Another Negative Gearing article to dissect

That's true if you have a ring-fenced/quarantine system as in the UK (and which I have argued for here), but if you're in a good job so can afford holding costs, buying a low yield, [hopefully] high CG property that may never be CF+ should be the better option and it's been the one advocated by outfits like Wakelin.

Quick and dirty calc (so possibly wrong), 2 x $500K properties, outgoings 5% of initial cost, rent increases by 2% a year, tax rate 37%. Property A: yield 2%, CG 8%; B: 5%/5%

Over ten years ...
A: Net income (outgoings) ($140K) reduced to ($89K) by NG, CG $499K reduced to $407K (assuming same tax rate for simplicity), total return $319K

B: $23K->$15K, $276K->$225K, total $240K

Before doing this, I'd expected the difference to be larger; over a longer time period it would be. Remove the NG so the losses on A are thrown away and the difference is just $267K/$240K

 

Time value of money.

 

I read an article earlier that pointed out the richest 20% tend to buy high growth / low yield properties (which @Tony3008 posted as scenario A), whilst lower income households buy cash cows (scenario B).

That makes an intuitive kind of sense, as someone who doesn't have a lot of spare money wouldn't want to be spending what they have subsidising a tenant's lifestyle, nor would they get such large benefits from negative gearing.

I agree with Tony that quarantining investment income makes sense.

Incidentally, I read an argument for treating property differently. (Can't remember where.) It went that ideally all sources of income should be treated the same, but in a case where tax policy is causing a distortion, there's a case for special rules.

So a government could windback negative gearing for property investors, in order to keep housing affordable, whilst retaining it for shares or businesses.

 

Terry Ryder argues that the Melbourne study behind the headlines ought to be challenged.

Melbourne University negative gearing study needs to be challenged over its methodology and assumptions: Terry Ryder

 

"This paper makes some pretty big claims. Three-quarters of households would be better off, home ownership would surge and rents would rise but renters would be somehow better off.

These are big statements. But they’re not justified or substantiated in any of the reports I’ve read."

^^^ this

 

I vaguely remember that the Melbourne paper was qualified that its findings relate to the state of the future economy after implementing the proposed policy. It does not purport to understand the economic dynamics during the turmoil of the transitionary years of implementing the proposed abolition of NG.

This approach will sidestep the difficulty raised by Terry Ryder about the aspiring FHB of being able to buy a property when a small decline in property price is expected. In other words, the expected adverse effect of rent increases will precede any discernible uptake of houses by FHB because of the proposed policy. The FHB will likely be blessed with a likely trickle down effect over a number of years because of the proposed policy!

Surely there are other policies being implemented that have achieved better outcomes for FHBs? The simple directive made by APRA to lenders to tighten IO loans has removed the capacity of many investors to add to or hold on to their investment properties. There are moves that governments are examining ways of increasing the access to loans of FHBs.