Potential negative gearing changes

[skater]

One example I found with a quick search (though not clear if OP is buying PPOR or IP): http://somersoft.com/forums/showthread.php?t=106347 There have been countless other examples I've seen over the years.

I'm not about to read the entire thread, however:

Response 1

I did that in a hot Sydney market and just ended up pushing the price further up. Not sure how it is for Melbourne.

That doesn't sound like he's telling the OP to jump into a hot market.

Response 2

as you mentioned "I do not feel right though submitting the offer without it being subject to pest/building inspections."

If you don't feel right, don't do it. many more other properties elsewhere.

Hot market is very hard to buy.

Still not telling him to jump into a hot market.

Response 3

Is the property worth this much? If it is (to you) then this is a good way to take it off the market, which is your number one priority at this point in time.

Questioning it's worth, another that's not telling him to jump into a hot market.

Let's just be clear here for a minute. If someone's going to buy, there's not really a lot you can do to stop them. You can warn of the dangers, you can question their motives, but at the end of the day, it is their decision, not yours. There could be some compelling reason WHY they want that particular property, that you are not privy to.

For instance, last year I was contemplating another upgrade of our PPOR. The market was rising fast, and I was perfectly aware of it, and knew all the risks, BUT as it was for a PPOR, I felt that it was certainly worth it. I didn't find what I was looking for, and the market has just kept rising, so I've now decided that I don't need to move.

 

[turk]

Housing serviceability is not too bad today because interest rates are too low, but the high prices mean that everyone has to take on a substantial amount of debt (and risk) to buy. Given where prices have gone today, I'd expect that if interest rates went back to where they were a few short years ago (say around 8%) today, we'd have a crash in Sydney prices and the banks would have to be bailed out. That's not a situation I like the country to be in personally. I'd rather see lower house prices, investors chasing yield instead of capital growth and a more sustainable housing market for all.

The question of what would happen if interests rates go to 8% is quite simplistic.

A few more relevant questions are, how how long will it take to 8%, what will the economy be doing between now and then, how can people with mortgages mitigate the risks should they occur?

A few ways the risk is mitigated could be,

Wage increases
Job promotions
Taking in a boarder
Renting out the house and living in a cheaper property
Living with parents
Getting ahead with mortgage payments
Getting a second job
Developing a business on the side
Better control over their budget

I'm sure other can think of more ways.

Many that I speak to including FHB are doing some of the above, in particular
getting ahead with the mortgage repayments or having a buffer in offset accounts.

Which makes me query how unaffodable is housing if they can do this.

 

[wategos]

So we get to the root of the problem! You now have a vested interest in trying to keep the property market down, so your own offspring can purchase (as if it's at all possible to keep a booming market down).

Great lets just screw the younger generation and all get rich at their expense. I dont buy this "it was just as hard in our day too" argument, I bought a place in my 20s, it was much easier with a lower relative debt load than it is today, and there was not such a huge army of property investors to compete with. I bought an invetment property in a block of 6, the other 5 were owner occupiers. Now 20 years later it has inverted...that block is 5 investment owners, 1 owner occupier. Investment is OK, I just dont want the goverment subsidizing it through NG.

 

[skater]

I dont buy this "it was just as hard in our day too" argument, I bought a place in my 20s, it was much easier with a lower relative debt load than it is today,

And I've heard this a thousand times too, but what isn't addressed is where the property clock sat at the time of purchase. I mean, if someone bought in Sydney a couple of years ago, it would be more affordable than it is today. Sometimes timing is everything.

Another example is my first PPOR, I bought in a slump & by the end of two years it was worth double. I remember discussing it with Hubby & how lucky it was that we bought when we did, because in our na?ve eyes, we would never be able to buy a place, if we hadn't bought when we did. Add to this, the place was something I'd knock over today. It was falling down around us & everything we owned was second hand, but we didn't care, because it was ours.

