i think you misunderstand me RP... and indeed as prices continue to fall the mismatch between reality and theory will grow.
Dispelling the doomsday debt myths by the RBA
- Thread starter MichaelW
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i think you misunderstand me RP... and indeed as prices continue to fall the mismatch between reality and theory will grow.
They are also saying that it is due to a large amount of stock on the market at the moment and that the decline will flatten out after the next month or so.
Nope...in fact, charts ease the headaches and sense of groundhog day I get reading many Somersoft threads, where the same fuzzy one sided logic based on the same fuzzy one sided personal anecdotes, from the same 10 years of property investment experience, cloud the same topics, week after week.
More hard data I say. For the rest of ye, take solace in the saying,
"In modern thought, if not in fact,
that is reckoned wisdom which,
describes the scratch, and not the itch."
I bet you could analyze and graph the rate at which headaches have been increasing pointing to an impending australian wide head explosion
Looking at the charts linking borrowing by PIs and the owner-occupier rate, I'm wondering if the difference is down to Negative Gearing.
If I could float a theory, it's tax efficient for an investor to remain geared up. Therefore he or she is more likely to be using an interest only loan, and drawing down equity in terms of further borrowings either to fund growing the portfolio or in a living off equity strategy.
In contrast, an owner occupier will probably aim to pay off their mortgage sooner.
Which brings me onto a question. It's an article of faith around here that abolishing negative gearing would increase rents due to increased costs for PIs. But how much borrowing is discretionary? And how heavily are investment strategies being influenced by tax breaks that encourage higher levels of borrowing?
If I could float a theory, it's tax efficient for an investor to remain geared up. Therefore he or she is more likely to be using an interest only loan, and drawing down equity in terms of further borrowings either to fund growing the portfolio or in a living off equity strategy.
In contrast, an owner occupier will probably aim to pay off their mortgage sooner.
Which brings me onto a question. It's an article of faith around here that abolishing negative gearing would increase rents due to increased costs for PIs. But how much borrowing is discretionary? And how heavily are investment strategies being influenced by tax breaks that encourage higher levels of borrowing?
You have hit an interesting insight in my opinion.
Again this raises interesting questions, i think your chain of logic is correct, at least for now.
and bingo, we have the potential question to the 'final solution'.
It good to see you thinking outside of the square.
Hi Graemsay, some good points, I hope I address them clearly
Quote From The Age, Negative gearing top tax break
The whole country is only just CF+. Obviously it would be a political nightmare to remove NG which is why govts wont touch it. But NG removes $12.75 billion from affordability each year and growing which means more and more people must use it. The question is at what point will the pressure to change or bypass it be greater than the pressure to keep it? Perhaps when Australia becomes net negatively geared? And how will they bypass it, who will get hurt?
Quote From The Age, Negative gearing top tax break
The whole country is only just CF+. Obviously it would be a political nightmare to remove NG which is why govts wont touch it. But NG removes $12.75 billion from affordability each year and growing which means more and more people must use it. The question is at what point will the pressure to change or bypass it be greater than the pressure to keep it? Perhaps when Australia becomes net negatively geared? And how will they bypass it, who will get hurt?
Graemay, if NG was abolished, what would be the potential impact if large number of investors decided to sell? Who is going to provide housing for ppl that will never save up enough and will rent for the rest of their lives? If you are expecting the Government to provide housing for renters, how much is it going to cost? (Keep in mind with Government there will be redtape, bureaucracy, mismanagement.) Is it going to be less then the bill of NG the Government has to foot currently? I think not! Also, keep in mind the Government might be footing the bill of NG and thereby helping CG, but when you sell, they will demand a share of profit through CGT. So they are recovering some of that money anyways. Would be interesting to see how much money in CGT from property does the government make.
Lets talk the alternative, what if yields were to increase and house prices were to decrease making investing in IP once again more attractive. But given our current tax system where someone on highest tax bracket will fork out nearly 50% of the income. So from an investing point of view where paying nearly 50% of your profits in tax can drastically reduce the compounding effect and hence the long term returns.
