Potential negative gearing changes

[BayView]

the appetite for this seems right, it may actually happen this time

It was done once, and failed terribly.

The first ramification will be a lot of would-be investors are not going to invest, and lot of current investors will not go again, and/or offload their neg geared property due to cashflow difficulties.

This might trigger a massive oversupply of cheap property on the market, which may trigger a slump in prices.

This will be good in the short term for cashed up investors who can support the decreased cashflow, and FHB's looking for their first place, possibly.

The possible bad ramification will be a shortage of rental properties available and rents will go up. This may then trigger another round of investor demand, but will it be enough?

 

[skater]

the last time NG was last restricted, investors did not bail out and even if they did who would they sell to ?

You are missing the point. You have the investors that bail (remember 90% of investors only have one IP, many just to 'save tax'), then you have the investors who just don't buy. You are not going to buy an IP to 'save tax' if there's no tax to save, now are you? So......this reduces the pool of rental properties available. Those that bail will sell to owner occupiers or for a loss to more cashed up investors.

other investors or former renters or owners, the demand supply equation remains the same and there is no upward pressure or rents.

Get real! Of course this changes the supply/demand equation. If there are less investors buying properties, then there will be less properties available for rent. Yes, existing stock may reduce in price, so there may be more people buying to occupy, but not everyone can, or will, buy their own place and there will always be a large proportion of people needing rental accommodation.

Changing policy on NG does not stop immigration either, so the population continues to expand making it necessary to build more stock. So, as the new stock comes on the market, who will buy it? Owner occupiers, of course, but what about the never ending amount of investors buying to 'save tax'? Well, of course, they're not buying, are they?

Over a course of years, this puts a lot of upward pressure on rents, because there are move people needing to rent. Simple!

The first ramification will be a lot of would-be investors are not going to invest, and lot of current investors will not go again, and/or offload their neg geared property due to cashflow difficulties.

Exactly!

This might trigger a massive oversupply of cheap property on the market, which may trigger a slump in prices.

This will be good in the short term for cashed up investors who can support the decreased cashflow, and FHB's looking for their first place, possibly.

The possible bad ramification will be a shortage of rental properties available and rents will go up. This may then trigger another round of investor demand, but will it be enough?

The thing to note is that all this won't be immediate. It will take years for the full ramifications to filter through.

 

[chilliblue]

Removing negative gearing on property unfortunately will not automatically make the types of property that some people believe that they deserve to be able to buy at impossibly low properties.

To property you need to make some sacrifices.

 

[Highlygeared]

Put it this way...and thinking selfishly, as long as NG is grandfathered for those with existing properties then bring it on! The next govt may potentially turn my intended LOE strategy to LOR.

 

[Francesco]

Me too - thinking selfishly, rent will increase if NG is grandfathered, although property values will enter low CG environment for a while. Not a bad situation if you already have enough finance from years of equity growth. Just sail along with improved serviceability, while Mark 2 social experiment of abolishing NG is carried out!

The more adventurous investor may look overseas for a better and more stable investment environment. In other words, external governments may seize opportunity to welcome disenfranchised Australian investors.

It will take some years to play out, but poorer investment environment should lower numbers of investors, in turn lower numbers of rental properties. Rent in private housing must go up! State/territory governments relying on stamp duties and land tax will take a hit as investors desert the market. State housing must take a hit and collateral pressure on government programs will increase! This will be experienced earlier in the dynamic and more populous states.

Private rental in niche housing may dry out. Implication for student housing will be interesting. If new supply peters out, yield of existing supply should go up, although for a short while initially value may drop!

When Mark 2 social experiment has run its course, wait for government incentives for private sector contribution to undo any damage a la Hawke/Keating programs.

Investor rejoice, with every social experiment there is opportunity as the market cycle turns!

 

[wategos]

Get real! Of course this changes the supply/demand equation.

No it does not. The property is still there and either rented or a former renter buys it. If an owner occupier buys it then there is also no change in the demand supply equation as their previous property enters the market also. So there is no upward pressure on rents, but more people would own there own home as speculators are less likely to own loss making properties. Simple maths.

There is a case for keeping Negative Gearing on new build properties only (currently less than 10% of purchases). This is the only way NG can affect the demand supply equation.

 

[turk]

No it does not. The property is still there and either rented or a former renter buys it. If an owner occupier buys it then there is also no change in the demand supply equation as their previous property enters the market also. So there is no upward pressure on rents, but more people would own there own home as speculators are less likely to own loss making properties. Simple maths.