 

[Angel]

Fair enough HJ, but what the hell is the point of a pathetic bit of yield if we cant get amazing Capital Growth? Why would we bother with all the hassle otherwise? I always thought the idea of buying ips was to get capital growth to provide for one's retirement from the workplace. It's a crappy way to make a yield. We can usually make the same yield elsewhere without all the crap. We put up with the hassles and short-term costs in order to boost CG more than we could if we dumped the same cash flow into our Super or a Managed Fund.

 

[Francesco]

This is an interesting thread. It is enduring partly because there are myths. Some that come to mind are:

1) some contributors believe unwaveringly that NG is a subsidy that the government is giving to the rich. It is not a subsidy. It is not just to the rich. To label NG as subsidy is to continue misinformation. It used to be bandied by property promoters, eg to entice unsophisticated buyers to go to Gold Coast to buy a unit. NG is merely the indiscriminate outworking of accounting to derive profit of the tax entity so tax can be levied morally. No profit, no tax is moral. The current situation for IPs is the same tax treatment for any investment class and taxable financial undertaking.

(However, NG is supportive of IPs and recognition should be given that states/territories levy taxes on IPs, which are used to cross-subsidise state housing. This is true at least in the ACT.)

2) it is used predominantly by the rich. This may or may not be true. However, buying a property is not cheap. A house should be expected to be one of the most valuable possession a person can have, if not the most valuable. So, it is no mean feat for one to buy a second house. Obviously, the richer and more diligent would have more chances of buying the IP than the one who could not manage to buy for lack of sufficient funds or effort. It is therefore disingenuous to use statistics to try and decry any higher participation by the rich. If there was a higher participation by low income demography would there be any concern that they may be taking too much risk, or that lenders are complicit in loose lending? An example of tall poppy syndrome?

(The numbers of low income group can be understated. Would any such segmentation study be able to take account of the joint venture vehicles that people of low income can use to invest in rental properties?)

3) NG is helping investors outbid FHBs. I have come across no information to justify one way or the other. However, refinancing has made it possible for me to own IPs. Does that displace FHBs? I own a number of new and established properties - mostly new, 1-3 bedrooms. Probably some OOs (including FHBs) may have lost out but on the other hand, my tenants - tourists, holiday makers, students, itinerant workers, migrants and expatriate workers have used and benefited from my houses/units. Traditionally, about 30% properties are rental properties to cater to tenants. Should the interests of tenants be forgotten? If we are to talk about winner and loser, I would nominate tenants as winners of NG. I have met two of my former tenants and they readily acknowledged me amicably.

4) it is claimed that IP is an unproductive activity and NG should be removed to divert investment into other classes. I think an economics professor can justify why I think instinctively that it is a productive activity. It is obviously productive in the tourism and hospitality areas. Investments in accommodation in those sectors support multiplier numbers of workers in direct and affiliated services. The GDP implication is considerable. If accommodation is a significant cost in this country then it is a significant earner in international education (from overseas students), which I believe is the third revenue earning sector in this country, after coal and iron. An IP is also intuitively a more productive form of accommodation than an OO house at least in dollar terms (or GDP). There tends to be more professional focus on financial performance of an IP than in OO properties, eg idle holiday homes (how many are under utilised in the country? 15%?).

5) Should NG be restricted to only new properties? This would restrict investment in established rental properties with negative implication for productivity and economic efficiency. It is a restrictive market view to ignore tenants' demand for established properties, wherever they are located, whenever they are needed and within their budget. Tenants come from varied background and financial capacity. Not all tenants are of the first class tourist variety, some are of back packer class. Private investors have to provide the IPs to meet the market demand, whether it be first class or back packer class. If the demand is for budget accommodation, then investors try to provide no frills, cosmetic and basic. Often this is met by refurbishing an old property, perhaps re-cycling a holiday home or derelict property, making it more productive.