The bottom line is this is the best we have got given our taxation, any other system you change it to will have it's own drawbacks once you think about it hard enough.
Cheers,
Oracle.
Oracle personally I agree with what you're saying which is why I don't think NG should be removed, and I dont think it will be removed because of potential political backlash. However I think that if NG removes $12B per year from affordability (and growing), and the majority of housing investments are nearly CF negative, then I think there must also continue to be massive political pressure to relieve affordability issues.
There is real risk built into the current system, but it's not interest rates, it's pressure on government for change. Thats a big risk because different governments will change different things, who knows what they'll do and who the losers will be? For example lately Rudd has decided he will slow population growth (the polling gods told him to), and how will he replace the lost future tax revenue? He'll introduce the RSPT. So have miners lost out for FHB affordability?
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The only question i would be asking is who do you think will be in government this time next year,that will play a more important factor
in the different investment markets that are out there,if you don't have "TaxBreaks" in the first place which have been in place for a long time
and hope for GC then why would anyone invest in the first place..willair..
It's hard to predict what would happen if negative gearing was abolished. Rents tend to track earnings much more closely than house prices as demand for rental properties is more elastic. For example, a tenant could move back in with his or her parents, choose a smaller property, or even share with friends, all of which would reduce demand.
Similarly, property prices could fall. But bear in mind that I've seen similar, single figure yields in the UK where there isn't any kind of negative gearing.
Oracle, if a large number of investors decided to sell then I'd expect property prices to fall, and rents would probably rise.
The question is then whether that's of benefit to renters. Using the UK as an example again (sorry), the average first time buyer is now 37 and this age has been rising by about one year every year for a while now. What's happened is that property investors have been out-competing would-be buyers at the bottom end of the market, and effectively replaced them. So there's a large population who've been priced out, and substantial falls would allow these people to buy. That might not be great for PIs, but it's good for society.
I agree with .toe that a growth in NG could draw the government's attention. I'm not sure what their budget is, but I'm estimating it to be in the $300 to $400 billion range.
$6 billion of deductions isn't a large proportion of that, but if it rose to $20 or $30 billion then it starts to have an impact.
I disagree about where the risks are though, and I think that there are two that haven't been brought up.
The first is that negative gearing encourages a high leverage. The typical Somersoft strategy involves an 80% loan to value ratio. If one of the Doom and Gloom scenarios played out then a lot of PIs would be in a very painful position.
Removing the incentive to retain high levels of borrowing would reduce levels of risk in the economy it would make more sense to pay down loans.
The second is that I believe it's a form of Moral Hazard. It reduces the downside of a bad investment.
Similarly, property prices could fall. But bear in mind that I've seen similar, single figure yields in the UK where there isn't any kind of negative gearing.
Oracle, if a large number of investors decided to sell then I'd expect property prices to fall, and rents would probably rise.
The question is then whether that's of benefit to renters. Using the UK as an example again (sorry), the average first time buyer is now 37 and this age has been rising by about one year every year for a while now. What's happened is that property investors have been out-competing would-be buyers at the bottom end of the market, and effectively replaced them. So there's a large population who've been priced out, and substantial falls would allow these people to buy. That might not be great for PIs, but it's good for society.
I agree with .toe that a growth in NG could draw the government's attention. I'm not sure what their budget is, but I'm estimating it to be in the $300 to $400 billion range.
$6 billion of deductions isn't a large proportion of that, but if it rose to $20 or $30 billion then it starts to have an impact.
I disagree about where the risks are though, and I think that there are two that haven't been brought up.
The first is that negative gearing encourages a high leverage. The typical Somersoft strategy involves an 80% loan to value ratio. If one of the Doom and Gloom scenarios played out then a lot of PIs would be in a very painful position.
Removing the incentive to retain high levels of borrowing would reduce levels of risk in the economy it would make more sense to pay down loans.
