negative gearing review by Govt - what is the status??

[rambada]

Govt sets policy to manipulate population. Neg gearing is no different. It allows tougher monetary control through ....... % rates. But it also allows growth.
Bad? Must say that overall & keeping it simple, increasing of the capital & wealth of the country is the govts secondary roll (just behind protection) and is incredibly important for populace well being.
If negative gearing did not meet this end, then by now there would be mega data from the ABS to contradict its benifit. Statistics can be manipulated but after all this time & scrutiny, I'm sure its been analysed by smarter people than me & its still here.
And negative gearing doesn't just apply to RE, it can be used for any investment. So negative gearing into shares would also be affected. Negative share gearing is actually an interesting number crunch as shares with good yield & franking credits, make interesting calculations.
But I do still love my RE

 

[vincenzo]

The way i see it, everyone should aim to pick up at least one ip, preferably many, or some sort of significant investments.

This way everyone is contributing towards thier retirement, and maybe even leaving something decent in the will.

But no, only some of us are picking up ip's and/or other investments, while others aren't picking up anything, just spending, and whining about those that are doing so well that retirement comes early, is very comfortable, and maybe even have heaps left in the will for the kids.

Investment needs to be a compulsory class in school for every child... and a compulsory parenting class would be good aswell... even if these two classes were only once a week each it would be a vast improovement. How did i get from negative gearing review to schooling?
Ah yes, the problem is that many just don't know what they are doing!

 

[BayView]

But most landlords don't provide housing, ~95% or so just buy existing housing - causing no new net supply of houses and thus just change a potential owner occupier into a renter (using their tax money!)

If we're not providing housing, what is it that we are actually providing then for all out tenants that live in them?

 

[tubs]

A lot of people on SS rent, and in fact the system works like that - it is more tax advantageous for 2 people to rent from each other than live in their own houses - how silly is this?

Its would be silly if it were true, but its downright wrong.

Over time the rents will rise to exceed the holding costs, and then each person will be worse off as they now have a taxable income exceeding their costs, and they will have to pay capital gains tax when they sell, assuming they will at some time.

Those damned facts again. You must be getting sick of them by now.

 

[Token Funder]

evand

I did the calculations based on ATO figures a couple of years ago (I have posted them previously - http://www.somersoft.com/forums/showthread.php?p=406710#post406710 ) and it worked out that the government paid out to investors on average a total of around $667 per tenant per annum to provide housing for those who rent.

Another way to look at is that taxpayers wrote out a cheque (using the 05/06numbers) of $3500 for every resi property investor in Australia and (given the efficiency of the tax office) probably blew another $2000 processing the thing.

Whether you are a property investor or not, we are all taxpayers and have a vested interest in a simple tax system where the government takes only what it needs and doesn't waste massive amounts of time and effort handing our own money back. If tax incentives are to exist, governments need to be absolutely ruthless in assessing if they are doing the job they are intended to.

Negative gearing is not an effective measure insofar as there is no evidence to suggest it achieves the outcomes it purports to.

1. It encourages speculation in existing properties rather than the creation of new housing stock and therefore adds nothing to the accomodation "pie".
2. The tax-payer subsidy increases the purchasing power of investors relative to OO and is both inflationary and inefficient. This wasn't the case in the early days when banks used to charge investors like wounded bulls, but times have changed.

And lets put the "Keating tried this before and the sky fell in" myth to bed. Saul Easlake and others have looked at the period and the general consensus is:

• the alleged rental crisis occured only in Perth and Sydney - not something that can be explained by a national taxation change. Much in the same way the 25% pa increases in negative gearing seen over the last few years has failed to lead to an abundance of new dwellings.
• 85-87 the stock market was going ape-doo doo so there is little suprise investors were out of property
• of course, October '87 saw the crash and -surprise, surprise - things improved.

A simpler exercise would be to remove the all negative gearing (why should taxpayers subsidise poor investment decisions) and take the $8B estimated to be the cost this year and use it to develop infrastructure that will assist in the creation of more dwellings.

*background screams of Heretic! Heretic!*

 

[plusnq]

Another way to look at is that taxpayers wrote out a cheque (using the 05/06numbers) of $3500 for every resi property investor in Australia and (given the efficiency of the tax office) probably blew another $2000 processing the thing.

Whether you are a property investor or not, we are all taxpayers and have a vested interest in a simple tax system where the government takes only what it needs and doesn't waste massive amounts of time and effort handing our own money back. If tax incentives are to exist, governments need to be absolutely ruthless in assessing if they are doing the job they are intended to.

