Negative gearing changes

NG a tax rort? hahah... soon they'll be saying Centerlink spends our tax dollars well....*insert eyes rolling*

 

And if NG is a tax rort, that makes me a tax rorter. The same people who want to abolish NG would consider my household too poor to be tax rorters.

 

is there any clarity on dates?
will cgt discount be GFd?

 

I dont think there is - although I have seen July 1 2020 bandied about. Everyone should remember that they have to win the election first then get this stuff legislated. It's far from a sure thing

 

Japan’s negative gearing is actually extremely generous in some ways. Many properties acquired can be depreciated over just 4 years! At the moment, that rule also applies for Japanese tax payers buying overseas , although this may change soon.

Biggest driver of tax driven investment in japan resi however is inheritance tax. It is very high, but many deductions etc for capital held in real estate.

On the discussions about the rent and price impact of abolishing negative gearing, I can’t see how they don’t move (rents rise, prices fall) if NG goes.

Just IMHO it seems finance 101 that they must. If we treat housing as a investment asset class, it has a risk profile and a required return (admittedly there are many buyers who won’t look at it that way, but key suppliers to the market, investors/ developers, should). And just for the sake of example, if we assumed for its risk profile housing needed to offer an expected return of say 5%. That could be made up say 6% capital growth, -2% loss on the rent/mortgage and +1% on the NG tax benefit. If the NG benefit is gone, either yields need to rise or initial prices drop, I.e. rents gotta rise and or prices fall.

These numbers are just for illustration, but I think make a point.

This is before we consider a potential reversal of the price increases driven by speculative investment in the sector driven by NG, which as various research has shown went mainly into pushing up prices of existing housing rather than stimulating new supply. Just imho.

 

Hold on... if the growth is -10% ( as it is in SYD and MEL right now) you're theory would then require 15% yields to get is back to a 5% return. So because of that we should be seeing massive rental increases to replace those "losses" , right? So why arent we?

Investors have rarely invested based on annual returns. They havent had to. And why would they when endless IO and falling rates have equated to improved borrowing capacity on an almost year on year basis - for everyone - which has resulted in "cycles" of growth that have consistently delivered growth over lets say 7-10 year "cycles"? This has all been facilitated by the credit environment . A rising tide lifted all boast, as it were. So its been an almost entirely speculative approach by most investors most of the time , even if people wish to argue otherwise. If it had been yield based investment they wouldn't be concerned by NG removal or P&I repayments - their returns would be sufficient to cope with both. That's not a criticism in any way - just s statement of reality/fact. After all - its all that has been required. And it worked - spectacularly for those who have done it - until APRA. Its only now that many are realising they need to invest for yield so they can pay down debt or manage P&I... but this has been brought about by APRA not the threat of NG being removed.

Besides all of this - we have an oversupply right now in most cities. Rents arent able to go up in many cases, even if landlords decide they need to lift them to make up 32.5%, 37% or 45% of their "lost" NG monies

 

Generally agree with the latter half of your message but not the first bit.

These are expected returns over the long term and don’t adjust or correct immediately. However they are how assets get priced long term, as explained by the CAPM model (essentially that prices are set by a combination of expected risks and required returns)

And while I generally agree with your second paragraph, as much as we can identify different factors specific to the housing market that may have driven prices over the last 20 years, ultimately they can be explained within the CAPM framework. In this case, falling rates were a key driver. If we said rates are 4% today and were 7% 10 years ago, and required returns from housing were/are 2% above interest rates, then then some of the strong capital growth can simply be explained by entry prices shifting from a level gave buyers a 9% expected return to a 6% expected return.

And whether you see value today can therefore be determined by your expectations for risk (eg rising tax/regulatory risk), interest rates, and growth in income (are rents going to rise or fall). Obviously this is a framework for a buy and hold investor.

I think I saw an article last week that quoted rba research saying that current market expectations were for house price growth of 2.5% in real terms, and that if it fell to 0% (I.e. in line with inflation) then prices needed to fall 30%, or something like that, sorry I’m not 100% certain on the numbers.

But that is using the same approach to asset prices as I mentioned above. And while markets can be driven by many factors within that model including blind investor bullishness, it does stack up as a valuation and forecast tool.

I do struggle with the fact that many punters don’t look at housing in this sort of manner. It is however how asset markets work. And if prices get to a point where expected capital or income growth is unrealistic, they eventually will correct.

 

Don't take it personally. By the same logic everyone claiming the tax free threshold is a tax rorter. Everyone who only pays 15% tax on superannuation contributions is a tax rorter. i.e. everyone who pays tax and contributes to super is a tax rorter

 

I believe that everyone who pays tax is a tax rorter and everyone who doesn’t pay tax is a tax angel .

 

PerthGuy,

Absolutely nailed it! Thank you.

I actually object to calling negative gearing a "benefit". It is only a benefit if paying tax at your marginal tax rate is a benefit.

The alternative of removing NG, means paying tax above your marginal tax rate in the present, and get your tax refunds at some stage, perhaps years or decades in the future.

Anyone who thinks abolishing negative gearing increases "fairness" doesn't understand negative gearing.

 

from the horses mouth
Positive plan to help housing affordability

 

Labor should be a shoe in...but because of stupid policies they may lose the vote of up to 40% of 3.8m people who are over 65 (pensioners are revolting in regards to franking credits) and another 2.5m people with investment properties.....

Given what happened in NSW....with the Coalition win...stupid statements and policies may come back to roost. The libs are on the nose...but if people think labor policies will hurt the economy and the 4.9% unemployment in play....it could turn against labor. If only they did not have stupid policies...

They seem to be targeting the younger vote......they are disenfranchising a large group of people...

 

Well if its not a benefit it should make no difference its its taken away as planned?

 

Precisely because it is not a benefit, removing it is wrong. Ie removing it is punishment rather than fairness. Not sure I get your point.

 

If you're talking multiple years or decades, then you've bought something purely as a speculation. It's not like starting a widget factory where you may lose money in years one and two as things settle down and sales grow, but you've started with a reasonable expectation of making money before too long. Letter in yesterday's Age:

"I have a rental property which is negatively geared and is currently on the market. I have had it for 15 years; I paid $208,000 and expect it to sell for $450,000."

I'm not quite sure how they've managed this, but I am 100% sure that this is not a tax regime I support.

 

I am 100% sure that this is not an investment I support .

 

Kept drawing out equity perhaps?

 

You are quite right. But I am not talking about the quality of the assets purchased under negative gearing, but rather the principle of the tax policy.

 

The NG rules will continue to apply the test of use of the borrowed funds NOT the security used. New borrowings wont relate to the acquisition of the existing property. It may fail the NG tests when its applied to the new acquisition. Even borrowing more $$ to renovate etc is likely to be caught. That portion of the interest may become not deductible. LOCs and recycling strategies will likely be impacted.

 

If its not a benefit, then the loss of it should have no effect on the people losing it. Seeing as they do not benefit from its existence.