RBA Suggests Review of NG Laws

I know this has come up recently especially from Labor saying that NG is contributing to the housing market booms. But now it seems the RBA has gotten involved suggesting that Joe Hockey look at reducing some of the NG concessions available to property investors.

http://mobile.news.com.au/finance/e...ive-gearing-laws/story-fnu2pwk8-1227443730991

This may not seem like a big deal right now to some as Liberal have said there will not be any NG changes as long as they are in government. But the problem I can see is they aren't the government forever. Sooner or later when Labor gets voted in, given that they are already pushing for a review as the opposition I'd say it's a sure thing when their time come especially now that RBA has stuck their nose in it.

How realistic are the chances of this happening?

 

If they do remove negative gearing my income will dramatically increase and so will my borrowing power. So not all is lost.

 

Something things may change if Labor gets voted in in the next election. Otherwise I can't see anything changing in the foreseeable future. All this talk about NG law changes only happens during a property boom, affordability is diminished and the people look for a scapegoat. Once the inevitable slowdown takes effect or when there's a bit of a correction in the market, deterring investors would no longer be in the governments interests.

 

It could happen, but I think odds are low in the short and medium-term.

I think the RBA are jawboning any way they can ahead of what looks like an inevitable need to cut again once or twice.

 

What about when companies make a loss or when you make loss on shares, you would need to change the rule for all.

Who will supply the additional houses for rent? Yes property prices might go down however rents would go up as there would be less rentals.

My cousin studying at uni needs to rent as no family around and has zero savings (she just finished school) so for her the price of property coming down doesn't help her however if investors start selling off assets then there is less properties to rent which means she has less of a choice in properties so she will pay more for the same as she has (making it harder to buy) or would need to downgrade to a lower property to keep the same rent price.

The only people that would benefit from removing NG would be people who are looking at buying now.

Has the RBA and Labour thought about the low interest rates just might have increased property prices? I know this is probably just a crazy thought of mine....

 

The RBA Submission to the Inquiry into Home Ownership touches on the Impact of Taxation on p23.

So the RBA reckons rents are artificially low because of NG.
And the ability to negative gear is an important principle in the tax system.

For those of us that aren't negatively geared, rent increases can only be a good thing.

 

I love your lateral thinking!!

Personally; couldn't care less because our one and only IP is pos geared.

What everyone seems to forget is; NG was removed in 1985, and then reinstated 2 years later.

WHY?

 

The RBA has also been urging the Government to fiscally stimulate the economy but the Government doesn't pay any attention to it... Same as Labor they are a pure populist party and once in power will realise the vast majority of property owners want to keep negative gearing. Labor always tries to appease everybody from both sides and ultimately sacrifice their identify and creditability in the process.

Imo if any adjustments were made it would be regarding the capital gains tax concession. Both political parties would have an easier time convincing the public that John Howard's changes to capital gains taxes in the late 1990s are no longer neccessary. If either party removed negative gearing it would be political suicide particularly if it led to a surge in rents, which would most likely be the case in Melbourne and Sydney where yields are currently low.

Overall I'm not too concerned about the proposal because if they did abolish negative gearing it would be grandfathered in, and existing investors should be exempt from the changes.

 

Hi Bigwill,

How is NG on existing property supplying more property for rent?

NG on new property make sense as this will
encourage more new construction which benefits economy via jobs and adds more supply to market thus helping renters.

NG on existing property to each other only helps landlords by pushing the buying power of purchaser, Just curious why should tax payers fund this extravaganza?

 

Bigwill means that if the NG concessions are removed then current investors who are NG will sell off their properties. Thus creating an oversupply of property. This will reduce the properties on the market for rental which would increase demand for rentals leading to an increase in rents. I think that's what he meant.

 

Low interest rate is the major cause of current speculation, but low IR is required to boost other parts of economy which is struggling.

The trick is to have an ability to lower IR without creating housing bubble, This can be achieved via
#. Allowing NG on only new constructions
#. Macro-prudential measures via LVR
tightening

 

You get deprecation on a new property at extremely high rates, I think that also helps create more housing/jobs. Where as you don't get this with an existing property unless it has been renovated (which created jobs anyway).

Because with the negative gearing component the tax payer is assisting the tenant with the rent. If a property cost the LL another $100 a week (do not read into the figure), the LL would either need to take 4 course of actions;

1. Increase the rent by $100 pw to keep the same spot where they are currently with NG.
2. Increase their rent by a certain amount to help cover the increased cost (e.g. $80 pw?)
3. Not increase the rent and just take the hit
4. Sell off the property as it isn't financially viable.

3, 2 & maybe 4 doesn't favour the LL.
1, 2 & 4 do not favor the tenant.
1, 2 doesn't favour people buying now that are renting.

The reason why NG is still on established houses is it would either create a huge disconnect between established and new prices and it alleviates the public pressure to build public housing (after all if all investors sold up) where would people rent? If there isn't any accommodation for people crime goes up (looters, squatters).

 

Allowing NG for new properties is also a dangerous strategy regarding supply/demand. If it is allowed only for new properties you will see a short term benefit for economy but then investors will flock to new properties to take advantage of NG and thus creating a market within a market where older properties drop in value due to oversupply and new properties go up because of demand from investors. FHB still will miss out. Then will start their complaning again because they can only afford an 'older' house and not a new one.

 

I am assuming you are not saying all investors in australia will kick their renter out and list their property for sale at the same time

When an investor sells an IP its still remains in market either used by owner occupier or by another IP investor so net result remains same.

 

Rental market is decided by only one thing 'demand and supply',
if there is more demand rent goes up if there is more supply rent does down Simple.


At any given point in time a landlord will want to extract the maximum rent and a renter would like to give minimum rent. Rental market is not a function of someones charity.

 

That's true but supply and demand changes when conditions change. If negative gearing was removed I know I'd be increasing my rents by $20 a week and explaining to the tenants that with the removal of negative gearing the current rents aren't viable. I imagine a lot of other landlords would be having similiar discussions. It's the same with interest rate rises. As in business at the end of the day it's the customer (in this case the tenant) that has to pay the increased costs.

 

If one could raise rents they would, one would not wait for NG or something else to change. Again.. in a capitalist society market decides rent not anyones desire.

 

With cheap money, loose credit policy and taxpayer funded NG entitlements, An average punters buying capacity is boosted exponentially thus creating the distortion in market by two punters outbidding each other by their inflated buying capacity.

 

This presupposes that investors invest only for the tax benefits not long term capital gains or future market positions or on spec for rezoning etc.

Not everyone who buys seeks to lose money and couldn't afford to keep it if the rates increased or if ng was to be removed.

The hypothesis that prices of inner-ring property would fall as it was older stock is wishful thinking. Upgrades to these properties would still be depreciable.

The posturing for the removal or limitation of ng needs to consider the mechanics not just the headline.

 

Great reply. You made some excellent points. Thanks Piston.