Jamie Alcock on Negative Gearing

Jamie Alcock, Associate Professor of Finance at the university of Sydney gave a summary on negative gearing.

I think his views matter because he is an academic, likely not affiliated with special interest groups, whether realty or gen Y.

He gives his views on the impact of negative gearing and investor activities on:

• rental costs with curbing of negative gearing
• housing affordability, prices because of negative gearing and investors
• supply
• equitable redistribution of negative gearing
• historical and international evidence

Negative Gearing fact and fiction + Affordability vs serviceability | Real Estate Talk | Your Trusted Voice For Property Investing. Anywhere, Anytime.

 

As he mentions it is a very emotional topic and people love to blame their problems (inability to buy a house) on others or reasons outside of their control.

Therefore selling negative gearing as the bad guy;

It is a great way to win votes

Publishing what people want to hear will sell papers

 

+1

Yeah, financial knowledge is not spread widely around in Australia. People are busy and tend to listen to 'sound bites' rather than knuckle down to understand the issues. Disseminating knowledge will eventually turn back the tide of ignorance on the issue.

 

Some people disagree.

The worst ever defence of negative gearing - MacroBusiness

 

Probably the main driving force behind the current changes proposed by the Gubb and Opposition:

The media rhetoric very often sites "rich" in the words used to describe investors who use NG, and the Gbb/Opposition have taken that ball and run with it....the rich are an easy target to blame - the majority of folks looking to buy houses are Average Joes - who are not rich - and therefore an easy vote winner.

I for one can honestly say it has never stopped me, and I have never been what you would call a high income earner or rich....got up to $1m in equity at one point a few years ago, but it was not there when I was born; it was simply work, save, invest, pay down debt.

 

Note the serviceability levels for mid-2000's.



During this period you could not give a house away in Sydney, apparently...flat market.

But then look at servicability for say '09 and then after '10...massive drop in 2010 with a gradual rise as house prices rose.

Given that investor owned houses are - on average - roughly 30% of all homes; wouldn't it be fair to say that a lot of that improvement in serviceability has caused wide-spread activity across the board by all buyers, and also investors, with rising house prices slowly shutting out all but the most cashed-up buyers?

Cashed-up buyers could be O/O's who are trading up or even down, foreign buyers (O/O or investor), and other (local) investors who are either higher income earners or longer term investors who may not necessarily be higher income earners, but have good LVR and DSI numbers.

 

That "takedown" is as biased, misleading and just as agenda driven as the article it attempts to "debunk".

 

I actually approached this article seriously and looked up the credentials of the author, who appeared to be a Treasury official federally and in a state at certain times in his career. He calls himself to be an unconventional economist, ie a liberal and free-thinking economist of some kind.

I read his article and his approach towards answering Myth 1: Negative gearing is responsible for the recent house price surges in Sydney and Melbourne.

He lays out his approach: "Any examination of Australia’s negative gearing rules needs to be considered in tandem with its partner in crime, the 50% capital gains tax (CGT) discount, which was implemented in 1999."

He proceeds to provide his collection of graphs of the impact of CGT. As he puts it: "The evidence clearly shows that loans to housing investors surged since the CGT discount was first implemented, as well as recently:"

Myth 1 is about clarifying the impact of negative gearing and his evidence is about CGT!

When evidence of the involvement of negative gearing appeared in the graph below, the interpretation is unconventional!

"Moreover, the correlation between increased investor demand and rising house prices is clear as day, particularly after negative gearing was reintroduced in the late-1980s, after the CGT discount was introduced in 1999, and currently:"




Regarding negative gearing: The graph actually showed that investor demand dropped precipitously in late 1980s before signs of recovery in about 1992. Prices held up quite well within a small range of variation. This is just looking at the graph and assuming a simple one-to-one exclusive relationship, which obviously it is not. Even when investor finance was in negative territory leading to 1992, prices had recovered before declining while investor financing was increasing! This is a clear contradiction of his settled proposition:

"increased investor demand and rising house prices is clear as day"

It is taking up my time to point to the 'unconventional' thinking that makes up this article. There is fluff in some of his other points as well, but I will let it lie.

 

I agree. I could do a blow by blow takedown of the takedown article but I really can't be bothered. What is the point? The people who have made up their mind and won't be swayed by any argument.

Breifly:- the author falls into the trap of thinking that correlation proves causation. He claims the 50% CGT discount is a market distortion but does not discuss the 100% CGT exemption for Owner Occupiers as a market distortion. How is the 100% CGT exemption for Owner Occupiers not a market distortion? It is.

