Why are we calling negative gearing a "benefit"?

If anything, its a mutual benefit for the individual and for society. So we all benefit which cancels out any exclusive benefit for anyone.

 

Both happen anyway even with NG

 

In my opinion:

In government terminology a 'benefit' is a freebie to eligible Australians. It is like a grant. Once given it is for the recipient to keep.
An incentive is any change a government brings that will likely change the economic behaviour of a target segment of the population in the way the government wishes.

Abolishing NG should fall in the category of being a disincentive to investors.
Some investors may leave the rental market partially and some act more decisively, depending on their individual assessments of the investment market in Australia vs available opportunities in Australia and overseas.

The demand in the rental market consists of many groups of people:
1) younger age workers saving for a deposit with various pay ranges. Some upwardly mobile and aspiring for higher standards of living.
2) significant of chronic rentals because of lower skill and education, access to deposit, mentally challenged or disciplined to maintain a mortgage, geographically mobile and disinclined to being tied up with a mortgage responsibility
3) constant cohorts of migrants requiring time to appraise needs to settlement
4) significant numbers from dissolution of family groups of divorcing and separating couples
5) financial setbacks to matured households due to bankruptcies, economy downturns
6) miscellaneous factors due to deaths, fire, flood, demolition for infrastructure development, etc

How the States budget for welfare housing will be significant. The budget is likely to be affected by the special levies and tax provided through the private rental market will be affected. The significance of this interplay will not be immediately apparent until perhaps up to a year.

The size of the inventory of rental properties will help to mask the impact of the abolition of NG, complicating assessments.

It is the interplay of reduced supply of rental properties and the complex multi streams of demand that will determine whether private rent will increase or decrease in different localities.

This complex dynamics will be played out across the rental market across Australia when NG is abolished over time. So, in certain places it may lead to rental increases but seldom immediately. More perceptible sooner would be the prices of rental properties and these may presage the direction of changes of rent levels.

 

NG typically provides a cashflow incentive. Thats a benefit for those with other income sources that are taxed.

In many cases rental losses reflect non-cashflow deductions like depreciation and cap allowances. Throw in a tax refund at 30-45% (marginal tax rates) and its a benefit. Funded by Govt.

The proposed ALP policies wont change that much. It will limit new investors access to neg gearing. But property investment will remain. And some existing investors may work out the loopholes in time and when conditions are ripe they will buy again.

 

The reason why it is important to leave NG on existing dwellings as well as new dwellings, is because it is not enough to get the negative gearing benefits on a new property - you also need to be able to sell it.

If you sell a property in an asymmetric market where new dwellings have different tax to existing dwellings, this will still impair the value of all dwellings. Ie if you have a new dwelling, but you can't sell it, it makes all properties worth less.

The key is keeping supply up to keep rents down. And making only OTP properties attractive that you can never sell, is going to be a problem for overall supply.

All of this is noise of course: the real problem here is a moral and intellectual one. Why should property investors pay above the marginal tax rates (at their gross taxable income) while everyone else pays at their marginal tax rates at the net taxable income.

 

Hello John, yes these rules have not been thought through as well as they should. And then look to disadvantage new investors. As you adhere to, one may have purchased an off the plan to gain these benefits, but to then onsell it, the desire for an investor to now purchase it becomes less as the tax incentives are no longer there.

The whole reason for these changes is to entice purchasing of new property, to entice new building and jobs. In one way it is encouraging more oversupply in an already oversupplied market. This effect could increase the potential price of an off the plan unit to become 10% or so higher than the equivalent unit built recently but void of benefits. Is it fair not to suggest that new otp units would command a premium over the equivalent not quite brand new unit.

We do not really know what the overall effects will be yet. There are many new variables to this which are also new to our housing market, as will be the effects.

 

Read @Simon Hampel 's post above, that is essentially what I was getting at. Saying rents can't rise because it is a closed loop or zero sum game is the part he (and I) are disagreeing with.

 

In the UK interest is progressively being disallowed as an allowable expense, no grandfathering. And this is a change brought in by a Conservative government.

Landlord tax: an overview of the changes to buy-to-let tax relief

"To put this in numbers, if Jane has a rental income of £2,000 per month and her mortgage interest payments are £1,500 a month, under the current rules she will only pay tax – at her current tax rate – on the £500 difference.

However, after all the changes are implemented, Jane will be taxed on her full rental income of £2,000, minus any allowable expenses and can only claim a tax reduction at a maximum of 20%."

 

They also imposed an extra stamp duty on anyone that buys a second home , regardless if it is a holiday home or a rental property., as well possibly another one for overseas investors that live outside the U.K

 

..... and common sense would dictate that there's now also one less renter looking for a place to rent! (supply vs demand is left unchanged).

Just to simplify things, this is the point I don't get. Even if the buyer was an existing owner occupier upgrading to another property, surely he wouldn't leave his old residence unoccupied....? I think it's reasonable to assume that he would either sell his old place, or rent it out. Either way, his old house is released back into the market. To be sure, there ARE exceptions such as (but probably not limited to):

1) The buyer is a new immigrant (they never had an "old" house)
2) The buyer has just moved out of accommodation which was shared with other people (their "old" house is still being occupied by others, so doesn't get released back into the market).

The crucial point being that neither of the above conditions relate specifically to NG.

 

I have thought for a number of years that negative gearing on established property has well past its use by date .
For something that was introduced in the 80s to help investors when interest rates shot up and the small profits turned into small losses ,it has just morphed into a multi-billion dollar loss making exercise , which in recent times provides very little additional property, from memory I think something like over 90% of IPs were established property
In many cases the tenants will get kicked out ,and then new tenants will move in.
We have generally taken a slow approach to IPs and its worked out quite well , and the NG refunds ,just paid for our holidays.
As interest rates get to low it also increases volatility in the economy and in house prices,as the RBA is unable to effectively deal with bad economic news ,where in the past you would see movements of 200-300++ pts in interest rates. With the current rate at 1.5%, its impossible to do anything that is meaningful to the economy..
For people buying in the current market they might be lucky if they see a 50 pt reduction in rates over the life of the loan , if they are lucky, but those that bought a half the price in Sydney prior to 2012, have seen rates drop by 300-400 pts.

 

I would say the ever increasing losses being claimed has finally become a burden for the government. And a lot over recent years, with record numbers of investors taking out record debt levels and paying interest only loans in record numbers.

Even if rates rose 1 or 2% , the increase in claimed losses would rise significantly, becoming more of a burden. The same can be said with falling rents. The claimed losses become greater.

This is becoming a burden for the government. But is unlikely the reason Shorten is wanting to change things. I doubt he thinks that far ahead.

 

I would have thought that the UK Government would be the LAST government anyone would recommend we follow .

For example, have we already forgotten the way they are handling Brexit ?

 

Ah yes. So when an investor sells an IP the renter automatically converts to a home owner?

Someone needs to explain to him why this doesn't happen.

 

Politicians playing stupid games as they do.
But seriously , they face similar problems with housing costs which got out if hand,especially in the SE area of the U.K and many areas with decent links to London .
Much of the issue was all about open immigration from mainland Europe and the flow on to house prices.
But leave it to politicians to make a balls up of it .

 

If you get it and I don't it's a benefit.

That wasn't hard was it?

Sir Garfield Barwick has a lot to answer for I reckon.