Media - Neg Gearing limit to New IPs

[Peter_Tersteeg]

Removing negative gearing for property but leaving it available to every other asset class and keeping it for new housing only would likely destabilize the property market. It would be a disaster.

Removing it for all asset classes, only being able to write off losses when that asset makes a profit would be interesting. The investment landscape would change but we'd adjust reasonably eventually. Within a decade people would still be complaining that housing is unaffordable (in fact I think that prices would only drop a negligible amount). It would discourage risk taking and innovation and we'd be worse of for this.

If the government really wants to reduce the cost of housing and encourage new housing, reduce the taxes on building a new house. Tax is currently about 40%-60% of the cost of a new property. Unfortunately this would also have massive disruption in certain housing markets and create a new area of slums, whilst mostly allowing developers to charge more and get rich.

 

[Dazz]

people would still be complaining that housing is unaffordable

.....just like they were years ago when all those young folk were gathered around by the ABC show broadcast about 5 or 6 years ago. They all sat around moaning about how expensive it was and they could never afford 1 property.

Of course, Nathan Birch was sitting amongst them and he had a totally different attitude to the moaning entitlement brigade.

He was I believe, 23 at the time and had 8 under his belt.

In the 5 or 6 years hence, the moaning brigade are still sitting there moaning about how tough it is, able to quote chapter and verse every study ever done, with statistical data up the wazoo.....but no property.

Nathan on the other hand, decided to button his lip, carry on, head down bum up, and has acquired probably 4 or 5 properties for each and every moaning person on that show.

Some people pour their energy into complaining, and some people just make the best of what they are presented with. Really, you just need to choose which bucket you wish to belong to.

 

[RPI]

I bought a site recently off a couple for $849,000. We had a discussion about affordability and he was saying how hard it was when they bought and had a young family. Needed sheets instead of curtains, house was old and run down but was all they could afford. His father told him he was crazy for taking out such a huge loan and he would regret it for the rest of his life, be a burden around his neck etc.

They paid $22,000 for it in 1975.

 

[Breamster]

I like Dazz's philosophy on this.

IF and I reckon it's a big IF the government make changes to NG, is anyone on this forum of the view that it would be retrospective? Ie that it would effect presently owned IP's??

 

[hobo-jo]

Of course, Nathan Birch was sitting amongst them and he had a totally different attitude to the moaning entitlement brigade.

You mean like the brigade of property investors on this forum moaning about the possible removal of negative gearing entitlements? Do you think Nathan cares whether it's removed or not? Will he sit around moaning with the rest of this forum if it is changed or just get on with it?

Removing negative gearing for property but leaving it available to every other asset class and keeping it for new housing only would likely destabilize the property market. It would be a disaster.

In what way would it destabilise the market?

 

[Breamster]

I for one would not call appropriate discussion (and some genuine concern) regarding the potential legislative amendments to taxation as 'moaning'..

Quite frankly I'm entirely perplexed as to the reason for your post.. aside from perhaps being an attempt to provoke, I'm unsure why you would bother suggesting this.

I've read many of your posts Hobo. I am interested to know whether you own IP's yourself?

You also suggest there is a feeling of entitlement among the investors posting here.. Well perhaps you are correct! Isn't that what we are discussing? Tax 'entitlements' on IP's and the goalposts being changed?

 

[Peter_Tersteeg]

In what way would it destabilize the market?

Negative gearing for new properties but excluding old properties will create a two tier market.

Many investors will flock to new housing stock driving prices up unrealistically for those properties, but their resale value would be lower and people would be in a negative equity situation from day one. Many of these properties are also targeted at the FHB market because the stamp duty savings mean a lower deposit required.

So here we see FHBs and tax oriented investors competing for stock that's over valued.

Perhaps 'destabilize' is the wrong word, but this sort of policy wouldn't help first home buyers, for many it would make things harder. It would also create a two tier market in which some investors immediately make losses in cash flow and growth, further dividing wealth.


If you're going to remove negative gearing, it needs to be consistent across the entire market, including other asset classes. Right now the property markets aren't in trouble, they're progressing through a cycle. If you're going to manipulate a market (at a government policy level), it's better done with a purpose than a political agenda. The best case is a change means an adjustment then business as usual. Worst case it actually causes more harm than good. Why risk this when overall we're not actually in a bad position? It also means you loose the ability to manipulate the market when you might actually need to.

 

[Peter_Tersteeg]

We've also got to ask how much impact the removal of NG will actually be...

About 70% of Australians are owner occupiers. There won't be a financial impact on them or their homes. They won't sell because negative gearing is gone, they won't try to help improve housing affordability.

Of the other 30%, how many are actually heavily negatively geared? A huge amount of investment property is held by baby boomers as part of their retirement income. They have little to no debt on these properties. My parents own a few IPs and other property. They have no debt at all. Business as usual here.

