RBA Suggests Review of NG Laws

Agree.

From my observation; most of the folks who are the most vocal about anti-NG are not educated in the game of PI. Some are actually IP owners; but this would be the minority I believe.

My assumption is they see a whole stack of folks getting a free kick to buy properties via bigger tax returns from NG, and/or being able to access their PPoR equity....they see this as unfair and that the PI's have an unfair advantage.

What everyone misses is the fact that those same PI's who are using their equity had to start on the same bottom rung as everyone else who are trying to get on it now.

Of course; the reality of how NG works is far different, and folks seem to forget that the IP has operated at a cashflow loss, so it is costing the owner money to hold it.

It's not all beer and skittles until the rent outpaces the loan - many folk wait several years for that to occur.

 

NG doesn't make sense to the average punter though.

Paying a dollar to save 30c in tax? You still need to stump up the dollar in the first place.

 

No, negative gearing was introduced in early 1980s. Originally designed to encourage new building but that doesn't apply anymore since 93% of investment property purchases are for existing properties.

I've always thought NG was a bad policy since I started buying IPs 20 years ago. It inflates prices, so reduces yield and so is bad for not only the country but most property investors themselves, except highly leveraged speculators making large losses in the hope of capital gain. It should be removed on all asset classes.

 

I think it is hard to deny that NG doesn't entice speculators.

 

Ah yes the life of consumer mediocrity. Blame every on else except their own poor habits why they can't enter the property market

 

You are wrong, negative gearing was not introduced in the 80's and there was no purpose. It's a commonly held myth you quote. It has been a part of federal income tax since it was introduced.

 

Even the head of the CBA is now calling for review of negative gearing...

http://www.macrobusiness.com.au/2015/08/cba-chief-calls-for-negative-gearing-review/

 

Removing NG is not going to bring prices down. Just because NG is gone, doesn't make the demand for property in Australia reduce. The reason why prices are not 'cheap' is because there is limited supply and everyone wants the best piece of land in the best areas they can buy. Its very simple. If 10 people really want what 5 people have, they are going to fight over it and the ones which want it the most, sacrifice for it the most and plan for it the most are the ones who will get it, obviously causing prices to rise accordingly. Its really that simple. Now if suddenly Sydney had double its current supply of land in areas close to great infrastructure jobs, amenities etc etc then you would see a whole different situation.

That aint gonna happen.

 

Removing NG from serviceability calculation can have the same effect as removing NG itself, at least in terms of curbing extra borrowing capacity from investors.

This approach will not have the usual back lash for politician as banks will be seen as the monsters, yet RBA can curb the property speculation by tightening lending

 

& negative gearing is one of those government policies that are enabling investors to hold a larger number than they might be able to otherwise, reducing the burden of carrying a larger amount of debt.

It's not the only contributor to expensive house prices, but it's one of them.

 

I've never experienced NG being factored into serviceability in any of the transactions I've ever done.

It is such an individual thing; how can it be assessed?

The Banks, however; have always factored in the rental income; some will accept a higher amount for serviceability than others.

Maybe they should exclude the rental income?

This'd be stupid, because noone would be able to afford a 2nd property...oh; wait; folks can afford holiday houses...thousands of them.

But it's a moot point, because NG is not the evil entity causing a few people to not be able to buy a place.

 

Speculation;

https://www.google.com/search?q=speculation&ie=utf-8&oe=utf-8

I don't regard buying an existing house in an existing suburb, with the purpose to pay off the loan over time, and receive some value appreciation on that asset - as speculation.

RBA regulates monetary policy; Banks regulate lending for the most part.

 

According to the ATO data, 72.8% of Australians that owned an investment property owned just one. Meanwhile, 18.9% of individuals owned 2 properties while just 0.9% of individuals owned 6 or more.

Its a massive myth that investors are the chief reason why property prices rise. Just in the last 6 months of my conversations with people who are looking to buy a home, not investors, they are willing to and are paying massive amounts of money for properties they feel are close to great hubs, close to their employment and in simply great sought after areas with limited supply. They are NOT investors.

