Silly question about Negative Gearing?

Good luck with that one. Like all the good people of Australia who wanted the offshore detention centres closed. They believed they were morally right, they believed they had legal support, they believed they had the UN on their side, ...

And what difference did it make? Jimmy squat. I wish you the same success. I would rather spend my time getting on with things I can influence and achieve.

Nothing changed. Some people like it; some don't. Been that way for years, and years, and years,...

And in 10 years time, the same people will still be whinging about prices and the same people will still be whinging about the possible changes to NG. Not me. I get on and play the game. Bit like that old tennis saying from Pat Cash (I think) when he was talking about John McEnroe, namely (can't remember the exact quote):

"It doesn't matter what your opponent is doing or saying down the other end, it's where the ball is that counts on the scoreboard.​

I find personal anecdotes absolutely amazing. They give a touch of reality to all the BS on the internet.

 

There are no REAL barriers to home ownership. Some people dream up imaginary ones because prices have increased (that has being going on since day dot), it got hard (it has never been easy), ...

If these same people put the same amount of energy in improving their financial position, they would be in a far better financial position.

The Aged Pension currently cost the nation $44B (from memory). Next thing, you guys will be lobbying for it to be reduced or maybe removed. Not this bunny.

I will never get the Aged Pension. By using NG and building a property portfolio, I will save the Australian tax payers $1.4M over the next 30 years. A small investment the Government made in me for such a big return. That is smart Government policy!!!

 

There are clearly barriers to home ownership, which change over time. I'll use an example from your very own anecdote:

You stated your wife's salary was not recognized as income back when you purchased a property. This was clearly an impediment to you purchasing a house. You managed to work through that barrier and still managed to purchase a house, but it clearly would have been easier had her income been recognized.

It didn't stop you buying a house, but it was dumb. Do you not agree?

Or are you of the opinion that it doesn't matter, and things should have stayed the way they were? After all, you had to deal with it, why doesn't everyone else? Banks were disallowing a woman's income for years before you started looking at buying property. Probably since day dot I'd imagine.

There's no need for change after all, just leave things the way they are.

A magnificent strawman you've got there. I've clearly got it in for pensioners.

 

So is NRAS - didnt stop it getting criticised.

Feds hand out 40,000 x 75K over 10 years. $3 Billion.
State hands out 40,000 x 25K over 10 years. $1 Billion.
State gets a good deal of that 25K back in stamp duty. Feds get a good deal of their 75K back with GST, and a little more with the GST they collect on the handover reports, depreciation reports, solicitor fees etc...

Net cost to State is pretty much nil... and to the feds it's @ 1 Billion over 10 years.
After accounting for GST etc... even the Govt believes it's inexpensive. Hockey's budget paper in 2014 values the cost to Govt @ 25K over 10 years, not 75K. How do we know? because when they cut Round 5 (10,000 incentives) they claimed it would save them $250 Million.

Now, to acquire sites and build 40,000 dwellings , assuming they were all apartments at 50K per site and 250K build cost, the Govt would have to spend $12 billion just to get the 40,000 dwellings built....

Assuming they were all house and land, with a median acquisition and construction cost of 400K, they'd have to spend $16 Billion just to get the 40,000 dwellings built...

That is smart policy too... but they decided we cant afford it...so it was cut.


Neg gearing costs far more than NRAS... CGT concessions cost far more than NRAS. Just saying. I am an investor and I'd personally /selfishly like NG and CGT concessions to remain - of course I would. NG in particular has a material impact on my net cash flow and on my capacity to borrow. In fact, I would imagine that for most investors here, it does - even some of those who puff their keyboard chests and pretend otherwise....

If you were to remove it from a lenders servicing calculator and hit ENTER,I guarantee you'd have a lot of very very sad faces - even amongst those with some of the puffiest keyboards! You'd have a triple whammy. Sensitised assessment rates, graduating HEM's and no gearing /interest addbacks on calcs.... for most, borrowing capacity would take a beating. So it's definitely an important input in determining the majority of investors capacity to borrow.... which is the most important tool in their toolkit for building a portfolio. So for no other reason than that, I completely understand why investors are loathe to see NG go... myself included

But unselfishly, if I put on my "what can we afford" treasurers hat, or even just my concerned citizens hat... I can at least understand the different view... At least a tax initiative I do support - NRAS - ensures the delivery of new rental accommodation at little net cost. But no honest person could argue that neg gearing or CGT concessions are effectively doing that. NG in particular is used to sustain holding costs on a finite amount of established stock more so than anything else.... so it's not really achieving it's policy objectives if we are honest about it .. even though it's certainly helping all of us achieve our personal, selfish objectives - for sure.

