Negative gearing to go?

[Francesco]

....
Now, let's go to van Olsenen's second argument -

Second, those buying other financial assets are bidding against other investors that can also access interest deductibility. However, with housing, the main other bidders are owner-occupiers that do not have access to this advantage (interest deductibility).

Where's the fallacy in this?

Owner occupiers do not have interest deductibility.
They have no CG tax.
No land tax.
Concessions on stamp duty.
FHB grant.

Owner occupiers are not complaining they have the pecuniary benefits listed above.

Presumably in complaining about PIs having RE NG, owner occupiers harbour the desire of accessing an expense deduction available to all businesses while retaining the status quo of grants and concessions on a private basis. In other words, owner occupiers want all the frills of grants and concessions with PPOR that tenants do not have AND cheap entry into housing with less competition from PIs. The saying about pot calling the kettle black sticks more strongly.

There may be some fallacy in saying that PIs are competing with normal owner occupier.

According to ABS:

"The private rental market in Australia provided housing for approximately 20% of Australian households in 1995-96. It was the second largest source of housing after home ownership. In size, the private rental market far outweighed the public housing sector which accommodated 6% of Australian households (Housing Occupancy and Costs, Australia, 1995-96 (Cat. no. 4130.0)).
Recent changes to government policy on public rental housing will place more reliance on the private rental market in the coming years. In particular, the Commonwealth Government intends to move away from the provision of capital funding for government rental housing in favour of the payment of rental assistance to low income clients who would then find housing in the private rental market. (Department of Social Security, Overview of the Australian Private Rental Market, Policy Research Paper No. 72, October 1996.)

The private rental market provides housing for a wide variety of Australian households. Apart from the low income groups who may not be able to purchase their own homes, rental housing is often a first step to independence for young people who are between stages of living with parents and buying their own home. There are also many other households who live in rental housing by choice.

Private rental housing is provided by a diverse group of property owners ranging from householders to non-profit institutions, employers and corporations. The largest group of providers comprises the private householders who have invested in residential rental properties. These household investors provided rental housing for approximately 60% of households who rented in the private market in 1995-96 (Cat. no. 4130.0). "http://www.abs.gov.au/ausstats/[email protected]/0/4F21545A53A56F13CA2568A90013938F?OpenDocument

From above, owners of residential housing are split as follows:
owner-occupier 80%
householder PIs 14%
institutional, corporations, employers 6%

I imagine the proponents for abolition of RE NG is targeting the 14% not the institutional, corporations and employers because they are not competing with them for ownership of those types of housing, ie specific remote locations or purpose built, institutional for groups.

So, if PIs switch to Trust and company entitties from personal names and buy investment units with borrowings they can still get all the deductions and bid against the owner occupier.

 

[Belbo]

Belbo that article is splattering BS everywhere, a reply/discussion cannot be focused.

I couldn't agree more, except about that last bit. When you're under attack, focus is exactly what you need.

I know you're angry. So am I. But if you don't marshall your thoughts into effective counterarguments you won't be helping to stop us getting steamrolled!

Now, right now, our enemies are rallying.

They are saying that it's property investors who are preventing first time buyers from getting a home. They are saying property investors can do this because of the misguided government policy of 'continuing to permit' negative gearing. They are saying, so hurt property investors, for the greater good!

I'm saying in reply, which is a more fundamental human need, home ownership, or political and economic freedom?

And, as to their consequent claim that property investors have the 'unfair advantage' of deductibility of interest over their first home-buying auction opponents, I'm saying that's BS too. Nothing is preventing first home buying aspirants from negatively gearing an investment property - or ten -before buying a PPOR!

It has to be shown that the politics of envy is at the root of the attack on negative gearing, and not simply asserted.

It has to be understood by all of us that their arguments are lies, so that we can explain why these are lies to others.

It has to be our focused thought that repels these barbarians at the gates of freedom to make better lives for ourselves, so that we can preserve these same rights for our children.

 

[Belbo]

Good Francesco! Very good. You see their strategy? Property investors are a scattered tribe.

"They'll never have the corporate muscle to defend themselves. But try as they might to take advantage of loopholes, they can be easily picked off one by one."

History's greatest and easiest target has ever been the diaspora!

 

[Francesco]

Addendum

I think I split residential ownership incorrectly. I believe ABS intends the split as follows:

74% owner occupier
6% public housing
12% householder PIs
8% charitable institutions, corporations, employers

I believe the proposed abolition of RE NG is targeting only the 12% of householder PIs.

The current concessions and grants owner occupiers get are often directly funded by the land tax and stamp duties levied on PIs. So the success of making IPs not viable will lead to higher charges on owner occupier, to make out for the shortfall from householder IPs and to fund additional public housing. There will also be economic impact multiplied out to the community in reduced need for mortgage finance, broker, PM, advertising, hardware, etc.

