If Negative Gearing was Scrapped!!!

Morning all,

I thought it would be a good idea to hear some different views on what would happen if negative gearing was scraped?

There has been allot of speculation about this subject and I think negative gearing will be scrapped eventually. I have been saying this for quiet some time and I think we are getting closer.

From my personal situation, negative has no benefit to me, as all my property are at the cash flow positive stage and we have low LVR's. I have also chosen to pay down investment debt even when others have advised not too.

Would you be effected by any changes?

 

@jpcashflow there is 2 threads going on this at the moment already. Join in the fun and speculation.

Even though you are cashflow positive you are still likely to be claiming your expenses such as mortgage interest so if that was scrapped it would effect you.

 

I don't see that it will be scrapped, that would be creating a massive tax exception for property that doesn't existing for other investments such as shares and business. Negative gearing is not exclusive to property despite what many believe.

Rather negative gearing will be isolated to the asset class. You can claim your losses from property when a profit is made, not against your income. Stands to reason the same could be implemented for shares. It'll have interesting implications on sole traders with a second PAYG job however.

Ultimately the outcome is simple. Initially there will be confusion and opportunities to be had. Some investors will prepare well for it and make quite a bit of money. Others will loose badly. Within about 3-5 years things will normalise again and people will continue to whinge about how unaffordabile property and rents are. First home buyers will continue to winge that they can't get into the market.

Think of it as a highway. At some point there's a section that's broken or under repair. You'll need to take a detour. Some people will give up, turn around and go home and never get anywhere. If you stay the course and work with it you'll still get to your destination. It's even possible that the detour will take you some place interesting with other opportunities.

 

My thinking, no doubt with a lot missing, but just trying to step it out logically.

• Government announces NG abolishment to happen at X time.
• This creates 2 kinds of investors:
  • Sellers - Wanting to get in before it is removed, these people will try and sell. The trouble they face is they will be selling with every other seller. The result will be a drop in property prices.
  • Holders - These investors are either CF+ or getting little benefit from NG, OR see it as an opportunity to rise rents. The rise in rents will not be a slow burn, I imagine it will happen soon after the announcement with an accompanying letter to "blame the government".
• This in-turn creates two kinds of renters:
  • Those that will wear the increase in rent. This will likely be accompanied with a pay increase request noting "blame the government". Those that are fortunate to get one are actually better off thanks to the abolishment. Those that do not get an increase are no different, yes rents have increased but house prices have decreased.
  • Those that cannot afford the rental increase and will need to move to a more affordable property, likely in a different suburb.
• This in turn comes back to the "Holder" investor who is left with 2 options. Become a seller along with all other sellers, this further will decrease the value of the property market OR stay as a holder and now be stuck wearing the additional cost. For those highly leveraged or NG reliant could leave them with no other option but to become a seller.

Then there are the additional flow-on effects:

• Development will slow right-up. Those buying apartments all rely on NG and with many now stepping away to go into an asset class that allows NG benefits will mean developers cannot offload stock. The result is a loss of jobs in the construction industry.
• Lack of development will result in immigration issues. Where do all these people go if no-one is developing? What incentive will the government now offer developers to cater for this? So the result is developers starting to get kick-backs now as opposed to other normal Australians? This fixes the above point but now the already filthy rich developers are the ones profiting further? OR not depends on how much support the government gives them allowing to sell for cheaper.
• Those that live week to week if a rent rise becomes the norm? How can they now afford to live? The government will need to support them somehow? Perhaps they have saved themselves 5bil so parting with 1bil to support this group is acceptable?
• What happens to those non investors in a bind caught selling with the investors. The likely result is a sale below what is required to pay out the mortgage. The result someone already in a pickle still stuck with debt. The above point then comes back into play.

 

Brilliant post @Peter_Tersteeg
I cannot see it being scrapped either, at best I can see a cap which will effect a few (likely a couple on this forum).
This can then silence all the uneducated who have no idea about the other brilliant points you raised regarding other asset classes that just like to whinge about property because some of their friends benefited from it.

The result in this case - Very few being effected and those that are no one will care about because the story will be "I had 15 properties and now I have nothing left except my PPOR".
Keeping all others happy because "YAY we won, our constant complaining about NG has paid off".

 

Can someone please confirm if by cutting NG they are completely removing the ability to deduct any property related expense or if it is certain classes of expenses they are targeting... eg cutting the claiming of interest payments but allowing us to claim for a plumbing repair, or if anything and everything is no longer claimable.

Cheers,
Dave

 

Why would there be an increase in rents?

 

less investors providing new rentals to the "rental pool" in established areas plus growing population, = rents increase....my simple take on it...very, very simple.....

There are those who will now say "but there will be more construction by investors if NG is kept for new builds" so there will be more supply....

Maybe....but people will want to live where they want to live....creating more demand on sought after established areas where the rental pool may not increase.

 

I would assume you would be until you get to 0 profit then you just have to cop it on the chin... That is IF they abolish NG, highly doubtful.

Supply/demand

If owners have a higher cost then they either take the hit, charge it to the end user or sell out.

1. Take the hit - hurts the investor but also lowers the value of the property as it now yields less than before.
2. Charge it to the end user - Cost of living goes up so does the rent.
3. Sell the asset - Great now there is 1 less rental property do this 100x in a suburb there is now 100 less properties however not everyone can afford the security to buy or makes financial sense to buy.