It remains a fact that houses were much more affordable prior to the introduction of Capital Gains Tax, therefore Capital Gains Tax should be abolished to make houses cheaper

Here is the issue. Many are blaming low interest rates, negative gearing and the 50% captial gainst tax concession for investors as the reason why house prices are so high. They claim supply and demand is distorted by these government market interventions. Compare Perth and Sydney. In Sydney, prices are booming. In Perth, prices are falling (by 30% or more in some areas).

Perth and Sydney have the same interest rates, the same regime of negative gearing and the same 50% CGT discount. All these things are the same and yet one market is moving up and one market is moving down. Something else is driving prices and it is not what the author claims. Correlation does not prove causation, it is a simple as that.

Not that I support Negative Gearing in it's current form. It does not make sense to me and is a regressive policy. But there is no benefit in replacing one regressive policy with another regressive policy. What is the point of that?

 

101 in economics - Supply & Demand.

NG is only as a small amount of demand as not everyone can benefit from it. The biggest factor in my eyes is population increasing/decreasing.

If I bought in Broken Hill (I will use this as an example) which received 11% rental yield and I was able to rent it on day one, guess what I can still make it negative geared. How I just have to pay $500k and rent it for $200 pw. Does this make sense to do it? Not really but it would allow someone to claim NG benefits.

NG is not a reason why someone buys a property (if you do it is a bad decision). NG doesn't provide the person with an extra $20,000 of additional income (unless they are severely negative geared). You have little choices in getting positively geared properties that are within 5km of Syd, Melb or Bris (i picked 5km as each city has different thresholds). So if you were looking at buying a quality blue chip property it will cost you. However it is unlikely these three cities will go backwards in price and will eventually become positive geared...Shock horror you now pay more tax again.

Am I using NG no, will I use NG most likely, do I agree with NG yes as I would want NG to stay around for ages as it may help my daughter get a property (it may not). Remember this is something EVERYONE has access to. Some just choose not do it.

Also you get far more money back when you sell the property through CGT.

 

IMO negative gearing provides the most balanced way toward taxing a person. The benefit is in proportion to the marginal tax rate of the person and provides an equitable counter balance to the risk the person has to take. The negative gearing provides only a tax offset for each year. A tax loss from negative gearing is available for the year and not carried forward. Capital gain is not assured. Anyone pinning his hope on negative gearing is taking a big risk through current losses in expectation of future gain.

The presence of negative gearing is natural in a tax environment premised on taxing profit.

Any removal of negative gearing is therefore an inequitable market distortion.

 

I think some first home buyers have unrealistic expectations about where they want to live. Living in a large city is hugely expensive and it's the same around the world; NYC, London, HK, Sydney.

If you want to live in a large city you need to make sacrifices by moving further out, downsizing or moving to a smaller city. Your never going to get an affordable house anywhere near the CBD.

He has a terrible writing style, he comes of emotional, bias and arrogant.

 

People have a hard time understanding the issues of negative gearing. It does not help them to have educated people like Bill Shorten making public statements on negative gearing that it is a subsidy. It continues to muddy the issue of negative gearing and we now have a clear line between two leaders. Malcolm Turnbull is calling negative gearing a tax offset and in contradiction Bill Shorten is calling it a subsidy. The apologists for the proposed abolition of negative gearing are pulling out all sorts of arguments, including masquerade as economists.

You would think that an advanced country like Australia should be served by its ivy league universities in getting the facts out to its people. Models and consultancies have presented their reports. Treasury and RBA have also presented their reports. Unfortunately, even media take sides and present the statistics to suit their individual bias.

However, admittedly there is improvement as the statistics on negative gearing are available online to show both the professions and income levels of those who use negative gearing. More people in numbers from the middle income sectors benefit from the negative gearing than the numbers in high income level. More people in high income level benefit in dollar terms than people in middle income sectors. Realty provides many people in Australia a doable path towards financial independence.

I find it hard that people would debate an equitable means of doing business/investment in Australia, which negative gearing is. The State governments do not bother. They are levying tax in one form or other on the investment properties - rates, stamp duty, land tax and other levies.

 

And it's not rocket science to work out why -

Society wealth is a pyramid - very small group at the top (wealthiest), slowly increasing in numbers of people towards the base of the pyramid as the the wealth deceases...poorest folks at the base, and lots more of them.

Therefore, in a sample of say; 5,000 investors across the Country and from all types of suburbs (not just the leafy suburbs like the news media pick out for everything relating to the Universe) a lot more folks are likely to be benefiting from NG in the groups further down the pyramid than at the top.

Of course; the higher earners at the top will benefit more in dollar terms; but they also pay more tax than the lower rung earners; so fair enough.