There is a case for keeping Negative Gearing on new build properties only (currently less than 10% of purchases). This is the only way NG can affect the demand supply equation.

It's simple maths if there is no change to the population.

Australias population is growing around the 1.7%pa rate, how does that effect your simple maths?

 

[wategos]

It's simple maths if there is no change to the population.

Australias population is growing around the 1.7%pa rate, how does that effect your simple maths?

Yes of course lots of things affect demand and supply, immigration, jobs, gentrification. But we are talking about investors selling, or not buying existing property.... this does not affect the demand supply equation or rents.

 

[skater]

Yes of course lots of things affect demand and supply, immigration, jobs, gentrification. But we are talking about investors selling, or not buying existing property.... this does not affect the demand supply equation or rents.

Of course it does. It really isn't rocket science, you know. More people needing to rent somewhere, with less properties available to rent means there is increased demand. Hence higher rents.

Changing policy on NG does not stop immigration either, so the population continues to expand making it necessary to build more stock. So, as the new stock comes on the market, who will buy it? Owner occupiers, of course, but what about the never ending amount of investors buying to 'save tax'? Well, of course, they're not buying, are they?

Over a course of years, this puts a lot of upward pressure on rents, because there are move people needing to rent. Simple!

It's simple maths if there is no change to the population.

Australias population is growing around the 1.7%pa rate, how does that effect your simple maths?

Turk get's it!

 

[MTR]

Not all investors fit the same mold.

Not all investors are negatively geared.

Not all investors buy in their own name, there are investors that only buy in Trusts so negative gearing is not a priority.

 

[Francesco]

Availability of or lack of NG has another impact on rental housing - its quality. If NG is not available on residential housing ie any effort and expenses exceeding revenue would not be readily recognised. It would bias landlords negatively from maintaining their rental properties. It would be a disincentive towards maintaining quality or renovation in rental properties. Something long term tenants would likely experience over time.

The genuine tenants are the likely victims. These are the people who would like to have affordable rent, available rental properties in whatever locations they would like to reside. For one reason or other they do not wish to buy - FIFO cohorts, periodic postings, mobility for careers, etc. Traditionally, private sector rental rather than Government housing meets their needs, but they will be impacted nevertheless.

Mums and dads pushed off from investing in rental properties will have to think of other productive avenues to help themselves, although the option of cashing out and retiring overseas may become more attractive.

I wonder whether the percentage of retirees dependent on Australian government welfare will increase over time. It may be instructive to base and start monitoring this effect at the time of abolishing NG. Some investors may be diverted to 'investing' in the share market and whether this will help or aggravate the welfare situation is a question also.

 

[see_change]

I'm not sure if there's anyone on the forum who owned IP's at the time it was came in .

We were renting at the time and the public perceptions ( not sayig it 's correct ) was rents were going up and this was a political problem for the labour government so they stopped it .

There are so many different factors it's hard to work precisely what will happen . My initial thoughts are anyone who is grandfathered in would be silly to sell , so that might decrease current properties for sale .

Most of our properties are in good central areas which would typically not be cash flow positive . Even our two Mosman units which we bought at the peak of the GFC over five years ago at a considerable discount to the then price are still negatively geared , though with current rate drops they're getting close to neutral . ( we borrowed 100 % and then spend another 10 % on a Reno , also borrowed )

If there was no negative gearing and at current prices ( which are still going up ) an investor who was buying with an 80% LVR would be in serious cash flow negative territory , so I would imagine in those sorts of areas there would be a gradual decrease in properties available for rent as most of the properties are second hand , not new . You may even have some panic selling as people want to get out

They are still popular for people who want to rent and it's harder to save up a deposit . We may even have a situation where there is a slight drop in prices whilst at the same time getting an increase in rental returns .

What I will be doing is paying very close attention to clearance rates , stock availability , vacancy rates ect and possibly some proprety being off load by motivated vendors

Cliff

 

[see_change]

Not all investors fit the same mold.

Not all investors are negatively geared.

Not all investors buy in their own name, there are investors that only buy in Trusts so negative gearing is not a priority.

We have one fund that is quite cash flow positive and distributes to othe trust finds to make up any short falls in cash flow .

Cliff

 

[BayView]

No it does not. The property is still there and either rented or a former renter buys it. If an owner occupier buys it then there is also no change in the demand supply equation as their previous property enters the market also. So there is no upward pressure on rents, but more people would own there own home as speculators are less likely to own loss making properties. Simple maths.

