RBA latest on NG

The Reserve Bank of Australia has called for a "holistic" review of taxation of property investment and says cutting negative gearing will mostly hurt the better off.

Luci Ellis, the RBA's head of financial stability, told a Senate economics committee inquiry into home ownership on Thursday that the interplay of Australia's concessions on capital gains tax and negative gearing created an incentive for people to borrow too much. She said this was a threat to the financial stability of households and banks.

"The combination of negative gearing and concessional taxation of capital gains creates an incentive that makes people more comfortable about taking on leverage," Dr Ellis said. "It's worthy of a holistic review."

She said the tax rules were the same for all investments but they caused the biggest distortions in real estate because banks allowed investors to borrow more easily to buy property than shares.

Luci Ellis, head of financial stability at the Reserve Bank of Australia, says the tax rules cause the biggest distortions in real estate because banks allowed investors to borrow more easily to buy property than shares. Alex Ellinghausen
She defended the finding in the RBA's submission to the inquiry last month that households in the top 40 per cent of incomes hold 80 per cent of investor housing debt.

Treasurer Joe Hockey shrugged off the Reserve Bank's call for a review of negative gearing, made in its submission to this inquiry in July, insisting that middle-income earners are the major beneficiaries of the tax break.

"More policemen negatively gear than specialised tax accountants, management consultants or university lecturers," Mr Hockey has repeatedly said.

The Property Council has cited Australian Taxation Office statistics to prove cutting negative gearing would hurt many people on low and middle incomes. It says 66.5 per cent of investors who made a loss on a rental property had taxable income of $80,000 or less.



But Dr Ellis said the RBA analysis was based on the Household, Income and Labour Dynamics survey which covers all income and all households while the Tax Office data cited by the Property Council only looked at the taxable incomes of people who lodged tax returns.

Dr Ellis said because of these limitations the ATO figures do not capture the fact that many negatively geared properties are owned by people with low taxable income but high "actual income", mostly because they were drawing untaxable income from superannuation.

HOME BUYERS THINNER ON THE GROUND
The chairman of the inquiry and Liberal MP John Alexander has complained that "uber-landlord" investors are driving young home buyers out of the market in Sydney and Melbourne.


Dr Ellis agreed that recently investors had made almost half of all residential property purchases and the share of owner-occupiers had fallen.

But she said this was a recent trend and the overall split between owner-occupiers and investors had been roughly stable for the past few decades.

Banks were still being cautious in their approach to lending against property. "It isn't just, 'Hello, you can fog a mirror. Here's a loan,' like in the US," Dr Ellis said.

She said the rate of home ownership among young people had fallen but this was largely because they were taking longer to finish studying and settle down, and not because of the rise in prices.


Dr Ellis said the concessions for capital gains-producing investment in Australia were more generous than most developed countries but not overwhelmingly so. She said, for example, New Zealand was more generous.

Asked if winding back negative gearing breached the general principle that costs of doing business should be deductible, Dr Ellis said many countries looked at it differently.

She said under negative gearing an individual could deduct the loss from a rental property business against a separate business activity. She said corporations could not transfer income losses so easily.



Read more: http://www.afr.com/real-estate/rba-...egative-gearing-20150806-gisw9q#ixzz3i1PaxKWk

 

The way RBA is coming heavily against NG, it looks more than just jawboning, I am curious how far can government defend NG against RBA advice?

Is this why few banks has started excluding NG from serviceability of loans?

 

tl;dr
Then I saw your 2nd post. Answer: Probably all the way.
And: Hmm, not sure.

 

Is RBA foreseeing some very unpleasant economic conditions ahead and are safeguarding them selves by saying 'We told you so?'

But economic stability of our country is RBAs mandate, do they have to rely on present day gov whose vision policy doesn't go beyond next election.

 

I guess few heads/govt will have to role to get NG abolished.

Problem is no major party want to be unpopular!

 

Agree with that,

Removing NG from serviceability of loans will reduce the speculative boost of investor, which few banks have already done. In spite of that this constant rumbling by RBA against NG makes me think there is more to come.

Politicians if cornered will achieve this by making it a rich vs poor war.