6) Investors are speculators. As BV has answered in a previous post all businesses entail undefinable risks because there are so many unknowns. It should be appreciated that investors come from all walks of life, which endow them with characteristics to ameliorate the risks. Some have PhDs, some doctors, engineers, lawyers, trades, brokers, etc. Accordingly, their skills, knowledge, commitment and background make them most appropriate to own the investment properties they take on. I imagine not many investors have achieved their current financial status through gambling or laziness. Hence, for an investor to be dismissed as a speculator shows a disrespectful and disdainful attitude. There are many threads in this forum which have demonstrated time and time again that many investors are offended, while maintaining tolerance. To persist with this labeling is a sort of class bullying.

 

[BayView]

I think Steve's view is a fair one though. If you negatively gear a property you are speculating on future price or rent growth to make a profit in the future, so how are you not a speculator?

Whether it is neg geared or pos geared is irrelevant.

The main objective is still to buy houses (or anything that can be construed as a possible asset that will go up in time and/or provide an income) to hopefully increase wealth - which has proven to be the case based on history.

The fact that virtually everyone buys a neg geared property is due to the entry cost of the investment, which means that almost every buyer needs to finance. Or; let's put up the rents enough to cover the costs so the cashflow is attractive and affordable to the average person. Otherwise it will only be the folks on $300k per year who will be able to play.

Is that what we want? Only the higher income folks enjoying getting richer while the "Mr.Average Wage Earners" (and lower) watch from the sidelines? I think not.

I guess we could bring in laws that only allow investors to purchase when they get a 50% cash deposit raised, thus making the IP cashflow pos or pos geared from day one. Still gives the high income earners an unfair head start.

Do we really want a world where we discourage anyone from trying to create wealth and provide for their own future, and simply try to rely on the Gubb purse-strings in retirement, or work at a low-paying job and not enjoy a nice lifestyle for probably their entire lives?

I guess they could buy shares or start a business.

Once you take away the ability of the average person to enter the IP world (because of massive neg cashflows, or having to wait several more years, or possibly decades before they enter the market), the volume of rental properties will drop.

But the demand won't.

Everyone on earth at some time or another has to rent. Either the Gubb provides the properties, or private citizens do.

From the Gubb perspective, they make more from letting the private sector do it than if they do it.

Imagine how much they would lose in Stamp Duty, GST, just to mention two - if only they provided the housing.

Where would they get the money to purchase/build all the required properties to cover the demand? (which is only rising due to population growth). More taxes on us, or more borrowings?

Would the Gubb be happy to borrow the lot, then cop a cashflow loss on every renter? If the answer was no, then the rents would need to be sky-high.

At least with NG in place, it is a fair playing field and everyone can have a crack at it - regardless of income.

 

[jerrybee]

Just curious - does anyone really think getting rid of it will suddenly spur the average 9 to 5'er who ordinarily wouldn't care about investing to become savvy investors? Would it motivate the "oh it's going up, let's wait....oh it's going down, let's wait" type of of personalities? Or the acidic, doomsday preppers from Whirlpool? Would it encourage FHB's who were too afraid to make a move even when the market was slow as hell (which constitutes HALF of every cycle)? I honestly believe we're trying to "help" a segment of the market that can't be helped. You can take a horse to water...

(And we already bring all the horses to water - Super)

 

[Francesco]

...

The fact that virtually everyone buys a neg geared property is due to the entry cost of the investment, which means that almost every buyer needs to finance. Or; let's put up the rents enough to cover the costs. so the cashflow is attractive and affordable to the average person. Otherwise it will only be the folks on $300k per year who will be able to play.

Is that what we want? Only the higher income folks enjoying getting richer while the "Mr.Average Wage Earners" (and lower) watch from the sidelines? I think not.

I guess we could bring in laws that only allow investors to purchase when they get a 50% cash deposit raised, thus making the IP cashflow pos or pos geared from day one. Still gives the high income earners an unfair head start.

Do we really want a world where we discourage anyone from trying to create wealth and provide for their own future, and simply try to rely on the Gubb purse-strings in retirement, or work at a low-paying job and not enjoy a nice lifestyle for probably their entire lives?

I guess they could buy shares or start a business.