The second is that I believe it's a form of Moral Hazard. It reduces the downside of a bad investment.
ah i think i've just seen the light - thanks Graemsy.
so, banks are only lending on existing property with minimal neg-gearing benefits - that is, if at all.
i wonder if that was a condition of the taxpayer backing to help reduce the neg-gearing burden without a poll-destroying policy....? as in, restrict lending on new homes to avoid the tax-benfit payback. it's certainly short-sighted enough to be a Swanny policy.
like i said, they're in each other's pockets now.
how very interesting. certainly very timely and ANOTHER large co-incidence.
so, banks are only lending on existing property with minimal neg-gearing benefits - that is, if at all.
i wonder if that was a condition of the taxpayer backing to help reduce the neg-gearing burden without a poll-destroying policy....? as in, restrict lending on new homes to avoid the tax-benfit payback. it's certainly short-sighted enough to be a Swanny policy.
like i said, they're in each other's pockets now.
how very interesting. certainly very timely and ANOTHER large co-incidence.
Our tax system is a joke - agree with Oracle. I take home less than 50% of my pay given compulsory super as well. And where does the money go? Good job keeping up Centrelink. When I was studying all my friends whose parents had houses / investments all over the shop were able to claim all sorts of benefits.
Not to mention stamp duty, land taxes etc for State Governments. Good job running the state guys, got to love our Myki system that doesn't work (did I forget to mention it's more expensive than London's Oyster or Hong Kong's Octopus, which were designed by Australians?) while criminals run on the street with shotguns. Keep jailing those guys who look at a few pictures with children on the internet and give suspended sentences to our samurai warriors (ie people who slash your kids at night clubs because you looked at their girlfriend) and cowboys (people who shoot you because they're annoyed with people in general). Too bad the Opposition is as much a joke. I think my vote goes for the Greens next State Election, as I just can't wait to screw this State up even more by giving them the balance of power. Maybe one day they'll be sent to jail for dodging $1 tax and their kids will be slashed by samurais who get 2 month suspended community service.
Not to mention stamp duty, land taxes etc for State Governments. Good job running the state guys, got to love our Myki system that doesn't work (did I forget to mention it's more expensive than London's Oyster or Hong Kong's Octopus, which were designed by Australians?) while criminals run on the street with shotguns. Keep jailing those guys who look at a few pictures with children on the internet and give suspended sentences to our samurai warriors (ie people who slash your kids at night clubs because you looked at their girlfriend) and cowboys (people who shoot you because they're annoyed with people in general). Too bad the Opposition is as much a joke. I think my vote goes for the Greens next State Election, as I just can't wait to screw this State up even more by giving them the balance of power. Maybe one day they'll be sent to jail for dodging $1 tax and their kids will be slashed by samurais who get 2 month suspended community service.
Graemsay,
What would happen in the following scenarios, if NG was abolished. As you mentioned it would cause house prices to fall and yields to rise. For an investor without NG the yield has to be higher then the borrowing cost otherwise it doesn't make investment sense and is not attractive.
1) Abolishing NG will put lot of pressure on removing CGT from IP. Will the government consider that option? Why should the government be entitled to any upside profit if it didn't contribute to the downside loss?
2) Secondly, if buying is cheaper then renting it would make the buying option much more attrative as majority of Australians prefer to own house if they could. So this would put upward pressure on house prices and thus reduces the yield. Now you have got a situation where there is no NG benefit to the investor and the yield neither attractive. So investor abandon PI which creates a massive shortage of rental properties. How do u think the government should handle such a scenario?
3) Land taxes and rates are directly proportional to land value. Decrease that will impact state revenue, creating budget deficits or cutting on services provided or introducing new taxes to make up for the reduced revenue. Will that be better then the current scenario.
So as I said...if you change the current system and replace it with whatever new system, remember it's going to have it's own set of problems. The argument is whether the positives outweigh the negatives.
Current system, keeps everyone happy especially the ones that are already in the game for a few years now. The current system is only bad for new FHO, as it makes it much more difficult for them to enter due to the ever increasing prices.
Cheers,
Oracle.
