Why removing negative gearing might be a good thing for some...

I remember the Keating removal of negative gearing. Melbourne rents increased more than at any time before or since as the number of available rentals decreased

Interest rates were far higher than our current low rates. A number of Investors who were relying on NG sold properties This resulted in a minor flood of the market. We were able to pick up a house at a much lower price

With interest rates so low I am not sure it will have much of an effect this time

 

Not necessarily - on the other side of the ledger, reduced costs of other necessities and even consumer 'wants' could also mean more money available to pay for rent.

 

A couple of possible reasons for higher than normal growth...

• Existing investors who are willing to hold, are less likely to ever sell. The market distortion caused by grandfathering is a huge benefit, investors know they are onto a good thing & are likely to never sell. Therefore the suburb becomes more tightly held, fewer properties ever hit the market, supply is restricted, prices rise faster than they would if investors did sell.
• As natural attrition removes a few investors, the ratio of OOs to renters increases, then suburb is more likely to gentrify & prices increase.

I do however acknowledge that the reasoning for increased growth is a little more tenuous than that for increased rents.

I'm not sure you understood the point I was making. Disallowing NG on existing properties only will create an unbalanced market. Existing well located suburbs will experience a decline in supply of rentals (investors will refuse to increase the supply & natural attrition will decrease it), and new outlying suburbs (& high rise) may well experience an increase in supply. So rents on existing well located property are likely to increase.

There is a big difference between housing supply and rental supply. The removal of NG on existing is likely to increase housing supply overall, but decrease rental supply in some areas.

The extra income comes from people with excess income who have a desire to rent in 'a nice suburb' - there's plenty of them out there.
All those without excess income get to live a couple of hours commute away from the CBD. Is this the side effect that will come back in 10 yrs to bite any govt brave enough to implement it ?

A few points regarding the history of NG removal & reinstatement and rents -

• No-one has satisfactorily answered the question 'Why was NG reinstated within 2 years in 80's & 90's?'.
• The rental market yield is unlikely to exhibit any noticeable change in rents within the tiny 2 yr period that NG was removed. People don't fill in their tax returns for well over 12 of those months (& therefore don't feel it in the hip pocket). It takes at least 3 months to get a property sold. If a wave of investors do sell, then it would take at least 2 years for there to be even a slight decrease in supply & consequent increase in rents.
• History appears to record rental increases in some cities, but not others. Hardly conclusive evidence either way.
• There are many other factors at play (noise) in crude measure of rental yields for the period (construction rates, vacancy rates, household formation rates, etc). Any conclusion that an increase or otherwise in rents was solely due to the removal of NG is tenuous at best.

Some have suggested elsewhere that rents won't actually rise because (on average) every house sold by an investor will be bought by a FHB. That is absolutely correct for the current generation. It would even be correct for subsequent generations provided the population remained stable (like Germany or Japan).

However, for a country with a significantly increasing population (like Oz), that works fine for the current generation of FHBs..... but the balance of 70% OOs, 30% renters that has been stable for at least a couple of generations will become closer to 25% renters and 75% OOs as a result of discouraging investment in IPs. To repeat post #1 - Investors require a return for risk taken - if NG goes then either rents must increase... or investors will refuse to participate, rental supply will fall & then rents will rise. This will take place over maybe 5-10 years.

Many groups participate in the rental market - divorced, mobile workers, potential FHB, low wage earners, new arrivals, and others equally disadvantaged. A one off event in 2017 will remove a larger than normal proportion of the FHB from that pool, however 100% of the other groups will remain & more will arrive . That pool of renters will continue to increase, but there will be a far smaller pool of rental accom available.... and rents can only rise. And maybe homelessness & social unrest too ?

Until now, NG has encouraged both the rental market AND new housing supply. In future it will only be encouraging new supply - those vulnerable groups who need a liquid rental market are likely to suffer rental increases within a generation. The only people to benefit will be a small proportion of today's FHB who have a deposit ready. And for future generations saving a deposit, it will be harder due to a return from the currently distorted low rents to a more normal return that is closer to the real cost of providing rental accom. Is that the legacy that today's FHBs want to be remembered for ?

 

OK So if the cost of living decreases then people will increase the rent they will pay. Not sure if I would be confident regarding decreasing costs of living, they have proved to be relatively consistent after inflation Eg CPI....

Hmmm so in most major cities, people are paying historically high amounts for rental payments circa 30-40% of income, and you argue that soon they will be happy to pay 50-60%!!! Lol.

No, something has to give, and it wont be from the demand side (renter side).

I think the balance of power in rental market has been one sided for so long that people forget that it can work the other way.

 

Keith - you make some sensible points however a good precedent is to look at what is happening in Docklands / South Yarra since FIRB reforms came in. 2nd hand apartment market (2-3yrs old) has suffered a micro-collapse (10-15%) due to the restriction on foreign buyers...

If similarly post removal of NG, the 2nd hand market more broadly suffers a collapse of 10-15%, then all of the above assumptions will need to be revised.

You say: "Investors require a return for risk taken", correct in the longer term, but what happens when investors see no yield growth and negative capital gains over a 2-3yr period.... irrational behaviour.

 

Fact check: Did abolishing negative gearing push up rents?

That's not to say that I think rents won't increase - I am sure they will in good locations. But it would seem the proposition that scrapping NG = rental boom, might not be as watertight or universal as some would believe.

But we will have the investing gods to thank for that property always doubles in value every 7-10 years.

