Media - Neg Gearing limit to New IPs

[Angel]

Good point Truong

 

[INVSTOR]

I don't think home ownership is completely about house price affordability. Some people seem incapable of handling simple tasks, thinking rationally or capable of handling minor responsibility. I can think of many examples but here is just a few.
- I can't remove light globe, can you contact an electrician to remove
- There is a wasp in the backyard, can you send out someone to spray it
- there is a loose handle on kitchen cupboard, send out maintenance person
- the soil in garden is disappearing and the pressure of no soil under the retic dripper system is causing the plastic pipes to split
- I got a large water bill, please send out a plumber and leak detector

 

[perthguy]

Add to that: these blinds don't work and need to be replaced. <-- turns out the blinds were just loose and simply re-winding them fixed the "broken" blinds. About 2 mins per blind to fix.

 

[Francesco]

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.

This is pretty much picking on trivialities, neither here nor there. As an investor I can renovate the property whereas my tenants who are students are financially living on the edge on part time work juggling with studies. Your argument depends very much upon the characteristics of tenants and landlords. I have made the point in my previous post that an old house does generate economic activities. Roe was dismissive of any economic contribution from an 'old' house.

My 'old' house over a period of about 20 years have most of its internals replaced - painting multiple times, carpet and linings, appliances updated everywhere from toilet, door handles to hot water tank.

 

[Francesco]

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.

Investors vote where to put their money by profitability measures grossed from yield and capital gains for their efforts. Profitability to investors is the reality and it beats productivity by economists based on their definition of productivity. To investors they serve a market need of transient workforce and temporary workers regardless of rhetorical productivity.

But the myth being bandied is that residential property investors are being given a 'concession' from the public purse and so it is open season for the NG 'rort' to be outed and subject to public ridicule. In my previous posting I am just calling this faddish quasi analysis bah humbug!

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.

This is weird if the productivity argument is at the bottom line to effect enhanced profitability to investors and equating this as good for the economy! But, I for one am doing just fine with my spread in shares and properties. Shouldn't Government be more concerned about balancing its own budget without diluting its focus to meddle in mine with obfuscation about 'concessions' on NG, etc?

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.

I have called this a myth. Cutting NG is creating inequity based on distorting equitable principles of tax and accounting principles. $50k portion returning nothing? LOL.

 

[truong]

Individual profit doesn't equate with common good. Plenty of profit-making schemes that are harmful to a country and its economy.

I have called this a myth. Cutting NG is creating inequity based on distorting equitable principles of tax and accounting principles. $50k portion returning nothing? LOL.

Why myth? Plenty of countries living this "myth" right now.

 

[Francesco]

Individual profit doesn't equate with common good. Plenty of profit-making schemes that are harmful to a country and its economy.



What myth? Plenty of countries living this "myth" right now.

Read my previous post if you do not know what myth I am talking about. May 13 can't come soon enough!

 

[wategos]

Funny the faux concerns expressed by NG proponents for renters who supposedly will have higher rents (they won't, but anyway if you really believe that isn't that good for our investments? ) or the increased social housing costs (won't be) or more people on the pension (or even living on the streets ! )

The biggest concern of course is to their own back pocket and not renters, FHBs, social welfare or the economy.
But if you're not over extended yet and plan to buy more property in the future you should see the removal of negative gearing as a good thing since yields will be higher as a result of lower house prices.

 

[greedy2000]

If your investment only stacks up because of the tax incentives then its not a very good investment.

 

[HiEquity]

Funny the faux concerns expressed by NG proponents for renters who supposedly will have higher rents (they won't, but anyway if you really believe that isn't that good for our investments? ) or the increased social housing costs (won't be) or more people on the pension (or even living on the streets ! )

The biggest concern of course is to their own back pocket and not renters, FHBs, social welfare or the economy.
But if you're not over extended yet and plan to buy more property in the future you should see the removal of negative gearing as a good thing since yields will be higher as a result of lower house prices.

Personally, I don't believe I own any negatively geared investments (might have to check my last tax return to confirm that - annual expenses on RIPs can move around a lot!). I think it's a dog of an idea as an investment strategy and don't advocate it for anyone.

My back pocket would welcome higher rents as well - from my point of view the current level of rents are far too low and not at all reflective of the marginal cost of providing new accommodation.

However, I fully recognise that this is only the case because other investors see some benefit in negative gearing. Take that away and I fully expect rents to rise by the same percentage as prices fall, particularly at the bottom end. You push down on the air bubble and it only pops up somewhere else.

The bottom 10% in wealth of our community will not be able to afford to buy a house regardless. They will find themselves in a rental market where no-one wants to build what they need to rent anymore. Rents will therefore have to rise until they meet the marginal cost of providing new accommodation - ie well above current values. The idea of quarantining -ve gearing to new builds is ridiculous as it requires every high income investor looking for a tax break to become a developer - most of them struggle to find the hours in the day for their day job, rather than taking on another one at the same time!

 

[keithj]

Does anyone have any evidence that prices fell when NG was removed back in the '80s ?

 

[hobo-jo]

The bottom 10% in wealth of our community will not be able to afford to buy a house regardless.