Negative gearing is not an effective measure insofar as there is no evidence to suggest it achieves the outcomes it purports to.

1. It encourages speculation in existing properties rather than the creation of new housing stock and therefore adds nothing to the accomodation "pie".
2. The tax-payer subsidy increases the purchasing power of investors relative to OO and is both inflationary and inefficient. This wasn't the case in the early days when banks used to charge investors like wounded bulls, but times have changed.

And lets put the "Keating tried this before and the sky fell in" myth to bed. Saul Easlake and others have looked at the period and the general consensus is:

• the alleged rental crisis occured only in Perth and Sydney - not something that can be explained by a national taxation change. Much in the same way the 25% pa increases in negative gearing seen over the last few years has failed to lead to an abundance of new dwellings.
• 85-87 the stock market was going ape-doo doo so there is little suprise investors were out of property
• of course, October '87 saw the crash and -surprise, surprise - things improved.

A simpler exercise would be to remove the all negative gearing (why should taxpayers subsidise poor investment decisions) and take the $8B estimated to be the cost this year and use it to develop infrastructure that will assist in the creation of more dwellings.

*background screams of Heretic! Heretic!*

Interest is a cost of business. Property "specufestors" are simply in the business of property. Companies and other structures are allowed to deduct the costs of business, including interest. Should we remove that too?

Cheers

Shane

 

[Token Funder]

Interest is a cost of business. Property "specufestors" are simply in the business of property. Companies and other structures are allowed to deduct the costs of business, including interest. Should we remove that too?

Cheers

Shane

Nope...businesses aren't also PAYG taxpayers and their tax deductibility isn't skewing a major market. As I said before, you have to look at the impact of the benefit compared with the intention.

It has always seem sensible to me that the cash-flow losses simply be rolled forward and deducted from subsequent capital gain. This maintains some parity with other investments but removes the additional borrowing capacity created by the subsidy relative to OOs.

BTW, I have the same view for other geared investments. You just have to consider the impact on *actual* agribusinesses of increased water prices caused by the tax driven managed agr. schemes. Oh, before you ask, I used to benefit from NG in property and up until recently had NG margin loans.

In today's environment, being debt free is somewhat comforting

 

[dave99]

If we're not providing housing, what is it that we are actually providing then for all out tenants that live in them?

LA, unless you built a house, you didn't provide anything. You just took over ownership of a house which someone else provided, and bid up the price in the hope someone else would do the same from you.

You can see it provides no economic benefit to this country, except to real estate agents.

 

[plusnq]

Nope...businesses aren't also PAYG taxpayers and their tax deductibility isn't skewing a major market. As I said before, you have to look at the impact of the benefit compared with the intention.

How much of housing finance is for OO (as a %) and how much is for PI? According the the RBA it is a reasonably consistent 70% OO and 30% PI +/- a few percent. Now if it was so advantageous to invest in PI over investing by upgrading your OO property CGT free, wouldn't the capital flow to where it makes the most sense? Of course it would. Given that OO have a major tax advantage over PI why wouldn't you consider limiting/that advantage?

Sadly private investment is what provides the funding for businesses to prosper. If you reduce the amount of capital available (by reducing borrowing for investment) then economic activity will be reduced also leading to a loss in lifestyle as GDP declines.

Personally I feel that if NG was removed except for new/redeveloped properties it may assist in the supply issue. Capital gains both for OO and PI is another issue that could be manipulated. But these are social welfare policies and the capital tends to flow to where it gets the best returns. The law of unintended consequences usually occurs and we end with a different result than was initially intended.

Cheers

Shane

 

[plusnq]

LA, unless you built a house, you didn't provide anything. You just took over ownership of a house which someone else provided, and bid up the price in the hope someone else would do the same from you.

You can see it provides no economic benefit to this country, except to real estate agents.

Where did that person move to? The economic benefit comes from the cash flow, that at some point in its movement, enabled a new dwelling to be constructed. Your argument only holds up if household size and number of houeholds remains static. In a population growth phase someone has to be building new dwellings to meet demand or household sizes must rise, which hasn't been happening.

Cheers

Shane

 

[Dazz]

In today's environment, being debt free is somewhat comforting

That is an extreme position to take, and one that restricts your exposure to differing markets severely. I couldn't subscribe to that.

At a conservative 50% LVR, you are only controlling half of what you could be.

At a 75% LVR, you are controlling only a quarter of what you could be.