Cabinet papers are released 30 years after the event - you might find out in a couple more years. Unless you can get the ear of someone who was in Treasury at the time.

 

I would think that many potential FHBs have moved out of rental accommodation and gone back to their parents' so they can save their deposits. They are currently not renters and potentially they will have a deposit ready to purchase in the next 2 -5 years.

 

How did this country get to a state where people in their 20's were forced to live with their parents for 5yrs to save up enough for a deposit for a house?

 

Two considerations I have;
If NG is allowed for new builds, would that apply to knock down-rebuilds? This could really be a game changer, older inner ring suburbs would transform and heritage listing properties would be even more problematic. Second consideration if NG is scrapped could a negative property still offset a positive geared property tax wise? Or would you still have to pay tax on positive property even though overall portfolio may be neutral or negative?

 

Presumably. This is my concern too. If the policy resulted in higher demand for new dwellings, pushing up the price, it would follow that development sites to build those dwellings would also increase in price.

 

I would be more likely to consider that neg gearing changes proposed by ALP will NOT occur but a UK style approach is possible. Features could include :

- Loss of CGT discounting on real property or a interest in a entity that holds real property
- Limitations on INTEREST deductions based as a % of the $ amount, limited to income or a specified $ cap
- Possible concessional limit to interest deductions that applies the lowest marginal tax rate to interest deductions with or without the aforementioned cap (This is the UK model from April). This could phase in so that the deduction is eliminated after "x" years
- Limit on neg gearing to new dwellings only (highly improbable)
- Limit on neg gearing to a single property...Difficult to manage.
- Co-ordinated changes to stamp duty with states so that a uniform investor rate applies (eg extra 2%)
- APRA tightening of investor lending further

I query how NRAS would be affected since it is built on certain assumptions.

The issue I haven't seen debated is whether the tax benefits available from depreciation could be limited and curtailed. These deductions do favour new builds and an alternative to interest deduction manipulation could be to limit depreciation deductions to the extent of positive gearing so a loss cannot be created by such deductions. This model was being bandied about by Treasury a few years back and wasn't rejected at that time. It seemed to minimise social effects as it was a non-cashflow change that immediately affects tax refunds. Such a change would immediately be a budget saver.

 

Turbull government proposes cap on NG rather than scrapping it according to SMH this morning.

 

I would be very interested in what all of you should consider appropriate for a positively geared investor.

ie. it's only fair that should NG investors have a 20k cap for deductions, then so should PG investors have simliar, being tax free after the first 20k in income.

Would Point Piper rentals go through the roof or tank, depending on the number of cash buyers?

Would regional properties with high yield have a substantial cap gain, because everyone wants them?

If there's a cap, which is by definition retrospective, would a deluge of new properties come on the market?

Or should everybody just buy into Nathan Tinkler's horses (the ones that Gerry doesn't own...) for a fire sale price, and hope for the best?

 

In many countries entire families fit into apartments the size of studios and all work their asses off to contribute towards a life long loan. If you enjoy what you have now lock it in.

 

What do you think we did when I was young? Go out drinking most nights or save for a deposit? Once you moved out of home you either bought a place of your own or you rented. I don't recall anyone that I knew being able to afford to rent and save at the same time. We lived at home and saved until we could afford to buy. There was a mindset back then that renters were losers anyway.

Most young people left school much younger than they do now, and went straight into full time employment. We could afford to buy a house in our early to mid 20s. These days they stay at school much later and often go to uni, extending out the age before they can get a job that allows excess cash for saving on top of their immediate living expenses.

 

As a property investor, I asked myself what would I do if negative gearing is abolished?
Warren Buffet said “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”

So what is my option so I don’t lose money?

Pretty Much I will only have 2 options either to “SELL” or “KEEP”. How will it play out if this happened?

Will most investors panic and start to SELL or calm and decide to KEEP? Interesting..

I believe this will be a test for investors to separate between the WEAK/Speculators and the Convicted / fundamental based investors

As for me, I am determined to KEEP it.

1) If most investors Keep their investment properties, then expect RENT to Increase (especially from investors who are heavily negatively geared).. Furthermore, I believe overtime rents will increase and it will be Positively Geared. Patience is the key. New investors will also keep their properties as the entry and exit costs will make them lose money.

2) However, if most Investors DO SELL, then yes, there is a possibility of house prices to fall due to sudden influx of properties for sale. This is what some people (including first home buyer) are hoping and waiting for. Will this happened? Maybe? But I think the likelihood is low for majority of property investors to panic.

My reasons to sell are:
· when a property is badly performing (in terms of rental growth and capital growth). Including when there is major economic down turn due to high unemployment. This is hard to predict, as you need to see it at least 12 months in advance.
· When I make a mistake and move on
· When I have reached to a point of financial freedom.

 

The last time negative gearing was abolished I kept my IPs. The reason is negative gearing is still grandfathered for existing investors, interest rate is still low, and rental rates were given a boost as removing negative gearing was a disincentive to competing investors to invest in the established housing market. I will only sell if it suits my timing and stage of need for the money. However, there will still be winners and losers resulting from the change. I think the main losers will be renters. There may be some FHB winners, especially those who will lower their sight and buy an established home.

 

was this also when everyone walked Barefoot in the snow to and from school, uphill both ways?

 

No, not at all. That was only back when my father was a child during the Great Depression. Since Global Warming, it doesn't snow in Brisbane any more.