Potential negative gearing changes

[skater]

Hobo, I'm not really sure why you are here, or what you expect to get out of this forum as all you do is complain about the prices of properties and the folly of negative gearing. We don't make the policy on that, only work within the guidelines. Like I've said earlier, I don't give a flying fig about negative gearing, as I don't target properties with a low yield, but that does not mean that that other investors should be denied it, if it is available for other asset classes.

Natedog has done a good job in answering your questions above, espeicially this part.

there is always an affordable property available for a FHB if they want one.

.

Most of the problem with affordable housing is that the FHB's don't want to live in a basic property in the outskirts of the city. They have champagne tastes on a beer budget and they don't want to do the hard yards, like save a deposit and somehow that is the fault of investors.

 

[Listar]

I think both views to and for NG take it too complicatedly.

What abolishing NG would do is it will push down prices in the short term, due to perception and mass sheep following. (may result in crash if taken too far).

Then with this new change out of the way, property prices and rental will once again be back into the norm again due to the simple supply and demand. Then the future generation will complain about being price out of the market and government is not there to help. That this generation got lucky due to the abolishment of NG that's why they were able to buy their house.

Rinse and repeat, and you get the same with all generations, because you always have the fundamental issue of population increasing while accessible land/housing supply is not, and you have the same whingers vs the go getters.

 

[BayView]

Most of the problem with affordable housing is that the FHB's don't want to live in a basic property in the outskirts of the city. They have champagne tastes on a beer budget and they don't want to do the hard yards, like save a deposit and somehow that is the fault of investors.

Correct; and go back to those Metricon homes I linked to; a bloody sight nicer than my first joint.

I reckon they're a decent enough champagne taste first home.

And if FHB son/daughter is living at home with Mum and Dad for a few more years after they buy it (used as a rental); look at all the lovely depreciation it would provide....

Shhh; keep that bit to yerself.

 

[hobo-jo]

Hobo, I'm not really sure why you are here, or what you expect to get out of this forum as all you do is complain about the prices of properties and the folly of negative gearing.

What can I say, I'm a sucker for punishment

I post regularly in the economic/policy threads, but read more than I post.

Don't expect my position to change on negative gearing, even once I've bought a couple of properties in the years ahead

 

[Listar]

Adelaide prices are much lower than Sydney or Melbourne, but relative to the past are still a larger burden on FHBs (and all PPOR buyers really) than they need to be.

I saw a 2 bedroom house advertised the other day, agent had used the POA advertising method, so sent a message to see what they were asking. They wanted $250-270k. Seems cheap right? Perfect entry level home, only 15km to the CBD. It last sold in 2000 for $55k, 1/5 the asking price and with no major renovations carried out since last sold (at least not any obvious ones). I'm not saying that FHBs can't alter their expectations and buy something smaller or further out, but I am saying that relative to the past, housing is far more expensive today than it has been and that goes for all capital cities, not just those which are currently booming.

IMO an end to negative gearing for established properties is one policy that could be used to take the heat out of the bubbly markets (Sydney & Melbourne) and continue to subdue excessive speculation from spreading to other markets.

That is just wishful thinking re the speculation part. Does gold have access to negative gearing? does that stop speculation? Does china have the same negative gearing system? Did that stop speculation on their property "bubble"? Speculation is not so much driven up by NG but by people thinking of inflation and population growth.

Malaysia and Singapore do not have negative gearing system as well as far as I know (and I maybe wrong on this). And their property prices have increase as much as Australia, if not more, in highly sort after places. Why is this?

You mentioned somewhere that current first home owner are priced out of the current "inner" city market, so you want to "take out" the investors with abolishment of NG, now all of them can fill the void of the investors that "left". But what about the new generation? How can they buy this "inner" city places where it has all been occupied by previous owner occupiers? Worse is they wont even have an option to rent there because now there are "no" investors left in that area? So is this considered a bandaid solution?

 

[keithj]

You mentioned somewhere that current first home owner are priced out of the current "inner" city market, so you want to "take out" the investors with abolishment of NG, now all of them can fill the void of the investors that "left". But what about the new generation? How can they buy this "inner" city places where it has all been occupied by previous owner occupiers? Worse is they wont even have an option to rent there because now there are "no" investors left in that area? So is this considered a bandaid solution?