At the current low rates the NG cost to Govt is not excessive...but rates will rise again one day and the cost will increase, so politically I guess now is the right time for Labour to be floating their proposals... minimal collateral damage... But CGT concessions are where I think the Govt may be forced to make some concessions ( excuse the pun) - even the RBA seems to agree and is starting to jawbone ever so gently about neg gearing and CGT...
Move against negative gearing 'a good thing', says Reserve Bank

 

Of course it does. It allows you to borrow more than you would without it, because you are effectively receiving a subsidy for losing money. It makes a loss bearing investment more palatable, so people are willing to spend more or will purchase something they wouldn't consider without NG. It distorts the market.

I can understand why people don't want NG to go. But looking at it from an objective point of view (which I believe I have, considering I will be personally worse off in the future with the removal of NG, as would most people who frequent PC) it is an outdated policy kept around because of vested interests.

I have a clear interest in NG remaining, not being abolished. But even with that in mind, I'm not a supporter of it.

This is basically the position I am coming from. Everybody wants more funding for health, education, defence, welfare etc etc. Different options for increasing revenue need to be considered, of which NG is merely one.

Not only that, but NG is going to become more and more popular, and is likely to cost more and more every year (rates won't be this low forever as you said).

In saying all that, I am completely open to a change to the CGT discount as well.

Not sure about the second half of the above quote, but the first half is bang on.

 

well the capitalist and investor in me wants it to stay... but the citizen in me understands it's a policy not delivering what it's designed to, so from that perspective the Shorten proposals are worth serious consideration, at the very least. Their proposals would enable investors with existing arrangements to continue to be able to utilise NG , but would also require investors contribute to new stock levels in order to utilise NG on those investments purchased after JUly 1,2017...

 

As @euro73 pointed out, here is part of what the RBA had to say in Dec 2014.

http://www.rba.gov.au/information/foi/disclosure-log/pdf/151608.pdf

Financial Stability Concerns

• Financial System lnquiry - could encourage 'leveraged and speculative investment in housing'
• Speculation - investors bidding up housing prices
• Excess leverage - financial stability implications if prices fall
• lncreased prevalence of lO loans than otherwise - which don't amortise and so don't provide as much of an equity buffer in the situation where prices fallthan a P & I loan.

 

Yes, a building really can be worth nothing after forty years. My 53 year old home is valued at approx. $45,000 and has hardly increased over the past ten years, though the land value has doubled.

 

Curious... what does your 45k home look like? Cause that's so cheap.

 

You couldn't actually buy my place for that little - it is rates valuation. The land value is all its worth. My point is that houses can and do depreciate.

To answer your question, it is a really really unattractive cream brick veneer, 100 square metre house ranch style, no garage 20 km from Central Melbourne and 3 km from the beach at Mentone.

 

Well, I reckon an insurer would say it would cost 300k or so to rebuild... that's what you'd need to insure it for at least. And hey, at least it's brick. Better than fibro imo...

 

Yes, insured for about $300,000 due to rebuild costs.

Got rid of the asbestos roof.

 

What about a unit? Will that be worth nothing as well after 40 years?

 

It hasn't been this way for years and years... the movement against negative gearing has really picked up steam lately and has become a mainstream issue. No longer is restricting it seen as "political suicide" but rather promising to reform it is a vote winner. I cant see it lasting too much longer.

 

Negative gearing remains the governments great big red herring.

It is the capital gains concessions that massively distort property prices and should be the real focus of anyone who genuinely cares about hosing affordability and fairness rather than negative gearing which beyond it's excessive reach in its application against other sources of income actually doesn't have that much of an impact.

Realistically if the government had any balls (and they don't, we know this) they'd simply make rental losses have the same treatment as capital losses and the vast majority of business losses and restrict them to being offset against profits in the same income type. That would remove the taxpayer funded incentive to hold bad investments and save a great deal of money for the public and far better uses than marginally increasing the cost of a need for the public.

Having said that, I agree with the basic idea that negative gearing isn't good for Australia as a whole. It drives up the price of a necessity and it redistributes public money from other possible and far better uses (education, health, infrastructure, basically everything else), it's really just government meddling in an already far too government influenced market.

Edit: Negative gearing is way down on list of things I will vote based on, Labor is going to have to take the two exceptionally good starts of the Liberal and raise them (Superannuation and corporate tax cuts) if they want to win my vote and beating a red herring into the ground isn't how to do that.

 

"distorts the market": only if you believe there is such an illusion as a perfect market that things can distort. Apart from calculators in the offices of some (not all!) university economics professors, I've never heard of such a beast. Cyclones "distort the market". Butterflys in China "distort the market" (through creating all that quantum that's about the place now but never was before ). Breathing "distorts the market". In other words, there's no such thing as a real-life undistorted market. NG is just another one of the factors making up the current housing situation. As usual, it's a high likelihood it'll be changed not because of logic but because of vested interests.