There is a case for keeping Negative Gearing on new build properties only (currently less than 10% of purchases). This is the only way NG can affect the demand supply equation.

The supply of rental properties will slow down or even decline, but every year another wave of young folks hit the real world outside of mum and dad's house and need a place to rent.

Unless the supply of new stock keeps pace, and investors buy them, the rental stock will be in short supply due to these new waves of renters.

Plus, there may even be a number of investors who have to sell up and rent if the abolishment of NG causes them too much cashflow hardship and they have to sell up to avoid financial hardship or worse.

 

[hobo-jo]

rent will increase if NG is grandfathered

Are you suggesting that landlords artificially keep rents low now just because they have the benefit of negative gearing?

Why is it that you think rents would automatically increase due to NG being grandfathered?

If it's because of what rents did in the 1980s when it was tried last then you may want to take a look at the evidence rather than relying on the myths:

http://www.macrobusiness.com.au/2015/04/joe-hockey-flat-lies-negative-gearing/

I think new investors would want better yields to buy (if NG was grandfathered), but rising rents isn't the only way yields can improve.

 

[D.T.]

Are you suggesting that landlords artificially keep rents low now just because they have the benefit of negative gearing?

No, suggesting that some investors will sell if they lose that benefit. Therefore supply : demand ratio will change and rents will increase.

 

[wategos]

You guys claiming that rents will go up because of changes to supply/demand just dont get it. You bring in other factors, like growing population, which of course pushes up rents in any scenario. Alone, investors withdrawing will not cause rents to rise since supply/demand is unchanged. The properties still exist - who did they sell to ???.

 

[wategos]

Actually when you think about it, rents could actually decrease for many places that have a small vacancy rate since the vacancy rate increases when there is a transfer of renters to owners. Interesting.

 

[turk]

You guys claiming that rents will go up because of changes to supply/demand just dont get it. You bring in other factors, like growing population, which of course pushes up rents in any scenario. Alone, investors withdrawing will not cause rents to rise since supply/demand is unchanged. The properties still exist - who did they sell to ???.

Oh, we get it, in a fantasy world rents don't go up because only the eqilibrium
between existing OO/investors is considered.

In the real world, factors such as a fast growing population have to be considered.

What is your real world outlook?

 

[Francesco]

Are you suggesting that landlords artificially keep rents low now just because they have the benefit of negative gearing?

Why is it that you think rents would automatically increase due to NG being grandfathered?

If it's because of what rents did in the 1980s when it was tried last then you may want to take a look at the evidence rather than relying on the myths:

http://www.macrobusiness.com.au/2015/04/joe-hockey-flat-lies-negative-gearing/

I think new investors would want better yields to buy (if NG was grandfathered), but rising rents isn't the only way yields can improve.

I am not suggesting that investors artificially keep rent low because of having NG. Sarcasm noted. I am suggesting that by comparison post abolition of NG with grandfathering should bring about higher rent.

A policy of abolishing NG is meant to remove perceived financial advantage available to investors and the outworking of abolishing NG should act as a disincentive to investors. Depending on the policy option chosen it will impact on the range of investors. Grandfathering option is meant to minimise impact on existing investors, leaving its full impact on future entry of investors. Hence, abolition of NG acts as a disincentive to existing investors to continue investing in rental properties and curb expansion in their portfolios, as well as discourage entry of new investors. You have already confirmed above (Note the highlight above, as the threshold of financial feasibility will be raised with no NG). Obviously, the supply of private rental properties must reduce over time.

However, grandfathering NG, means incumbent investors already with IPs using NG will be minimally impacted. Let's be clearer, not many people will suggest removing NG for corporations or companies. It is the individual that removing NG is meant to be targeting. There may be some blunting of the new policy as investors in personal names may shift to other tax entities or other strategies not reliant on NG. However, there will be a negative impact on supply!

If it is financially less feasible without NG then to that extent supply for the rental market will be reduced. Some investors do not rely on NG to make it viable for their investment, but (they use it) and I believe significant numbers do. I think the NG arrangement makes it possible for many investors to start investing in residential rental properties. It is arguable how many, but there should be many. So many investors are still having one investment property and that is when NG is available! Take it away and I think many of these marginal investors may face cashflow problems that may become unmanageable when the interest rate and employment environments turn sour.

OK no figures given, but I am not developing the policy. IMO and experience, there should be data out there to substantiate my perspectives for policy developers to consider.