So what you're really saying is that the the removal of -ve gearing today will enable the current crop of self interested FHBs to get a foot in the door & thereby deny the next generation of FHBs the same opportunity by inflicting higher rents on them in perpetuity.

And we self sacrificing property investors who have been subsidising their rent (at great personal cost) & helping them to save a deposit for the last 20 years, will no longer be able to do so .

 

[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.

March 30 2013


http://www.news.com.au/finance/real...ead-on-mortgages/story-fncq3era-1226609151657


AUSTRALIAN families are now $160 billion ahead on their mortgages, squirreling away an extra $30 billion since the start of the GFC.

Westpac's chief product officer David Lindberg said the bank had about $300 billion in mortgages and two-thirds of customers were in front of their repayment schedule.

"On an average $300,000 mortgage they are paying $266 more than they need to pay on their mortgages each month ... that would mean the average person is 7.6 years ahead of where they need to be,'' Mr Lindberg said.


Add to this those that hold money in offset accounts also add the approx. 30% of OO who have no mortgage plus investors that own outright and we are seeing quite a buffer in place.

 

[natedog]

If negative gearing were abolished and all the future potential investors looked for higher yielding properties as a consequence, could that not possibly push the values of those areas (further out from CBD, fringe suburbs, regionals) up ?
This would probably cause more direct competition with FHB and investors in areas that NEED to remain affordable,

just a thought

 

[hobo-jo]

Speculation is not so much driven up by NG but by people thinking of inflation and population growth.

It's a combination of factors, but favourable tax policy is definitely a major factor in Australia.

You mentioned somewhere that current first home owner are priced out of the current "inner" city market

Prices have been driven up across the board, making housing more expensive (less/unaffordable) for everyone in regional areas, outer suburbs & inner suburbs.

And we self sacrificing property investors who have been subsidising their rent (at great personal cost) & helping them to save a deposit for the last 20 years, will no longer be able to do so .

Rents are set by the market (capacity or willingness to pay depending on supply & demand in an area), it's not discounted by the generosity of investors, despite that being a meme around here.

 

[hugh72]

What can I say, I'm a sucker for punishment

I post regularly in the economic/policy threads, but read more than I post.

Don't expect my position to change on negative gearing, even once I've bought a couple of properties in the years ahead

Keep the posts coming, its good to have a contrarian on here. Nothing new is learnt from having everyone in agreement. While I don't agree with much of your sentiment regarding NG I agree that property is mostly unaffordable for the average FHB in SYD Presently.

 

[keithj]

Rents are set by the market (capacity or willingness to pay depending on supply & demand in an area),

Yep.... supply & demand is the key. If investors are dis-incentivised from providing supply and we know demand is increasing via popln growth..... what do you expect to happen to rents ?

The removal of NG will benefit the current crop of FHB, at the expense of future generations of FHB. It's actually double dipping - the current batch FHB have had the benefits of artificially low rents for 20 yrs & then get to buy relatively cheaply when investors are removed from the market.

Anyone who supports its' removal is guilty of either short term thinking, or is selfishly expecting to benefit from it at the expense of our children - un-Australian or what ?

it's not discounted by the generosity of investors, despite that being a meme around here.

I'd disagree.... it is discounted by the generosity of investors. We choose to lose money on an investment in the short term, the govt also chooses to lose money, and the only people to benefit are renters/FHBs

Of course, our generosity is often repaid in the longer term in monetary terms, but much more importantly is the warm fuzzy feeling we get from helping our future generations of FHB save their deposit faster

So we really ARE the good guys.

 

[hobo-jo]

Yep.... supply & demand is the key. If investors are dis-incentivised from providing supply and we know demand is increasing via popln growth..... what do you expect to happen to rents ?

Supply comes from investment in newly constructed homes, I'd support NG remaining for new homes (with a limit, perhaps 5 years).

Most investors buy established.

I'd disagree.... it is discounted by the generosity of investors. We choose to lose money on an investment in the short term...

Easy to adjust the price you are prepared to pay for a property so that you aren't losing money short term.

 

[keithj]

Supply comes from investment in newly constructed homes, I'd support NG remaining for new homes (with a limit, perhaps 5 years).

Most investors buy established.

Hmmm, so you've told that investors buy established, but you want to keep NG for new homes only. From an investor POV, that's not an attractive proposition & is unlikely to be taken up by many rational investors.