Cynical? me?!

 

Uuummmm,

It's getting scary when a long term conservative like me is now seriously considering voting for Labour in this coming election.

Just on Super alone either parties policies will impact us but I agree with making Super fairer. However the Libs proposed Super changes are an administrative nightmare with so many potential unintended consequences it is crazy. And the Libs have singled out Super to do most of the heavy lifting. Labour is taking a more balanced approach by raising tax more broadly.

Turnbull has incorrectly made a massive mistake with his policies in assuming long time Liberal party supporters would never vote Labour. The number of conservatives and those in rural areas I have spoken to who have said they are switching to Labor has really surprised me.

Very interesting times ahead.

 

I think this article gives a good overview of why the finance/real estate sector is so strongly opposed to changes to negative gearing. In brief:

On one hand, I think it's clear why there's such a high level of resistance. If you're in the real estate sector and the government proposes changes that make your business harder to run (or potentially collapse), you're not going to sit back and let it happen without some pushback. If the government makes changes that risks these sorts of consequences, it needs to take a good look into the risks and find possible ways to mitigate the worst that could happen. Which, incidentally, seems to be why Shorten is grandfathering existing NG properties (that and the obvious political ramifications of course).

On the other hand, such consequences haven't been--and shouldn't be--the only factor governments consider when implementing reforms. Take the car industry for example - a cursory Google search came up with a study estimating up to 200,000 jobs lost if Australia's automotive sector is shut down, yet the Abbott/Turnbull Government is still going ahead with its plan to cease subsidies to the industry. Why? Because the handouts were doing nothing to improve efficiency in the sector, the economy is still mediocre, and there is a need (at some point) to start reducing government debt. These factors trump the obvious consequences of widespread job losses, even in manufacturing-dependent regions such as Geelong or South Australia.

 

I believe you are re-writing history here.

In 1985 (so we are talking 21 years ago), Australia had a PM called Bob Hawke and a Treasurer called Paul Keating. After a noisy, concerted campaign by the good people of Australia, they removed NG.

Yep, that was years and years and years ago. And guess what, Bob and Paul later re-instated it.

Just because a bunch of people conduct a noisy campaign for a cause and hence make it appear to be popular, especially in the media, doesn't mean it is. Beware the silent majority!!!

 

• 5 points were made in comparison of business with the NG. It's encouraging to note that:
  • Most of arguments have been accepted, except trivial interpretations of speculation and social costs.
  • The remaining argument hinges on similarity of business with NG with regard to both being speculative and the basis for the assertion is 'Life is speculative'.
• Inherent business risk is not equal to intentional tax avoidance. All those businesses were not started or sustained with a model "tax payer will pay for the annual losses and hopefully the asset will have an increase in value, when other tax avoiders inflate the scarce commodity. And when the asset is sold the share of the tax will again not be paid.". The way NG and CGT are set up, tax avoidance is the business for many (not all) property investors. Thanks for paying for my house. When it comes to speculation NG and CGT is in a league of its own.
  
• While there is no justification provided above on what basis the businesses have been classified as speculative, let's for the time being assume that both are speculative and look for differences and other relevance:
  • Currently in case of property investments, profits due to speculation are privatized (CGT exemption) and the expenses are socialized (NG). This is not the case for businesses. The losses are confined to businesses and not deductible against personal income.
  • Preferential support for property speculation via NG is a uniquely Australian and NZ phenomenon and that makes it an aberration (Ref: Grattan Inst. latest report).
  • What is being sought via amendments to NG/CGT is a slow (grandfathered) return to normality (by capitalistic standards) and for equitable treatment of property with businesses. Many would argue that grandfathering and CGT exemption as proposed by labor do not go far enough.
  • Extrapolation and hyperbole "We need the government to ban xyz.." adds nothing to the POV. It is easy to extrapolate to the other extreme and claim 'Governments should provide tax relief for gambling losses'. Manufactured outrage at strawman is a well known obfuscation technique, and best utilized with placards outside the parliaments.

• Comparison presented is inequitable on following counts:
  • Equating social security to tax avoidance.
  • Recipients are different making it an inappropriate comparison:
    • In the case of FEG recipient is the victim of the speculation whereas in case of the NG it is the perpetrator of the speculation.
    • In case of FEG compensation is for the exploited labour whereas in case of NG/CGT it is for the speculative capital.
• The quantum of sums differ logarithmically. NG losses claimed are 11.4 billion not including the deductions Bill shorten poised to take negative gearing.. A simple google search if more references are required
  
• Yes other than NG and CGT, tax payer does not subsidize speculation, just provides a social security to the needy (including victims of speculation). All the more reason to strengthen the tax pool by removing NG and CGT.