As I have mentioned before, abolition of RE NG makes more sense as a policy of envy than as sound economic management for growth and employment.

 

[HiEquity]

So, we agree that housing investment is no more a special need that every other form of investment (in food, power, transport, etc, etc). Why, because economic freedom as a human right trumps any claim coming from human need. Otherwise, you're endorsing communism, which is the antithesis of human rights.

Now, let's go to van Olsenen's second argument -

Second, those buying other financial assets are bidding against other investors that can also access interest deductibility. However, with housing, the main other bidders are owner-occupiers that do not have access to this advantage (interest deductibility).

Where's the fallacy in this?

Housing is special!

Enabling the population to be able to affordably rent their house should be and is a major policy focus of govts.

Enabling the population to be able to affordably own a house should not be, by comparison, anywhere near the same level of priority.

Negative gearing pushes down rents and increases prices - it favours renters over OOs, which is excellent social policy in the "Labor tradition".

Removal of negative gearing would ramp up rents on those least able to afford them, at a time when they are already stretched to the limit. These people aren't just able to walk out and buy their own house at whatever depressed price they reach. They will always have to rent and could easily be forced out on the street.

Where is the justice in this?

Australia already has some of the highest rates of home ownership in the world. Removing NG would only increase this rate even further for those lucky enough to afford their (now cheaper) house and leave everyone else to fight it out in an ultra competitive rental market. When no-one is building houses anymore because prices have collapsed while the cost of construction hasn't.

What I don't understand is so called competent economists arguing against NG thinking they are barracking for the "underdog" (the poor young couple who can't afford these hideous prices!). They wouldn't know the real underdog if it bit them on the bum!

 

[locko24]

How is negative gearing different to claiming any other business expense?
Sure, housing is a basic need - so this, even more so, justifies claiming the cost of providing it!

....and i'm still suprised at the number of die-hard Labour supporters trying to justify the incompetance of the Gillard Gov!!!


Cheers
Locko

 

[Belbo]

Locko, you're right on target: Why should property be treated differently from other investment classes in a free democratic country?

Don't make the mistake of assuming Labor has a monopoly on stupidity though.

Your Liberals today are the dumbest bunch of nitwits in the entire history of that woe-be-gotten political party. Expecting economic competence from them today would be like imagining Tony Abott to understand economics. Their comprehending the superlative relevance of the genuinely national interest would be as likely as their recognising the disgusting racism of their immigration policies. Presuming that they have solutions to problems well beyond their comprehension of complexity would be a leap of faith into abject abandonment. Don't go there, I implore you!

 

[rastus2]

a) it shouldnt be on number of IPs held, that is just going to create a bias towards low yield high prices. If the first couple of properties are going to get the green light to negative gear, then your want the deduction to be the biggest you can. It should be based on the purchase value of the property.

b) there should be an exception for newly built homes, and perhaps for specific areas. for instance regional areas may barter an exception with the federal government to push develpment etc.

I would agree with both of these comments...

Especially b).

In fact I would go further... have no change to -ve gearing rules at all, except for properties that are older than 5 years.
5 years - 75%
7 years - 50%
10 years 25%

What we need are rules that push investors towards buying/constructing more fresh stock on the market, not old stock being speculated on with prices going up, yields going down and rents being pushed up to counter these results as a result.

caveat: @ 10 years, 0% might be more realistic.

 

[rastus2]

Ok.
What about the poor old mum and investors out there.
Forget for a second about the actual effectiveness of NG.
Fact is many Australians where enticed into the market by this policy.
Do you now think it is fair to whip NG out from under them.

so we should make tax rules fair with a purpose of 'actual effectiveness', but exclude 'poor old moms and investors' ?

 

[Peter Parker]

I would agree with both of these comments...

Especially b).

In fact I would go further... have no change to -ve gearing rules at all, except for properties that are older than 5 years.
5 years - 75%
7 years - 50%
10 years 25%

This is effectively like being able to claim accelerated depreciation.

The risk here is that this would encourage cheap shoddy buildings with limited life spans.

 

[pieman]

Reading Saul eslakes article in the age today gives some good reasons for the abolition of ng

 

[devo76]

so we should make tax rules fair with a purpose of 'actual effectiveness', but exclude 'poor old moms and investors' ?

The government should recognize that Australians may and do make important financial decisions based on their policies. Any changes they make down the track should consider this.
If any changes are made I'm sure this will be the case. So basically existing NG holders will likely not be effected. This with a market that is already correcting I don't see the point at this stage.

 

[Belbo]

Pieman, I seriously beg to differ -

http://www.somersoft.com/forums/showthread.php?p=785582#post785582

 

[Piston Broke]

But if you don't marshall your thoughts into effective counterarguments you won't be helping to stop us getting steamrolled!