I always have trouble understanding folks' mindset that the future generations of taxpayers are "subsidising" those who benefit from NG....the NG crowd have paid their tax, and are then getting some of it back, and then spending it (for most of the folks) back into the economy, paying more tax through GST, and ultimately costing the Gubb (and future taxpayers) less money through pensions.

Then the "subsidy" believers call it a Ponzie Scheme which is doomed to fail...how?

Are we going to run out of humans to keep on getting jobs and paying taxes and buying properties?

 

Negative gearing is not equitable, a minority of people use it, it is a legal tax avoidance strategy, but others have to pay for it through higher taxes. I find it ridiculous that speculation is subsidized in this way, it is a completely failed policy, reducing home ownership, increasing speculation, depriving other areas of investment. It only continues to exist because of self interested politicians, and up until now an apathetic public, who thankfully now have started to awaken and ask questions. Its great that it has become a mainstream issue, it will be gone soon enough (actually, not soon enough.. should have been gone a long time ago...). The tide is turning.

 

It is available to all.

There have been tax increases and decreases with various Gubbs my whole life.

Some of the reasons we pay the rates of tax we do are due to small population and large land mass to provide infrastructure and other social services; not limited to pensions, rent assistance, subsidised Health care etc.

You keep using the word subsidised; I don't see it that way - we pay tax, then we get deductions for the tax we have already paid on an income earning enterprise.

It has been around for approx 100 years, and from my 55 years of life I haven't seen it affect home ownership at all.

The breakdown of PPoRs to IP's stays roughly the same from one decade to the next (70/30) - except for those mini-booms in various areas when the conditions are better for investors - cashflow and/or a spike in CG - but even the PPoR buyers are out on the tear at that time too.

Perth is currently/has been going backwards at a rapid rate of knots - is that due to NG?

I can reel off probably at least 30 or more suburbs in Melbourne alone that were either not there at all when I was a kid, or at best were almost out in the boondocks - that are now suburbs and thriving with humans...Narre Warren for one, Craigieburn and Keilor for two more.

How does it deprive anyone from investing in other asset classes?

Folks are still quite free to invest in their cigarettes, their tattoos, their food and alcohol, Tattslotto tickets and scratchies, their VS Commodores or Beemer X5's, their trips to Bali and the Gold Coast theme parks, IPhones and 60" tv's, their Superannuation, Bank deposits and even shares for the more financially astute within that group..

 

Minority of people use it but accessible to all.

So for someone who has never claimed the dole and only ever gotten the stimulus (great work that did) and paid parental leave (I didn't choose to have a kid because of it). The tax I have paid would be far greater than my housemates where I lived combined (I was one of 6). When I was living in the house of 6, only 2 people worked (casual part-time) and one of those 2 I know hasn't worked for a couple of years since. They would of probably received more money than they have paid in taxes.

Guess what with NG you still pay tax and if I was claiming NG benefits I would still be paying more tax than 5 people I used to live with. The 5 others would still be receiving more benefits/money (per person or collective) from the government than I would. So I think it is far.

Remember when this NG property becomes positive you then have to start paying more tax. If you sell you pay tax, you pay stamp duty, gst and pay for others to be in jobs when you purchase. Who would want to pay $20,000 in stamp duty alone just to get $2,000 back a year (not great planning). Also removing NG is hardly going to change property prices as it is a small amount of money in the overall picture.

TLDR - Read 50,000 other threads on PC, NG will stay or you need to remove it from ALL other forms of investment (shares, businesses).

 

And; how many of those hard working flat mates were providing rental housing for those who are not in a position to buy their own yet?

Another anecdote for ya's about how NG has no bearing on housing prices either way; my 2nd IP (bought in 2001) was a 2x1 villa unit in Highett. .....Paid $206k (owners wanted $225k). Spent a further $25k approx on a reno....great spot, quiet court, only 12 units in complex, right near the train station, Southland, Nepean H'way and beaches etc....came out looking gorgeous after the reno...on a winner for sure.

Rented it for $210p/w , and had the same tenants (young couple) in it until they bought their own place 3 years later...not one single rent increase in that whole 3 years due to flat market.

Then, sold it for $245k...nett result CG over 3 years was pretty much zero - it was a dud investment.

How on earth did NG contribute to that house price and/or rent movement? (zero in both cases; and I did not pay over the asking price to cut out some FHB).

 

Accessible to all, including people trying to get into the property market.

I would like to believe that the defeatist mentality is still in the minority; albeit an outspoken minority. There are opportunities out there for everyone, and people of all incomes are getting in on the action because they see the opportunities presented to them, irrespective of the opportunities taken by others.

 

So, do you support Labor's regressive policy to remove negative gearing?