Once you take away the ability of the average person to enter the IP world (because of massive neg cashflows, or having to wait several more years, or possibly decades before they enter the market), the volume of rental properties will drop.

But the demand won't.

Everyone on earth at some time or another has to rent. Either the Gubb provides the properties, or private citizens do.

From the Gubb perspective, they make more from letting the private sector do it than if they do it.

Imagine how much they would lose in Stamp Duty, GST, just to mention two - if only they provided the housing.

Where would they get the money to purchase/build all the required properties to cover the demand? (which is only rising due to population growth). More taxes on us, or more borrowings?

Would the Gubb be happy to borrow the lot, then cop a cashflow loss on every renter? If the answer was no, then the rents would need to be sky-high.

At least with NG in place, it is a fair playing field and everyone can have a crack at it - regardless of income.

Kudos.

Removing NG for individuals (that is what we are talking about) would further make private rental an investment option for wealthy individuals or collectives of individuals (joint ventures of individuals) - all using company and trust structures.

There are already plenty of examples of this situation in continental Europe and UK. A good study show be able to highlight the outcome of this.

I gather the outcome would be:

1) higher rent environment in terms of rental yield - tenants are losers

2) private rental becomes an investment activity of companies and trusts (used by HNW individuals and joint ventures) - an entry barrier for low and medium income earners to invest directly for their future, likely more government welfare payments for aging

3) affordability of housing is no clearer - it is unaffordable at least in UK

4) less OO housing - rental for life and intergeneration becomes a common reality

A good study should courageously cover the more successful countries as well, eg Singapore.

 

[Deltaberry]

If you're on Centrelink and pay no tax, negative gearing is not a benefit. So let's make a deal, I give up NG. You give up Centrelink. Can't always just rob from the lifters you know?

 

[BayView]

One more thing to think about when you hear a FHB crying about affordability, or some doogooder wading in on their behalf....

Ask the FHB (or the doogooder wading in on their behalf) where they (the FHB) are looking to buy, and what are they trying to buy.

I just wonder how many investors out there are looking at buying $600k (or something of that order) townhouses/apartments/houses with rent yields of $600 per week or less....because that's about all the rent (or even less) a sought-after suburb property of that level will return to the investor.

I can't tell you how many times I've heard real estate agents talk about "5% is a great rent return on properties in this area!"

Pu-leeeze.

The cashflow drain on a property of that level, with that rent return or worse, would not be doable for most mum and dad investors - even with depreciation deductions etc. They would only look at joints like this if they had a swag of cash to whack down as a deposit to make the cashflow positive....how many mum and dad investors have got that sort of cash sitting around?

The mum and dad investors (which this forum has bugger-all of these days - mostly high earning professionals now) are out there trying buy cheaper properties with better rent returns; these are properties in areas where FHB's don't seem interested in buying anyway.

 

[Angel]

If you're on Centrelink and pay no tax, negative gearing is not a benefit. So let's make a deal, I give up NG. You give up Centrelink. Can't always just rob from the lifters you know?

I like your thinking!

 

[BayView]

If you're on Centrelink and pay no tax, negative gearing is not a benefit. So let's make a deal, I give up NG. You give up Centrelink. Can't always just rob from the lifters you know?

Touche!!

 

[hobo-jo]

Claiming property related costs as a deduction is not a benefit or subsidy or funded by other tax payers as many claim, but should be quarantined to offset only against other property related income or profit.

Bringing the arguments of other people into this thread is pointless.

The number of myths and anecdotes that are being spun in this thread by investors is hilarious. BV please explain how you've come to the conclusion that "bugger all" of the 3000 active members on this forum are "mum and dad investestors" and clarify the difference between them and professional investors...

 

[BayView]

BV please explain how you've come to the conclusion that "bugger all" of the 3000 active members on this forum are "mum and dad investestors" and clarify the difference between them and professional investors...

Pretty simple, really.

Mum and Dad are yer average "battler" type families who scrimp and save to go on a once in a blue moon Theme Park holiday to QLD with the kids, or go camping, or go nowhere because they are mostly trying to make ends meet, driving commodores and falcons and camrys etc (China and his Corolla - with $1mill in the bank not included)....