 

The two possible changes seem to be to NG or the CGT concession.
I've got some simplistic ideas how it may go .

One way to change NG is to continue to allow it but make it more like business deductions: it's against the business income of running a portfolio and nothing to do with the personal. Since most people don't run their portfolio as a business, the effect would be that NG on residential property would be taken on your income only from those residential property items, not from any other personal income. ie. NG would be used with multiple IP's only, with a loss in one offsetting a gain in another.
Possibly ok for those with larger, varied portfolios?

I can't see a simple way to gently change the CGT concession. I'm more worried about this being dumped compared to NG being dumped (unlikely except as I said above). The NG effects every year, but I think the CGT concession is a pretty big reason why longer terms holds are better than other investments after inflation. For some scenario's I've tested, NG has the same impact on final benefit as the CGT concession, while in higher yield + high CG, the CGT component is twice as important as NG.

 

Sounds to me like the RBA is mainly concerned with protecting their leverage over the economy, as they probably should be.

 

The way I look at this, with the recent tightening of lending, it is already a defacto decrease in NG. Lets just say, suddenly, the regulation changes again, and every investor have to have a higher LVR 30/70 instead of 20/80. The market rent will still remain the same, but there will be a reduction in NG amount required to hold.

 

Ask the RBA why it keeps our cash rate so high, that many commercial foreigners borrow at much lower rates only to lend at minimal risk to our banks, via the wholesale funding market. It is the RBA's high cash rate that distorts the Australian credit market, and funnels excessive foreign capital into a bidding war for limited Australian property.

One can only presume RBA blunt pencils live in ivory towers.

{deleted personal attack}
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http://www.smh.com.au/business/bank...n-from-wholesale-markets-20141124-11sspn.html

Big four banks to raise $134 billion from wholesale markets
Date
November 25, 2014


Australia's big four banks are tipped to raise $134 billion from wholesale markets this financial year, the most since 2009-10, as lenders use cheaper global funds to fuel domestic competition.

New research from NAB credit analysts forecasts that Commonwealth Bank, Westpac, National Australia Bank and ANZ will raise $134 billion in wholesale funds in 2014-15, up from $125 billion last year.

The last time banks raised this much wholesale money was in 2009-10, when the government was guaranteeing bank borrowings in response to the global financial crisis.

The trend helps to lower banks costs, as most of the wholesale money being raised is replacing more-expensive funding that was secured during the global financial crisis.

Banks are also using wholesale markets to fund some of growth in new lending, which is being driven by the $1.3 trillion mortgage market.

New borrowers are benefiting from the trend, because banks are passing on the lower costs to their customers via deep discounts in their advertised mortgage rates.

For savers, however, it is less positive. The growing use of cheaper wholesale funding has weakened competition among banks to secure household deposits. This is pushing down interest rates on products such as term deposits.

The big banks' use of wholesale debt is also an issue that the financial system inquiry is expected to address in its final report, to be handed to Treasurer Joe Hockey within days.

Regional lenders say the big four are able to raise wholesale funds more cheaply because of a perception they are "too big to fail" – and the inquiry's draft report raised several policy responses to this issue.

Standard and Poor's last week cited lower funding costs as one reason for the big four banks' dominance in home lending – a key market most lenders are targeting.

The global ratings agency upgrades its ratings on the big four by two notches because of the likelihood that the government would support a big four lender that was financially distressed.

Banks noted the decline in wholesale debt costs at their latest round of annual results. For instance, Westpac said the cost of new long-term issuance was lower than maturing debt, much of which had been raised during the global financial crisis.

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This is a very illumining insight into Australian credit:
http://theconversation.com/dont-just-target-the-big-banks-why-all-banks-need-higher-capital-33407

As is this:
http://www.rba.gov.au/publications/rdp/2013/pdf/rdp2013-15.pdf
"Trends in the Funding and Lending Behaviour of Australian Banks Chris Stewart, Benn Robertson and Alexandra Heath RDP 2013-15"


And the concerning thing is Australia keeps increasing its foreign borrowing faster than it increases GDP. which means Australia on the whole doesn't use credit to increase productivity. which begs the question "what does it use credit for".... go to the top of the class if you said bid property prices up.