Amended) had quarantined all property losses from deduction against income from personal exertion (other business or salary and wage income). Any losses incurred in any one year would be accumulated on a register and would only be allowed as a deduction from income from property in succeeding years. In so doing property income and property losses were in one 'bucket' and personal exertion income and losses were in another 'bucket'.

This ensured that either at personal level and more importantly at a national level, that property losses would not be subsidized by income from personal exertion. In applying this formula, all previous governments thereby isolated and consequently discouraged capital speculation being subsidized from the general income tax receipts pool.

Keating initially changed this legislative treatment only months prior to attempting to revert to the original. Politically, those who took immediate benefit from the initial change, made false claims that any attempt to remedy the situation would give rise to an explosive increase in rent costs. There was no statistical or real world data to support this claim, other than a small blip in rentals in a small part of Sydney. This was enough to have Hawke/Keating submit to the landlords demands and remove the attempt at repairing the initial decision.

​

Source

 

[Francesco]

...had quarantined all property losses from deduction against income from personal exertion[/U][/I] (other business or salary and wage income). Any losses incurred in any one year would be accumulated on a register and would only be allowed as a deduction from income from property in succeeding years. In so doing property income and property losses were in one 'bucket' and personal exertion income and losses were in another 'bucket'.

This ensured that either at personal level and more importantly at a national level, that property losses would not be subsidized by income from personal exertion. In applying this formula, all previous governments thereby isolated and consequently discouraged capital speculation being subsidized from the general income tax receipts pool.

...

subsidy
ˈsʌbsɪdi/Submit
noun
1.
a sum of money granted by the state or a public body to help an industry or business keep the price of a commodity or service low.
"a farm subsidy"
a sum of money granted to support an undertaking held to be in the public interest.
"she was anxious about her Arts Council subsidy"
a grant or contribution of money.
"the position is generously rewarded and benefits include a mortgage subsidy"
synonyms: grant, allowance, endowment, contribution, donation, bursary, gift, present, investment, bestowal, benefaction, allocation, allotment, handout; More
2.
historical
a parliamentary grant to the sovereign for state needs.

DEFINITION OF 'SUBSIDY'
A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy is usually given to remove some type of burden and is often considered to be in the interest of the public.


I would like to point out that you are using the word subsidy (subsidise, and such like) in the situation of negative gearing on residential properties by individuals when it is available to all other tax entities, eg company and investments, eg shares. Negative gearing is part of the capitalist system. You incur costs, and all costs should be taken into account so that the real or net profit can be calculated. Then, tax is morally applied on the real profit. If all costs are not taken into account immediately, then real net profit is not calculated and then how should the process be moral - tax immediately when you are in profit, ignore when you have a loss or defer, consider only investments that make a profit ignore the losses on properties?


No one would contemplate treating companies like this, but they still try to apply to individuals.

However, a case can easily be made that the private rental sector is cross-subsidising public housing. For example, in the ACT, landlords in the private rental sector pay land tax, not home owners. An online dictionary defines cross subsidization as the practice of charging higher prices to one group of consumers (private sector landlord) in order to subsidize lower prices for another group (public housing). Often land tax costs more than the council rate.

 

[Freckle]

I would like to point out that you are using the word subsidy

The para is a direct quote...I'm not using anything. Debating the application of 'subsidy' in this context is somewhat pedantic to say the least.

 

[Ausprop]

this discussion has been trashed and is going nowhere. not many people would be neg geared at these interest rates anyway

 

[Freckle]

this discussion has been trashed and is going nowhere. not many people would be neg geared at these interest rates anyway

ATO figures suggest otherwise. 60% by all accounts.

The reality is around 80% of PI's own 2 or less properties while less than 1% own 10 or more.

Low rates have contributed to property appreciation at a rate faster than wage growth and (correct me if I'm wrong) corresponding rent growth.

When you look through the threads you find a recurring theme re trying to find positively geared property.

Anecdotally I would suggest that many PI's in the semi serious category actually purchase property on a NG basis with the belief they can get it to PG status withing X years. Many I would suggest don't care about NG as long as CG compensates them for their operational losses. They are more interested in nest egging into super than being hard arsed PI's.

The activity you see on these forums is less than 1% of the PI'g fraternity. I doubt that more than 10% of the PI community make a serious proactive attempt at screwing the last $$ of efficiency out of their property hence why so many are NG according to the ATO.

 

[Ausprop]

Low rates have contributed to property appreciation at a rate faster than wage growth and (correct me if I'm wrong) corresponding rent growth.

when? In recent years I believe this applies to western sydney

 

[Freckle]

when? In recent years I believe this applies to western sydney

Couldn't find anything later nor more geographically specific but the trend is fairly supportive of the cheap rates accelerate property prices faster than anything else.

It also supports the contention that if prices are rising much faster than rents then NG must be more prevalent today than a few years back. You would need to cross check that with ATO data to confirm.

 

[Angel]

Hi Freckle, we have three IPs and the rents have remained the same (SEQ) or dropped (central qld) over the past four years. Unless there is something really wrong with my ability to read graphs, it seems the graph here shows real rents having hardly any movement since the early 1970s. Would you please show me what I am missing.

We have been neutrally geared most of the time but will go negative next month when we get a new lease on the property in central qld.

 

[joanmc]

I wish that these low rates will transfer into higher growth. Nearly every property I own is still down 20% on their 2007/08 valuations. In that time I have had very minimal rent increases too.
So all this talk of booms about to end when I am still waiting for one to hit leaves me wondering.
But then again I think that Australia is a big place and some markets can be booming while others wallow and eventually I will get my turn. I don't see how you can take one section of the market and extrapolate it to the whole country.