The only thing that can help help the cause is many hundreds of thousands of dollars in political donation and retaining some good lobbyists like Riccho for 20-30k mth.
These guys are better at getting development approvals and concessions for land bought cheap, as history shows.

All else is just BS that walks... but money does talk and politicians listen.
Off focus maybe but the NG is political not factual.
And political is about money, influence & power. Nothing else is of interest.
NG debate is just another money spinner for them.

 

[Belbo]

PB, I have to say that's a cynical and defeatist position to take, but at least you can see that we've got a storm coming.

I agree with you wholeheartedly that our representative democratic institutions confront a constant and seemingly overwhelming barrage of elbowing-in by special interest-group lobbyists.

Perhaps you're disgusted by the thought of contributing in any way to that by advocating an intervention on behalf of the interests of property investors?

I know I would be, at least if it were an attempt to garner us special priveleges or selective protections.

But it's not special priveleges or selective protections I'm afraid of losing.

What I'm afraid of losing is the same entitlement that all asset classes currently enjoy, which is the opportunity of negatively gearing an investment.

What I'm afraid this will do is take property investing off the table for so many investors that a socially-disruptive undersupply of rental housing will ensue.

What I can always do in my own 'special' interest is to reallocate my capital to other classes of investment, but in what state would that leave the public interest?

I'm suggesting that we, as the providers of roughly 30% of the housing of people in this land, have a democratic duty to at least make it known that we are serving the public interest at the same time as we are serving our own personal interests.

Don't feel defeated already. Opinion-makers, journalists and business leaders all visit this little forum on occasion too, and even just here I believe you can make a difference to the public debate by expressing your concerns and your reasons for them.

I know I don't have all the insights needed to make a difference personally, but if we all put our minds to it I think enough insight will flow to contribute something of importance to the national interest at this dark time.

 

[Piston Broke]

lol it's just the way it is.
I once posted "you'll be amazed at what goes on and how it works. land development is a dirty bizness..."
http://www.somersoft.com/forums/showthread.php?t=55548&highlight=dirty
Dont think for a minute that those big developers want the small backyarder giving them competition and if they think isolating PI NG is the way, its gonna take a bit to reverse it. They held the NSW govt in their pocket for 13 yrs.
Of course this is now way off topic...oops
Back to the ranch

 

[investor2009]

I'm not convinced that abolishing NG would cause rents to rise. All those with their properties paid off wouldn't really flinch and those who are heavily leveraged will raise theirs while the tenants rent the houses who's owners have them paid off and have not raised the rents. That's a scary thought.

Supply and demand, during down times when theres lots of rental property on the market, if you have not secured a tenant within 3-4 weeks things get pretty scary and most people DROP the rent just to get someone in.
Don't be so sure about 'Ohh I'll just raise the rents!".
People will not rent a property that is over-priced. Especially when there are plenty more available.

Selling most probably would not be an easy task at this stage either because many people in financial hardship would be attempting to do the same. Housing prices would drop as a result and we could end up with something like the US has been enduring until the government woke up to themselves and changed everything back to how it was.
I'm still buying and relatively undeterred.

 

[Mry]

I must admit I am still not convinced they would get rid of negative gearing. The government talks about it at regular intervals but nothing ever seems to happen. They are planning a tax summit in a few months and the tax bodies seem a little annoyed about the whole thing as they will discuss some taxes but not all of them.

I would be interested in seeing how they would implement it. If they would limit it to people with more than 2 rentals, would they contemplate negative gearing restrictions for shares and managed fund purchases on some sort of equal footing? How do they manage people with properties in other structures like trusts?

I would say though that if a client had 2 rentals worth 400k and wanted to buy a 3rd property but was worried about the loss of negative gearing, it might be worth selling both and buying a more expensive (900k?) rental, or funding major renovations to improve the current properties.

If the changes are seriously recommended, I'd be interested to see what the changes to rental yields and price values might turn out to be. Since the end result is that some of the money the government supplies from tax breaks gets removed from the market, they won't be all rosy scenarios. I know I have some clients that would be forced to make some tough choices if these plans come to fruition.

 

[joeExpat]

I'm suggesting that we, as the providers of roughly 30% of the housing of people in this land, have a democratic duty to at least make it known that we are serving the public interest at the same time as we are serving our own personal interests.

I´ve always found it laughable that property speculators (those heavily dependent on NG) think they are providing some kind of public service. Unless they´ve built new housing (less than 5%) then the net effect on demand/supply of a speculator buying/selling a property is zero. In fact subsiding speculators through NG does a massive disservice to the public by robbing many tens of thousands of the chance to own their own home.

 

[Belbo]

Really, joeExpat?

Can I ask you one or two personal questions?

Do you actually own any property?

Or are you residing at a clinic in Zurich?

I'm just trying to understand how you could possibly be so profoundly and mindbendingly confused.

Please don't tell me you work in Swiss bank. I couldn't survive the mirth.