 

I recall reading from a thread that a high level officer of RBA revealed a finding at a parliamentary hearing that NG was not responsible for increasing property prices. Instead, she found that the trend of increasing duration spent on acquiring education prior to work contributed to the increased in property prices.

As to the history of NG in Australia, Wikipedia is making a commendable work in-progress to present an impartial narration of it. I find this statement:

"Previous to their initial decision the Income Tax Assessment Act 1936 (As Amended) had quarantined all property losses from deduction against income from personal exertion (other business or salary and wage income). Any losses incurred in any one year would be accumulated on a register and would only be allowed as a deduction from income from property in succeeding years. In so doing property income and property losses were in one 'bucket' and personal exertion income and losses were in another 'bucket'."

So, impliedly prior to 1936, NG was available, but no further hints about its extent into the past.

NG was apparently reinstated, as mentioned in this statement:

"In July 1985, the Hawke/Keating government quarantined negative gearing interest expenses (on new transactions), so interest could only be claimed against rental income, not other income. (Any excess could be carried forward for use in later years.) What is less appreciated is that Hawke/Keating introduced negative gearing only six months prior. "

Based on above statements,

Impliedly, by default of initial tax laws based on accounting principles since colonial days, NG was available.

1936 - NG for residential rental property was first removed.

NG brought back in January 1985.

July 1985 - NG for residential rental property removed second time, with grandfathering of existing negatively geared properties.

1987, full negative gearing reinstated.

2015 debates continue .....

 

Even if only buying one property negative gearing enables them to pay more, carry more debt than they'd be able to otherwise.

Largest investor motivation according to one large survey? Tax efficient investment, second is speculating on price appreciation.

http://www.digitalfinanceanalytics.com/blog/property-investors-still-hot-to-trot/

 

It is a very, very small amount of investors who have more than 2 investment properties. The majority of home ownership in Australia is not by investors.

Even if NG is cut tomorrow, it will not stop the majority of people who buy property, to continue to buy property in desirable, sought after locations. And that majority is not investors. Its simple.

You cannot bypass the laws of Supply and Demand to greatly reduce property prices by cutting NG (of which only a small proportion of society are using NG anyway). 10 years from now, whether NG exists or not, I can almost guarantee you values in property would have risen and in many areas.

 

You seem to not understand or comprehend what I am saying. To clarify:

An investor doesn't need to buy more than 1 property to impact prices.

It's not only negative gearing that drives investors to buy, but it is one reason and enables them to pay more than they might have otherwise.

It's not only investors who impact prices. But you'd have to be blind, ignorant or stupid to claim they aren't have a significant impact at the moment (particularly in Sydney and Melbourne).

 

I am only talking about NG. That's it. And I am saying what I have always said, which is NG is not the main culprit. I understand your saying there are other factors and I agree. We disagree that NG is a big factor. Even without it, many investors can still hold the same amount of property, just cut back on a coffee here and there. Its not a big deal for many imo. You want to know what allows investors to pay more???? Its the banks! They are willing to lend 80-90%. and you know why?? they make a huge profit!

 

I'll trot out my same old response to this;

Most investors are not going out to force prices up.

They are buying as an investment, and they are looking at the numbers (they'd better be; or they'll be stopping at one IP).

It is fair to say that the vast majority of investors will be looking to buy/have bought for less that what the asking price is, and hopefully less than what the market value is, to attempt to maximise their cashflow and future CG..

There will be a percentage of investors who don't, but I'd wager it is the minority.

And these folks are the minority of a minority.

I consider myself to be a bog-standard bloke; hopefully somewhere between a no-care/no class bogan, and an up themselves poser. (More towards poser )....much like most folks running around who are looking to buy an IP; not rich, not poor, ambitious and keen to better my financial position that my income alone won't.

I have never paid full price for any of the IP's I've owned (5 in all); so why would everyone else do it?

What you preach is a myth, BB .

 

That's true. But sometimes the dollar spent is only a dollar spent. It's the effect that dollar had on the whole property. Example: some form of improvement for value added task. Kitchen or bathroom etc. Yes it's cost you some money but what value has it added to the property? The benefit as well as increased value is you will get a deduction via depreciation over several years. For properties that are neutral or slightly positive, this can push you over the line and push you taxable income down.