3.a - Uni student, grew up regional and now living in the city whilst they study - where do they live?
3.b. A person with a net worth of 5M is going to live in a city for 12-18 months it isn't financially viable to purchase and then resell so they will pay the extra in rent.
3.c M&D with 2 kids and no assets, can afford the mortgage repayments but again don't have the security where do they live?
3.d Welfare - There isn't enough government housing for everyone (hence why there are benefits for investor investing in providing rental accommodation). So where do these people live? If you want the Government to supply enough public housing then they will need to increases taxes (more than the cost of paying NG benefits) and quickly start building.

 

The natural first reaction for majority of landlords who want to continue to hold will to be rise rents to offset there loss of NG. This I am almost absolutely certain of.
What may happen as per my post though is they may find themselves with a vacant property and the end result is basically a reduction in rent. Now that reduction could come in many forms.

A deduction to only a slight increase in the previous rent to offset the loss a little to an acceptable point by renters.
A deduction back to what it was.
A deduction to under what it was previously as renters now have options with other landlords in a similar position.
A big deduction as now they are struggling to even find a tenant as prices have fallen allowing buyers into the market.

 

This may be the reaction but that's not how markets work. Rents wont rise just to ensure that the segment of the market that is NG financed can maintain the same returns.

 

A good segment of the market do rely on it so will react like that. Another portion of the market not reliant on it will just ride the coat tails and attempt to cash in. These two combined will account for a large portion of the market.

I think we may need to agree to disagree on this one.

 

So then the NG gear people either wear it (same rental supply) or sell/force to sell (less rental supply).

People don't buy properties to lose money but it helps offset the early period of purchase. If you have less investors buying as there are better options out there then who is going to supply the rental accommodation?

People need to remember that a NG property will in time become positively geared along with the government recoups the money when the investor sells.

Why not remove depreciation from investors as well?

 

Who are they selling it to? How does that reduce supply?

They certainly can react like that but whether the buyer(s) (renter) accepts the price increase is a another story. As has been shown from the last time NG was scrapped, rents rose in Sydney and Perth and stayed stable everywhere else.

Market forces like vacancy rates etc, population gowth and housing supply determined rents not the owners cost base.

 

Personally I think this is the solution. Restricting losses to offset their own particular class of income (and carrying forward those losses to offset future income of that type) seems to be the most sensible approach.

It's already in place for capital losses and non-commercial losses, and seems to work adequately in those areas.

This also then allows governments to implement tests or exceptions to allow property losses to be deductible against other income types if they wish in the future, assuming the criteria are met. This is already what occurs with non-commercial losses.

 

In capital city markets where supply is tight with a sub 3% vacancy rate (not Perth) most investors will look to raise rents. I could comfortably raise rents on quite a few presently and would look to do so if market dynamics changed despite current arrangements being grandfathered.

Most tenants are not going to leave for rent rises providing they are reasonable. The cost of living continues to rise each year, everyone including tenants understand this.

Of course market forces determine rents but owners cost base is one of them, if that wasn't the case why have rent rises been more pronounced when interest rates were higher?

 

I hold a negatively geared property, NG is abolished and I raise my rent as per @albanga's first post. Some in my area do the same, some do not. Those properties priced at market rent will most likely be leased first. Those priced over the market rent for the area will likely remain vacant. I have seen this before. People looking to rent will have a choice of paying above market to stay in an area or move to surrounding areas where rents are lower. Bottom line is, that to a large extent, tenants set the rent for an area, not the landlord.

What is likely is that my place will remain vacant. I can hold it at the higher price and wear the loss, or reduce the price to market rent and wear the loss.

The other side is that supposedly abolishing NG will drive down the price of properties so there will be less renters and less rental properties available.

Because we don't know how many investors will retain properties and how many will sell, we don't really know what will happen to rents if NG is scrapped.

 

I agree. Rents won't immediately rise just because landlords want them to. It's based on supply and demand. A change to negative gearing will likely create some changes in the market supply/demand balance. In some areas rents could increase as a result of this, others it might even decrease.

Some people might see their tax return and sell within 12 months. This would push down prices (if enough do it). Most of the purchasers would probably be owner occupiers, but I suspect it won't be local renters (removing negative gearing won't give more people a deposit). Less supply of rentals will start to push rents up over 2-3 years.

Some investors will also flock to locations with better cash flow, pushing up prices, increasing rental supply, dropping prices.

As @Perthguy has suggested, if enough people raise rents at the same time, tenants won't really have many options other than to move away. For landlords to move in sync like this it would take a major trigger. Probably like a government announcement of changes to tax legislation...

This is why I say you can't remove negative gearing for one asset but not touch the others. Depreciation is a key factor of negative gearing, it's also a key element of business.

 

People... upgraders, downgraders, first home owners, side graders, migrants from other parts of the city/state/interstate/international. Yes there will be some investors still there as now the product yields less I am not saying there is going to be 0 rentals. What if interest rates went to 20% would rent remain the same? How about 50%? There is a point where investors will pull the pin.

Also you will find a lot of the more seasoned investors on here approve of NG even though they are not NG but because it help them get to where they are today and want other people to also have the benefit.

Remember NG is available to everyone if you meet the criteria and isn't limited to select people or backgrounds.

 

Well said @Big Will
At the end of the day I do not and have never benefited from negative gearing but I totally opposed the scrapping of it.
My question is why? Is it to appease those making the most noise about it? As Will said, this is open to EVERYONE! Its not a secret society.

Is it to give the government more money? If so then there are probably 50 other places they can start.