And from a renter POV.... it comes across as though you're in favour of removing renters from established homes (in the inner & middle rings), and condemning them to the either new outer ring suburbs or high rise CBD apartments.

And of course the rents of this reduced choice of (no-longer subsidised) housing will be higher.

Sounds like a lose-lose policy to me. Hardly surprising the pollies haven't jumped at the plan.

Easy to adjust the price you are prepared to pay for a property so that you aren't losing money short term.

We'd love to pay less, but those damn OOs keep outbidding us

 

[wategos]

Yep.... supply & demand is the key. If investors are dis-incentivised from providing supply and we know demand is increasing via popln growth..... what do you expect to happen to rents ?

Nothing happens to rents .. since the vast majority of investors buy existing housing, they don't provide supply.

I'd disagree.... it is discounted by the generosity of investors.

I don't think perceived social generosity is the driver behind property investors actions...

Got to laugh at the faux concern some show for the imagined "rental shortage and rent increases"... (would not that be good for investors if true?)

 

[hobo-jo]

Sounds like a lose-lose policy to me. Hardly surprising the pollies haven't jumped at the plan.

While they haven't "jumped at the plan" there have been indications it will be considered if any changes are made to negative gearing.

And while you are at it, why not tweak negative gearing to encourage affordable new housing. It's crazy to have a blanket tax code that rewards debt over equity.

http://www.adelaidenow.com.au/news/...rable-in-society/story-fni6unxq-1227036221219

Alternative approaches considered in this study (including, where appropriate, in combination) should include:
(c) limiting the application of negative gearing arrangements to new housing stock, or designated new affordable housing stock;

http://www.digitalfinanceanalytics.com/blog/senate-delivers-final-affordable-housing-report/

 

[keithj]

Nothing happens to rents .. since the vast majority of investors buy existing housing, they don't provide supply.

I don't understand.

Do we agree that popln growth will continue ?

I've mentioned 2 supply issues..
1) Investors have been supplying the market for rentals of existing houses for decades. Removal (or limiting) of NG would reduce the supply of rentals of existing housing.
2) Investors are less likely to invest in new supply even if it offers -ve gearing benefits.

Are you saying those supply issues won't exist ?

Or are you saying that even though there will be supply falls and demand (popln growth) increases, prices will remain in equilibrium ?

Or are you suggesting that we don't actually need a supply of rental properties ? and that everyone should be an OO ?


And are you happy to condemn renters (temporary workers, recent immigrants, migratory workers, broken families, recently left home young adults, those saving for a PPOR, and many other vulnerable groups) to either the outer ring or new stock or high rise apartments ? Sounds like the makings of a ghetto !

I don't think perceived social generosity is the driver behind property investors actions...

Got to laugh at the faux concern some show for the imagined "rental shortage and rent increases"... (would not that be good for investors if true?)

 

[hobo-jo]

1) Investors have been supplying the market for rentals of existing houses for decades. Removal (or limiting) of NG would reduce the supply of rentals of existing housing.

So if negative gearing is limited to new homes only, what happens to the established stock? Who does it get sold to?

Or are you suggesting that we don't actually need a supply of rental properties ? and that everyone should be an OO ?

Of course there is a need for rentals, but the balance is clearly out of whack in some cities (for example Sydney when stats show new finance is circa 50% investors).

 

[Francesco]

So if negative gearing is limited to new homes only, what happens to the established stock? Who does it get sold to?

Of course there is a need for rentals, but the balance is clearly out of whack in some cities (for example Sydney when stats show new finance is circa 50% investors).

Current
Buyers of established houses - investors and OOs (including FHB)
Buyers of new houses (including units) - investors and OOs (including FHB)

Increase demand comes from - home leavers, migrants, overseas students, interstate workers, FIFO, financially limited situations (bankrupts, sickness, accidents, family breakups, other unforseen priorities)

Proposed abolition of NG
Abolition of NG will raise the threshold of financial feasibility of an investment - a disincentive by intention and will prove to be in practice. NG will quarantine losses from being aggregated with the other income of the individual investor. The individual investor will have to bear the loss until his portfolio of IPs become positive and tax is then paid. Abolition of NG will put a damper on investing in rental properties - on established properties alone or with new also, depending on the policy option to be chosen. The investor, if he has economic sense and financial nous (otherwise he will rightly be called a speculator) will calculate whether he wants to invest in such an environment. Some investors will recognise the impact of the policy earlier than others, but both will be impacted financially by the proposed policy.