I've also noticed that there's also been a heavy focus on positive cash flow since the GFC. It's been a clear trend with the investors I've met through my business. Take a survey on the forum and it'll be fairly obvious that people are making cash flow a priority compared to 10-15 years ago. Many aren't buying cash flow positive, but they're buying with an aim to get it there as quickly as possible. Buying with granny flats, multiple units, subdivide and sell. They're all strategies focused on making a profit, not a tax loss.

The really, really serious investors often use trusts. There's few immediate gearing benefits here. There would be few immediate or future changes at all for these peoples financial positions.

I'm often asked to analyses the cash flow position people will be in. People aren't relying on the tax benefits to make investment affordable, they do their budget on the pre-tax out of pocket expenses.

In reality the number of investors affected by the removal of NG is tiny compared to the whole market. I'd be surprised if more than about 5% of the market is genuinely affected, less than 1% would be put into a difficult situation. For most it would mean that their tax refund is a bit smaller. For myself it means I don't get an annual splurge with my refund, I might have to forgo a holiday or luxury item.

It will put short term cash in the governments pocket from the savings, but this will be eroded over time as the losses are offset to future profits. Very few investors will actually be put in a position where they will want to sell. The general consensus (correct or not) will be that it's an opportunity to increase rents.

Removing negative gearing across the entire market will do little to make housing more affordable and have no long term outcome towards this goal. Best case it will only create some short term opportunities for the more savvy investors.

 

[hobo-jo]

Some fair points there PT_Bear (had not considered that restricting NG to new builds would push more investors into FHO territories, but you may be right). Although my expectation is that restricting NG to new builds is not only intended to try and restore balance to the market (making room for more PPOR buyers in the established market), but also to encourage more residential property construction to cater for the growing population and to counter the effects (on the economy) of the mining capex boom winding down.

On your second post, the most recent statistics we have are from the 2010/2011 tax year and 67% of property investors were negatively geared, though I'd expect that number to be a lot lower now given the fall in interest rates.

 

[Breamster]

There seems to be a lot of discussion each budget. An absolute heap of hype in 2011 with Gillard etc.

Perhaps moreso this year with a lot of activity and growth in the Sydney market in recent times.

I think it would be a knee jerk to introduce it predominantly because of 18mths of some extraordinary growth.. where arguably it was just a good dose of activity well overdue for that section of the market coming off years of stagnation. Then again admittedly I'm probably predisposed to be right against removing NG as Im right in the middle of my acquisition phase.

 

[Peter_Tersteeg]

Although my expectation is that restricting NG to new builds is not only intended to try and restore balance to the market (making room for more PPOR buyers in the established market), but also to encourage more residential property construction to cater for the growing population and to counter the effects (on the economy) of the mining capex boom winding down.

I hadn't considered the PPOR buyers moving to established markets, but realistically a $300k - $400k house and land outer suburb buyer isn't about to switch to a middle ring area $600k+ property on this basis. Keep in mind the government encourages construction because they get to collect a massive amount of taxes from the building industry. The stamp duty they don't collect or ~$10k in FHOG is negligible by comparison.

On your second post, the most recent statistics we have are from the 2010/2011 tax year and 67% of property investors were negatively geared, though I'd expect that number to be a lot lower now given the fall in interest rates.

Fair to say that my posts are fairly anecdotal in nature on the stats, but keep in mind that even in 2010 investors were focusing on cash flow. Rates have dropped significantly since so between increasing rents and falling rates I think we'd see a lot of negative cash flow properties becoming neutral to positive.

Even if my figures are way out, almost nobody I see these days is making an investment decision on the basis of the negative gearing benefits. Many are curious on what it might be, but almost nobody is relying on NG to make the purchase affordable.

 

[baby blue eyes]

We have restricted first home buyers grant to new builds in NSW, and they receive a significant sum. Will turn more investors to the same place and they get a smaller new build grant.

Depreciation is a big player in ng to make the paper loss, not just interest rates.

 

[roe]

Wasn't a disaster at all...It was only reinstated by a government spooked that they might lose an election because of its removal. The Liberals are in a much stronger position to initiate the phase out of negative gearing.

Removal would not increase social housing costs at all since more people would own their own homes.

you know what labor want to do it but too chicken to, if the lib pull it
off labor will keep status quo. It been recommended to labor in the last audit, they did nothing.

There is no proof any where, not in Australia, not on the whole planet without NG gear rent will be more expensive ...just scare tactics throw out by vested interest group....

 

[roe]

We have restricted first home buyers grant to new builds in NSW, and they receive a significant sum. Will turn more investors to the same place and they get a smaller new build grant.

Depreciation is a big player in ng to make the paper loss, not just interest rates.

I support NG for new build, at least this create jobs and demand for material
buying an old home on a block doing nothing to the economy and NG make it even worse, tax payer money subsiding un-productive asset.

 

[D.T.]

I support NG for new build, at least this create jobs and demand for material
buying an old home on a block doing nothing to the economy and NG make it even worse, tax payer money subsiding un-productive asset.

Doesn't that further encourage OTP Spruikers?