There is indeed a heavy price to be paid in lost opportunity for being debt free.

I was told by a wise old man some years back, you're either "in debt or in retirement". I thought this to be truism, but even now, my opinion differs from this and I can never see a time which would warrant being debt free. It is so inefficient from a tax perspective.

Your comments on the above, Token Funder, would be appreciated.

 

[BayView]

LA, unless you built a house, you didn't provide anything. You just took over ownership of a house which someone else provided, and bid up the price in the hope someone else would do the same from you.

You can see it provides no economic benefit to this country, except to real estate agents.

Nonsense, and you're just stirring the pot to try and upset everyone. But I'll bite; I've got nothing to do this morning.

Back in 2001 I bought an IP that had NO rental increases for 3 years due to the soft rental market. Imagine what the situation would be like if every investor only built new houses to put tenants in.

I agree, it would be great for the tenants - plenty of choice, cheap rent, nice houses to wreck and not care for. House prices would almost never increase due to excess supply. Peachy.

Now, welcome to reality. What landlord is going to commit many hundreds of thousands (or millions) of dollars to an investment like that? You?

And let's not kid ourselves - investors in property are in it to make money first, provide shelter second. In fact, if we could do it without having to have tenants, we'd do that.

Except for 2 of the properties I have bought (already tenanted), the rest were owned by o/o's.

Even my own PPoR was an o/o house since 1950, was bought by a builder in 1996 and renovated as his own home, and I bought it from him in 2000. We converted it to an IP in 2005. I have now added one more rental roof to the pool that didn't exist previously.

I didn't bid up the price either; I paid less than asking for every single one of the properties I have bought in my life. I bidded the prices DOWN every time.

When I bought them, I was simply out shopping to buy, I saw the property I wanted, put in an offer and signed the papers.

The asking price at the time was what it was - the prices were bid up to that level by someone before me.

But, if you don't like the status quo of how people buy and sell property, then that's okay.

You are more than welcome to go out and offer half the asking price for any property for sale, and then let it sit there empty forever because you don't want to be part of the horrible system that we now have. Good luck with that.

Or, better still, go out today and arrange for a brand new house to built so you can put a tenant in it.

I'll check in with you in 1 week to see what you've done in that regard.

In the meantime, I will go out and look for another existing home, bid lower than asking price, sign the papers and put in a tenant and help to relieve the rental squeeze currently on.

 

[HiEquity]

At a conservative 50% LVR, you are only controlling half of what you could be.

At a 75% LVR, you are controlling only a quarter of what you could be.

Not sure I follow the maths here - I assume you mean that at a 25% LVR you are only controlling a quarter of what you could be? 75% would be three quarters wouldn't it?

Anyway, totally agree with the message - full exposure to the market as well as lack of exposure to the market both represent the extremes of risk management. You take a pretty big risk in terms of opportunity cost if you don't use leverage...

 

[Bill.L]

Hi all,

There is a large misunderstanding going on here about the effect of price rises on development of new resi housing.

People do it for the money. If the NG and CGT (50% reduction) were removed for existing property, then prices would stall/fall. There is no incentive for a developer to build new, because his clientele would be gone.

Nobody would be buying them to rent out, because at even $300k you would need a $600-$700 pw rent return to even consider it.
Existing OOs would receive less for their house and be reluctant to trade.
FHBs will be harder pressed to buy, as a greater percentage of their income is already going to rent, plus banks will have more strict lending criteria in a stagnant/falling market.

The ones hurt the most would be those at the bottom of the market, who could not afford the rent. Pressure on the Govt to spend vast amounts on cheap housing would lead us back into the large inappropriate developments (ie housing commission flats).

Now how do you spell ghetto ??? Is that what you really want HG????

bye

 

[Dazz]

Not sure I follow the maths here - I assume you mean that at a 25% LVR you are only controlling a quarter of what you could be? 75% would be three quarters wouldn't it?

Hi HiEquity,


What I meant was, say you have $ 1.00 in equity, you have no debt and everything is tickety boo. Your LVR is 0%. Sit there and pay big mobs in tax.


If you take that $ 1.00 in equity and go and buy yourself something for another $ 1.00 - fully funded by debt, then you control $ 2.00 in assets. Your LVR is 50%.


But, if you take that $ 1.00 in equity and go and buy yourself something for a whopping $ 3.00 - fully funded by debt, then you control $ 4.00 in assets. Your LVR is 75%.


