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Bank chief weighs in on negative gearing debate

If you’ve ben reading my blogs or articles for a while, you’ll will know by now that I am, to make somewhat of an understatement, a huge fan of property as an investment vehicle to create wealth.

Why? Quite simply because I know that it has worked for me and a lot of our clients at Metropole.

So when the head honcho of ANZ came out recently to “phooey” the notion of using housing as a means to get rich, I obviously felt compelled to weigh in on the argument…

In a recent Sydney Morning Herald article, ANZ Bank’s Australian boss Phil Chronican blamed the strategy of investing in negatively geared property for pushing housing prices beyond the reach of many would be home buyers.

He went on to claim that as an investment, real estate has pretty much had its time in the sun and is now a “weak” commodity compared with other investment classes, saying the substantial gains many property investors made over the last two decades were unlikely to be repeated.

Currently it is estimated that around 1.7 million Australian investors use negative gearing as their preferred strategy and in doing so, enjoy the many tax advantages that go along with it. The Tax Office reports that a net rental loss of $6.5 billion was claimed for the last financial year alone.

These tax incentives are Mr Chronican’s biggest beef when it comes to negatively geared property investments, suggesting that they’re encouraging people to jump on the real estate bandwagon.

”Governments might want to look at whether the current extent of negative gearing tax breaks are fostering an unhealthy focus on housing as an investment vehicle, thereby compounding affordability issues,” he told a business lunch in Sydney.

While Mr Chronican does not feel that Australia’s property market is a bubble on the brink of bursting, due to the continuing tight supply of housing, he does believe that with interest rates expected to rise again toward the end of the year we are in for a sustained period of low price growth in the sector.

Additionally, he cites housing as an “excessive concentration risk” for our economy given that as much as 60 per cent of Australian’s wealth is tied up in property, which is one of the highest rates of ownership in the world.

While current median house prices reflect the softening market, with national property prices falling by 0.3 per cent according to RP Data-Rismark, the research agency says this is largely due to higher-priced homes coming off the boil and dragging overall values down as a result.

I have always said that given the cyclical nature of real estate, you can never take one isolated period and determine the long term health of property in general as an investment vehicle.

So while I do not agree with Mr Chronican when he says that housing should be viewed purely as “a place to live in, sleep and raise your family”; I do support his stance that it should not be used as a speculative investment vehicle to get rich.

Note the word “speculative”. Mr Chronican is correct in stating that this is not an asset to invest in lightly or dabble in speculatively.

Rather, it is a long term investment that requires research, diligence and patience in order to generate those excellent long term gains that well bought property provides and will continue to provide into the future.

And you definitely shouldn’t buy property just for the tax benefits of negative gearing.

By the way…I can’t see the government removing negative gearing.

Someone has to provide housing for he 30 percent of our population who can’t afford to buy a house or chose not to own a house. In some countries the government provides this facility, but other than a small amount of affordable housing, the government has left this function to private investors like you and me.

And they expect us to treat our property investments like a business and therefore allow us to claim interest and other expenses as a tax deduction.



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About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


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