 

[Francesco]

I support NG for new build, at least this create jobs and demand for material buying an old home on a block doing nothing to the economy and NG make it even worse, tax payer money subsiding un-productive asset.

I disagree.

I disagree that investors buying old home does nothing for the economy. Every year I spent money on repairs and maintenance beside ongoing payments of land tax, rates, utility bills and management fees. It represents sizeable amounts and averaging $21,000 a property. It excludes occasional big items like re-roofing ($3400) and replacing lighting ($770). Obviously, there is demand for jobs and materials through investments in old homes. It may not be of the same order of new homes but investing in old homes do contribute to the economy.

The NG arises from applying the tax and accounting principles. It is conceded by critics and recognised by some academics that 'large businesses' get it and so do individuals for investments in managed funds and shares. The moral imperative requires that before tax is levied on an individual's earning all the expenses should be deducted. This includes wear and tear as represented by depreciation. This is the equitable way of treating profit and tax.

All income, employment, part time and casual, to a tax entity such as an individual is reported and taxed. However, when it comes to residential property, the proposed NG policy is to deny the loss from being recognised in the year it is incurred. But, certainly apply it if it is positive in the year to obtain the tax. This is not a practice of fair go - tax if cashflow positive, otherwise defer. It seems that a portion of society is asking the working property investor to subsidise housing in Australia by deferring recognition of losses. Just who is subsidising who?

Try asking multinational companies engaged in the residential market to get the same policy hit. If the proposed NG policy is to target only individuals, it is transparent that it is because individuals are more likely to stay put in the country, not big companies. Increasingly, this assumption is getting weaker and weaker - notice the big traffic flow of investments out of Australia into US.

There is an occasional deprecating reference in various media to residential property as being unproductive. The worth of anything is the value a market assigned to it. Why must a property need to be productive? Is it the case of viewing residential property through the wrong lens? It is purchased freely by individuals to be 'consumed' downstream from the toils of their years of production, to be enjoyed by the individuals. In the process it again sustained the jobs of many individuals in private (eg bank) and public institutions( eg all levels of governments). A constant obsession with controlling and directing individuals' funds is a predilection for return to a discredited state control system such as communism.

By the way, I hope my views do not constitute a whinge as I am quietly confident that an 'adult' Coalition Government would not repudiate much of what the Howard Governments espoused for maintaining the NG policy (after reintroduction by Labor Government). The Governments maintained the NG policy for different reasons - Labor for rent, Coalition for individual self-reliance away from welfare.

 

[Tillie]

Common principle used in many European countries...

All expenses are tax deductable from the income that these expenses relates to. It is often done by asset class. Property is one asset class, shares another etc.

E.g. In IP case: interest, depreciation, rates & taxes are tax deductible against the gross rental income from the IP such like the interest is from dividend income if the loan has been taken for the share purchases.

In similar logic all expenses related to earning PAYG income are tax deductible against PAYG income. But you can not deduct net rental income loss from dividend or PAYG income etc. But the net rental loss will be carried forward and it is deductible from the rental income earned in the future. It means that when IP turns to make a profit the previous losses can be deducted or when you sell IP you can deduct the carried forward losses from the capital gain. If you make a capital loss it can be carried forward and in the future years deducted from the capital gain made from the other IP sale.

Hopefully the sample makes sense...

 

[Tony3008]

I disagree.

I disagree that investors buying old home does nothing for the economy. Every year I spent money on repairs and maintenance beside ongoing payments of land tax, rates, utility bills and management fees. It represents sizeable amounts and averaging $21,000 a property. It excludes occasional big items like re-roofing ($3400) and replacing lighting ($770). Obviously, there is demand for jobs and materials through investments in old homes. It may not be of the same order of new homes but investing in old homes do contribute to the economy. ...

But an owner-occupier would, management and land tax excepted, be spending just the same, possibly more in that as an investor you look to maximise your return whilst an OO might well spend an extra $10K on a kitchen just because they like it.

 

[Angel]

Anyone who owns a house spends money within the economy. Some OOs spend more than investors, sure, but investors still spend dollar$. Money is money and it keeps staff employed at Bunnings. We still keep plumbers, electricians, painters etc employed.

 

[truong]

When critics of the current NG arrangement talk about it being unproductive, they're not talking about the lack of money being spent by investors on their properties but the inflated capital that investors have to put into these properties that could have been used more productively.

Say you have invested 500K of capital into an IP. If houses prices were 10% lower you could have owned exactly the same property with only 450K capital outlay and used 50K to invest somewhere else eg. in shares. As a result you'd have more capital invested in productive assets which overall would be better for the economy.

OK, the reality is a bit more complex than that but you get the gist (and I'm not talking about the consequences of a 10% price drop here, just trying to explain how wasteful this all is).

Because your capital outlay is primarily financed by debt what happens is that a 50K portion of your debt is returning nothing. It's a dead weight on your personal finances but more importantly the nation as a whole is paying for its costs through NG and getting little benefit out of it.