It is true that there will always be a large pool of lifetime renters who either don't have a high enough income to save for a deposit or who have a high enough income, but not the discipline to save it.

That said data from the ABS / RBA suggests that the last time negative gearing was removed it allowed a large number of young buyers (presumably not in a position to bid against investors) to buy their own home as is indicated by the bump higher in home ownership rates:

Does anyone have any evidence that prices fell when NG was removed back in the '80s ?

http://www.econ.mq.edu.au/Econ_docs/research_papers2/2004_research_papers/Abelson_9_04.pdf

According to the data in this document (pages 8 & 9), prices increased in nominal terms, but in most cases decreased in real terms (i.e. underperformed inflation).

 

[HiEquity]

It is true that there will always be a large pool of lifetime renters who either don't have a high enough income to save for a deposit or who have a high enough income, but not the discipline to save it.

That said data from the ABS / RBA suggests that the last time negative gearing was removed it allowed a large number of young buyers (presumably not in a position to bid against investors) to buy their own home as is indicated by the bump higher in home ownership rates:

Hi Hobo-jo

I agree entirely that prices would drop and more young people would be able to buy their own home, it's just that the corollary to that movement is that rents will go up for those who aren't able to take advantage by making the switch to home ownership ie the least wealthy in our society.

Personally, I prefer it when govt policy is focussed on the welfare of those who are the least wealthy and the most in need of assistance. I am of the view that Australia has far too much middle class welfare as it is and that welfare should only provide an uncomfortable safety net to those with the capacity to work and a more comfortable safety net for those without that capacity (eg the disabled).

If the govt was to remove -ve gearing, they would have to increase rent assistance across the board to maintain that safety net at a reasonable (still unattractive but survivable) level, due to this rental price effect. This would include a lot of pensioners and seniors. Or they would have to provide more social housing at likely greater expense still. I'm doubtful that the end result would be any better than what we have now - either for the govt or for those most in need of affordable rental accommodation.

As for everyone else who is merely shut out of buying a house, well they can and should be able to look after themselves. In the meantime, they can continue to enjoy their cheap rent!

 

[Francesco]

Someone in WA writes that NG is a positive for the economy:

http://mccarthygroup.com.au/negative-gearing-stephen-appears-australian-financial-review

It may provide some information to help make sense about NG.

 

[Tony3008]

Someone in WA writes that NG is a positive for the economy:

http://mccarthygroup.com.au/negative-gearing-stephen-appears-australian-financial-review

It may provide some information to help make sense about NG.

The obvious answer to his question, " If you had a widget that cost you a dollar to produce, why would you sell if for 80 cents?", is no. But if you're producing a million a year in a factory you own that's increasing in value by $300K each year, then the answer might be different.

The latter is akin to buying a property in a blue-chip area of Melbourne that will never cover its costs bur should make up for this big time when you sell. As for the rest - the property that initially is in NG territory but will become cash flow positive in a few years - more tax now is less in the future, assuming a UK-style ring-fenced loss regime.

 

[Propagate]

When it was abolished last time, how did the carried over losses work?

What I mean is, If you had one property that was negatively geared for say 3 years and each year you carried over a loss, then in the 4th year you started making profit, could you then start to use some of your carried over losses against that profit? Or, were the losses locked away until sale time and deducted from any capital gain only?

Similarly, was it restricted to each individual property? Say you had two properties, once was positive, one negative. Did you pay tax on the positive one and carry losses over on the negative, or were they added together as one class allowing the loss of the negative one to be offset against the income on the positive in that year?

Thanks.

 

[hobo-jo]

Someone in WA writes that NG is a positive for the economy:

http://mccarthygroup.com.au/negative-gearing-stephen-appears-australian-financial-review

It may provide some information to help make sense about NG.

lol what a ridiculous article.

"Negative gearing does not subsidise investors. It, in fact, subsidises the tenants. If you had a widget that cost you a dollar to produce, why would you sell if for 80 cents?"

Want cash flow from a property from day 1? Put down a large enough deposit and it can be.

 

[Paul@PFI]

Maybe a potential opportunity for unit trusts. Will the legislation be worded such that interest deductions to acwuire units in a unit trust which in turns buys a residential property might be excluded. Will be interesting to see things closer to the date if anything does happen and maybe a potential opportunity at the same time.

Good point Mike.

 

[Paul@PFI]

When it was abolished last time, how did the carried over losses work?

Last time it didnt last long enough to count.
Rents only marginally rose in Sydney...Anecdotally Sydney was a rising market prior to announcement anyway.
The factor that pushed the market UP last time (Almost 30 yrs ago) was the introduction of capital gains on property which occurred as a substitute for the neg gearing losses. And there was no 50% discount until 1998. Lots of owners rushed in to sell and buyers flooded in from the stock market crash and these factors all pushed prices up rather than down.

This sends a sgnal to me - Perhaps the end of the 50% CGT discount on property ?

 

[Dazz]

This sends a sginal to me - Perhaps the end of the 50% CGT discount on property ?

What do you mean by "this" ??

There has been no suggestion, no mention, not a peep from the Govt whatsoever.

By "this", do you mean that article in the fish and chip wrapping by now from that young journalist with no authority on the matter ??