When / if the growth cycle kicks in, or as HG so charmingly puts it - the equity fairy takes a dump - things look a lot rosier. If everything takes a huge dive, obviously you are sunk - game over.....great back up plan huh ??


If the market doubles, the first chap will grow from $ 1.00 to $ 2.00. LVR still 0%.


The second chap will grow from $ 2.00 to $ 4.00......equity rises from $ 1.00 up to $ 3.00. LVR down to 25%.....maybe time to go again.


The second chap will grow from $ 4.00 to $ 8.00......equity rises from $ 1.00 up to $ 5.00. LVR down to 37%.....maybe time to go again.


The first chap has certainly been left in the dust.....but he is in theory "safer".


As always, it all comes down to your appetite for risk, and your ability to handle whatever may come along - which is usually dictated by two factors, your quality of cashflow and also your personal temperament / attitude. Some sleep easy under a certain load whilst others would be having a pink fit under the same load.


Did I explain my point to your satisfaction Hi Equity ??

 

[HiEquity]

Did I explain my point to your satisfaction Hi Equity ??

Hi Dazz

No worries - just a terminology problem related to the word "control". To me I control my assets whereas in your earlier post you control your equity. Therefore to me the higher the LVR the more assets I "control".

Fully agree with everything you said - leverage is a wonderful thing.

Most people seem to unfortunately focus on what there is to lose in using debt. To me that absolutely needs to be tempered by the opposite view of how much there is to gain. It is only when you are truly looking at both sides - risk and opportunity cost - that you can make a good decision. That analysis has never led me to the conclusion that I should reduce my exposure / debt - rather that I should get off my lazy backside and do some more investing!

Another way to look at it is that if you want to use very high leverage to get the greatest gains, then you absolutely have to be prepared to lose that $1 equity you started with. To me that makes sense if you're a young 'un and can afford the time to dust yourself off and start again from scratch. So here it does (to me at least) make sense that calculated financial risk taking is more appropriate for the young. Less to lose and more time to correct the mistakes...

If you're young and don't have many assets then a high LVR might mean you won't make money and could even lose a bit. However, a zero LVR (low risk) strategy means you definitely won't make money!

And if NG is available and you're young with a mid to high income that skews the balance even further in favour of leverage...

 

[Dazz]

No worries - just a terminology problem related to the word "control". To me I control my assets whereas in your earlier post you control your equity. Therefore to me the higher the LVR the more assets I "control".

I think we agree - one controls the full asset, not just the equity. The lender will hold you accountable for the debt portion no doubt, but the investor controls both equity and debt = asset.

leverage is a wonderful thing.

Agreed.

 

[Token Funder]

In a population growth phase someone has to be building new dwellings to meet demand or household sizes must rise, which hasn't been happening.

Exactly.

Which begs the question, could the $8B in IP subsidies be utilised in another fashion that *will* increase the construction of new houses?

Putting our own self-interest aside, it seems to me that all the evidence points to the fact that negative gearing as currently structured is not growing the housing pool. Therefore, it is failing in its stated objective and should be changed.

Lack of appropriate infrastructure, land hoarding by developers and governments, planning restrictions and a shortage of skilled labour are all impediments to development that $8B might help out

 

[plusnq]

Exactly.
Putting our own self-interest aside, it seems to me that all the evidence points to the fact that negative gearing as currently structured is not growing the housing pool. Therefore, it is failing in its stated objective and should be changed.

I don't see this and nobody has shown any evidence that NG is restricting the housing pool.The housing pool is restricted by the cost of developing and interest costs. Property is treated the same as all borrowings for investment purposes by the ATO which is consistent rather than trying to socially engineer winners.

D&G claim NG is the cause but then claim the affordability issue is a result of excess credit as can be seen worldwide. The arguments are very inconsistent and rather socialistic in their approach.

Cheers

Shane

 

[Token Funder]

D&G claim NG is the cause but then claim the affordability issue is a result of excess credit as can be seen worldwide. The arguments are very inconsistent and rather socialistic in their approach.

Shane

My point is that an opportunity exists to determine whether you can reduce demand and increase supply through reallocation or restructing of NG across the RE sector.

Price pressures are caused by too much money chasing too few assets. On the demand side, easy credit drives house prices and credit is made easier by NG...nothing inconsistent about that.

What *is* inconsistent is self-proclaimed free-marketeers (property investors, equity investors or subsidised industries) believing that their business should be supported by taxpayers.

It's the National Party philisophy - capitalise the profits/socialise the losses.

Weaning investors and industry off the public purse is the opposite of socialism