I'm not convinced that leverage is high enough for it to pose a widespread risk of default. According to RBA figures in Assets to disposable income ratio, 'housing debt to housing assets' is currently 28.8 percent. 'Interest payments (for housing) to disposable household income' is currently 9 percent. Neither of those would be cause for concern.
Also this quote is from RBA Deputy Governor Ric Battellino's speach linked at the start of this thread by MichaelW
Thats why to me it seems that the widespread risk of default is low. I think there's some confussion in Australia because of Jerremy Granthams comments about the risk posed by high value to income ratios. The thing is that value to income is a measure of affordability risk, not risk of default. Thats because the income figure includes ALL incomes not just home owners & PIs. As we know there is already mucho political pressure on all levels of government for change affecting affordability.
Oracle, I'd agree that tax changes could have (or probably would have) unintended consequences. As for your three questions:
The government is largely made up of the latter group, and the housing boom hasn't been exactly unpopular, so they're going to support prices.
If the FHO group becomes a bigger voting block, particularly if the average first buyer's age tracks upwards as it has in the UK, then we might see political change in years to come.
I wasn't talking about systematic risk .toe, but rather to individuals. The figures that I've seen suggest around 15% of Australians have a property portfolio, but I'd guess that the more aggressively geared strategies used by Somersoft regulars are in the minority.
My concern was more that the tax system rewards risky strategies, whilst penalising those that might be more prudent. For example, if you're taxed at nearly 50% then virtually no savings account is going to keep up with inflation.
- Capital gains are already treated at a discounted rate relative to other forms of income. (50% deduction if the asset is held for 12 months.) And ungeared assets are subject to it. As an aside, should negative gearing of shares be allowed? This is a purely speculative activity, and doesn't provide a social benefit in the same way that rental property does.
- It's hard to say what would happen. If FHOs can't afford to buy, and it's not financially viable for PIs to let property then I'd expect prices to drop. Though if a PI cannot sell a property then they might rent it out at a loss, rather than suffer a larger loss from keeping it empty for a prolonged period.
- Governments are good at extracting money, so I'm sure that they'd think of something, such as increasing the tax rate relative to value. Alternatively property taxes in the UK are based on the value in the early nineties. (Which means a notional value for the newbuild apartment I'm living in... )
The government is largely made up of the latter group, and the housing boom hasn't been exactly unpopular, so they're going to support prices.
If the FHO group becomes a bigger voting block, particularly if the average first buyer's age tracks upwards as it has in the UK, then we might see political change in years to come.
I wasn't talking about systematic risk .toe, but rather to individuals. The figures that I've seen suggest around 15% of Australians have a property portfolio, but I'd guess that the more aggressively geared strategies used by Somersoft regulars are in the minority.
My concern was more that the tax system rewards risky strategies, whilst penalising those that might be more prudent. For example, if you're taxed at nearly 50% then virtually no savings account is going to keep up with inflation.
$12b per annum buys a lot of public housing or subsidizes the release of a lot of land. The "public good" argument in favour of negative gearing is fatuous.
I stumbled across this report yesterday about housing affordability in 2004.
The government's response was dismissive.
But both fit nicely into the debate myself, Oracle and .toe have been having.
The government's response was dismissive.
But both fit nicely into the debate myself, Oracle and .toe have been having.
TF, I agree $12B can definitely buy a lot of public housing. How efficient are the government at spending that $12B. I don't have much confidence in them spending money wisely. They are only good at collecting money.
Are they prepared to forgo, CGT. Are they prepared to forgo increased rates and land taxes revenue that have progressively increased with increase in land value?
Are they prepared to forgo the increased tax revenue in form of increased profits for banks with so many ppl refinancing due to substantial increase in the equity of their properties. Not to mention a lot of ppl would be channeling back that money into the economy by spending on doodahs.
As I mentioned before tinker with the system there will be ramifications. At the moment majority of the population is happy to see their house prices rise. The only ppl unhappy are the ones who missed the boat or are mostly economists whose academic theories don't fit with the real world.
Cheers,
Oracle.