Clearly, there is broad support that investors in new IPs provide new supply. But, I suggest that the investor also provides 'new' supply in IP when he renovates and maintains an established property for tenancy. If such an investor were pushed out of the market and demand remains unchanged, rent must go up. Such investors make it possible to recycle many established properties, making it possible to keep rent lower than if only new properties are available as IPs. (Generally, old is less expensive than new and reflected in rent.) By disincentivising investment in established properties does not mean that the repulsed investor will be diverted to investing in new properties. New IPs may not be possible where there is most rental demand, where it needs to be built. 'Repulsed' investor may not be able to find a suitable new IP to continue as a player in the housing economy. 'Repulsed' investor becomes inactive in the housing market leading to a loss of supply.

The economic scenario below assumes that abolition of NG still allows new IP to retain NG:

Established IP - no NG.

Investors unable to demonstrate financial feasibility for established IPs nor with new IPs alone - repulsed and pushed out of market, supply drops.

OOs for established property rejoice for a few years (notably FHBs) - as competition from investors repulsed.

'Repulsed' investors do not necessarily translate to investors in new IPs as financially less feasible (even with NG - not speculator) - vacate housing market to await higher rent environment or compelling low price to re-enter market.

Less supply for tenancy.

For the more long term tenants - higher rent, especially in areas already built up and depends on established properties to be re-cycled to IPs, or localities mainly occupied by tenants.

The argument above refers to 'repulsed' investor in established properties means both established investors and future new entrants. It becomes a disincentive on supply, which implies a step to a higher rent environment.

 

[Singo]

I really shouldn't get into this as there is no point arguing with people who have made up their minds. Anyway...

In another thread, an IP was mentioned in Huntingdale (WA) at $ 375/w. One such property can be bought for 400k.

Let's assume both a FHB and an investor will be getting the loan at 5%.

For the investor, loan amount 420k
Interest only $ 404
Rates and insurance $ 50
Fees $ 35
Total $ 489
Rent $375
Depreciation $25

Loss per week $ 139
After NG, loss per week $76

If there is no NG and the investor can afford only $76/w loss, the property price will be $360k. (Loan amount 380k)

For a FHB
For a 400k property, after the deposit, stamp duty etc the loan amount is 370k.

Principal and interest payments for 370k loan is $458
Principal and interest payments for 330k loan is $409

Of course, the rates are there, but a FHB won't take that into consideration when they make their buying decision.

The tenants who are paying $375/w can manage another $34 to buy their own house. But they cannot afford another $ 83. They just cannot, because these are people who work in Maddington or Canningvale industrial areas, earning $700-$900 a week.

Of course, there are determined ones. They will get a second job, delay the children etc and buy a house. But most cannot do that. And they are the majority.

Such the mojority of such FHBs can never afford to buy a house because with NG, the investors can always pay more than them.

I know a certain street where I have seen most of the houses coming into the market in the last few years. Built in late 60s, the houses hit the market as the original owners move to nursing homes. Almost all are snapped up by investors.

I am one of them. Long live negative gearing

 

[wategos]

I don't understand.

Do we agree that popln growth will continue ?
Sure.. but thats another issue that affects both scenarios
I've mentioned 2 supply issues..
1) Investors have been supplying the market for rentals of existing houses for decades. Removal (or limiting) of NG would reduce the supply of rentals of existing housing.
No.. because they invest in existing housing and the housing still exists
2) Investors are less likely to invest in new supply even if it offers -ve gearing benefits.
If NG remains for new housing it could only increase investment in this area, not decrease it
Are you saying those supply issues won't exist ?
No
Or are you saying that even though there will be supply falls and demand (popln growth) increases, prices will remain in equilibrium ?
No, supply doesnt fall. If it does because a former renter bought the property then demand has fallen also
Or are you suggesting that we don't actually need a supply of rental properties ? and that everyone should be an OO ?
No
And are you happy to condemn renters (temporary workers, recent immigrants, migratory workers, broken families, recently left home young adults, those saving for a PPOR, and many other vulnerable groups) to either the outer ring or new stock or high rise apartments ?
No.. A lot of renters including from these groups would be able to afford a home quicker when they dont have to compete with speculators.

Adding the population growth factor into the argument is a furphy, its a seperate issue which applies upward pressure to both house prices and rents.