If we were to take a poll of the demographic of this forum today, the volume/percentage of yer ordinary average wage earning family would be very much the minority.

Teachers, nurses, tradies, council workers, retail shop workers, cleaners, support staff, labourers and so forth and so on....you get the picture.

From my observation, much of the activity here now is by folks in the higher-end of the income earning arena, professional and IT, finance, accounting type jobs, medical etc.

Either that, or the majority of folks here who are active posters on a daily basis are the minority of the forum, and all the average wage earning Mr&Mrs Thong forumites don't post much. Yeah, right.

A professional investor - I don't know one, but I'd imagine folks who live solely from property development, or someone like a Warren Buffett would be a "professional investor".

Anyone else is a wage earner or business owner who invests aside from their real occupation - not a professional investor.

A person on $150k, $200k, $300k per year etc who buys a few IP's is not a professional investor, but is also not a "mum and dad" investor in my opinion.

They are in a very select group who buy IP's, and the majority of this forum.

 

[hobo-jo]

If we were to take a poll of the demographic of this forum today, the volume/percentage of yer ordinary average wage earning family would be very much the minority.

Teachers, nurses, tradies, council workers, retail shop workers, cleaners, support staff, labourers and so forth and so on....you get the picture.

From my observation, much of the activity here now is by folks in the higher-end of the income earning arena, professional and IT, finance, accounting type jobs, medical etc.

Either that, or the majority of folks here who are active posters on a daily basis are the minority of the forum, and all the average wage earning Mr&Mrs Thong forumites don't post much. Yeah, right.

If we compared these two groups you've just described, which of them do you think might be in a better position to post more often on Somersoft? e.g. The labourers outside with a shovel in hand or the accountant inside with a computer keyboard in hand?

Just because a few dozen users on here who have time to respond to polls about income and post more often have professional cushy inside jobs, doesn't mean that it's common across the thousands more who login (or don't) and read, posting irregularly.

 

[BayView]

If we compared these two groups you've just described, which of them do you think might be in a better position to post more often on Somersoft? e.g. The labourers outside with a shovel in hand or the accountant inside with a computer keyboard in hand?

Just because a few dozen users on here who have time to respond to polls about income and post more often have professional cushy inside jobs, doesn't mean that it's common across the thousands more who login (or don't) and read, posting irregularly.

http://somersoft.com/forums/showthread.php?t=87654

 

[hobo-jo]

http://somersoft.com/forums/showthread.php?t=87654

http://somersoft.com/forums/showpost.php?p=1306530&postcount=136

 

[Deltaberry]

Touche!!

Ha I'm sure you've worked out what political party I vote

 

[BayView]

Ha I'm sure you've worked out what political party I vote

Yep.

But I can't see how this NG issue is something that should be applauded by Libs, and despised by Labs.

It's not as if it's a rich versus blue collar thing; not as if it's a Boss v Worker thing etc where the little bloke seemingly is being trodden on...

Everyone can do it, and it's been available for everyone to do it since I can remember, yet all of a sudden it is the evil cause of increasing prices...what happened to Sydney prices over the last decade or so?

And it's not as if investors are going; "Hey; I get a tax break from my NG, so I'm gunna pay more for my IP"...

There may be a few who would possibly have that mentality, and I know there are spruikers who say; "Secure your future with property, for as little as $50 per week"...and for sure these folks are encouraging folks to buy NG property,

But seriously; how many investors are going out there into all these areas where FHB's are wanting to buy, knowing that they are going to take a massive casshflow drain in these areas (notwithstanding their tax returns), and then pay more on top of that than an FHB will?

How many of them have enough cash set aside to to do the above, but to make it a cashflow pos or pos geared venture from day one?

Maybe we have to start blaming the OS investors for that one....but what is their percentage of the properties bought in those areas, and indeed; across the entire market (which is usally how the stats are compiled on property prices etc).