Don’t bet your house on Bill Shorten – negative gearing changes will harm the property market

With a Federal election looming Australian voters face a taxing time.

We’ll have to choose to back either Malcolm Turnbull, who seems to have disappointed almost everyone with his performance as Prime Minister over the last 6 months; or vote for Bill Shorten with his background of working with allegedly corrupt unions.gearing negative

And as the election campaign unfolds both sides will be aiming at our hip pockets.

Malcolm Turnbull launched a campaign warning voters of the perils of Labor’s policy to remove negative gearing for established properties purchased after July 1st 2017 and halve the capital gains tax discount to 25%.

He says that Labor’s housing plan would “sledgehammer” the property market as well as penalising mum and dad investors who are using negative gearing to build their financial futures.

Turnbull’s intention is to convince those 67% of voters who already own or are paying off their homes that Labor’s plan to curb negative gearing will reduce the value of their home, their castle, their biggest asset.

And on my reading of the effects of Labor’s proposed tax reforms, he’s right.

On the other hand, it’s Labor’s task to convince Australians that a minority (those 1.8 million ugly, greedy property investors) are distorting the housing market and making it harder for first-home buyers to enter the market.negative

Labor plans to ban negative gearing for existing properties will not be retrospective, meaning those who already own negatively geared investment properties will not be affected.

According to Labor, their proposals would boost housing supply, putting downward pressure on house prices and help first-home buyers enter the market.

They also suggest these reforms will save the Budget $32 billion over the next decade.

However recent reports suggest that Labor is working on false economic models, ignoring warnings that their policy would push down house prices, hit economic growth and put 70,000 households into rental stress.

Labor negative gearing policy ‘could create bubble’

In my mind Labor’s negative gearing policy will create a short term property bubble with investors rushing into the market in the year before the new laws come into play.

It’s much like when the end date for first home owner grants was announced, it brought forward demand which was followed by a slump in the first home buyers’ market.

This time it’s likely a tsunami of people will be wanting to get into property investment in the year after the election, causing price inflation before the policy gets up and running, which could then lead to property value declines in late 2017.

It will direct investors to the wrong properties.

If Labor is elected to government and its negative gearing policy comes into play, many beginning investors will be directed to new high-rise apartments in our CBDs and new house and land packages in the outer suburbs, naïvely believing these will make good investments.

Unfortunately, many will suffer the same fate the majority of investors in these specific sub- submarkets have endured in the past, with low capital growth, no scarcity and lack of rental growth.

But it gets worse…

When these investors try to sell their properties (and remember in the past up to 50% of investors need to sell up in the first five years because they got it wrong) they will be selling “second hand” properties – not new properties – and will find the value of their properties have fallen significantly as now only owner occupiers, and not investors, will be interested in them.

Even worse, the young owner occupier couple, who owns the house next door to these investors in that new estate in the outer suburbs, will find the value of the homes coming back onto the market falling thereby decreasing the value of their home that they worked so hard to save a deposit for.

No one wins!

The Bottom Line:

Yes, houses are expensive in Australian, and sure it’s difficult for first home buyers to get into the market.negative gearing money dollar

By the way… there’s nothing new about this, it’s always been difficult for first-time buyers to get on the market.

And like in all large international cities – London, New York, Paris – it seems to be getting more difficult for young families to buy close to the CBD or in the suburbs of our big capital cities in Australia.

But the answer is not to disenfranchise close to 7 million Australians who already own homes by lowering the value of their homes or to penalise the 1.8 million property investors in Australia who are taking a punt to secure their financial futures.

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'Don’t bet your house on Bill Shorten – negative gearing changes will harm the property market' have 18 comments

  1. Avatar

    April 30, 2016 Alex

    The reason negative gearing is allowed is because the government gets their investment back. Many properties are negatively geared when they are aquired, but over time and thanks to inflation with rental increase they become positively geared. This is when the investor starts paying an increase in tax back. The depreciation available also decreases as the property ages, so leading to less available deductions. When the investor decides to sell their investment property, usually for a profit, the taxman gets another cut of the action. If the government wants to remove negative gearing, then that’s fine, but they should then remove the tax on property income when they become positive, or remove the CGT. You can’t have it both ways.


  2. Avatar

    April 29, 2016 Michael

    A lot of us invest purely into property for capital gain to fund our retirement, so the tax advantage is a bonus which we gladly accept. The negative gearing and capital gains discount we receive will be know where near the saving to government on pensions they will not have to pay us. Investing for anyone’s future should be encouraged to lessen the burden on the government purse strings it should never be an easy election trump card. Anyone can work out how to buy a property if they put their mind to it.


  3. Avatar

    April 29, 2016 George

    Lets not forget that the tax system is already heavily biased towards new properties. Not only are new residential properties more expensive and hence command higher loan values and so higher interest tax deductions. But they also have extremely generous depreciation allowances on the building costs, plant and equipment, especially over the first 5 years ! Any property spruiker is always quick to point the unique benefits of new building depreciation allowances in any presentation


  4. Avatar

    April 29, 2016 George

    Seems to me that everyone would be better off WITHOUT any negative gearing whatsoever as it would put everyone (owner occupiers and investors) on an equal footing and not create a bias nor artificially inflate values on new properties. But reducing the CGT concession would make property must less attractive so certainly a double whammy on property investment.


  5. Avatar

    April 29, 2016 George

    QUOTE: “as now only owner occupiers, and not investors, will be interested in them.”
    Micheal Yardney.
    Pls explain why wise investors would not be interested in properties that offer superior value, superior rental returns, superior prospects for capital gain and yet still allow 100% tax deduction of property expenses, though possibly not all in the same tax year if expenses exceed income. After all as you keep saying, buying property should not be all about tax deductions and in fact this is the wrong reason to buy property…yes?


    • Michael Yardney

      April 29, 2016 Michael Yardney

      George it will be because these properties will be located in the outer suburbs or inner city high rise blocks with poor capital growth, but where naive investors are mistakenly buying for tax benefits


      • Avatar

        April 29, 2016 George

        Thanks for your prompt reply. Yes totally agree. But you haven’t answered my question why smart seasoned investors would not be interested in established properties that offer superior value, superior rental returns, superior prospects for capital gain and yet still allow 100% tax deduction of property expenses, though possibly not all in the same tax year if expenses exceed income. After all as you keep saying, buying property should not be all about tax deductions and in fact this is the wrong reason to buy property.


        • Avatar

          April 29, 2016 George

          Just read the paragraph again. Sorry you are correct about all those ugly high rise in the wrong suburbs. They will become gettos.


  6. Avatar

    April 29, 2016 Peter Ralph

    When an investor at an auction, bidding against a home occupier, is the beneficiary of government subsidy there’s something not quite right in Denmark. Again, when it’s easier to buy your second and third homes than your first, the system’s gone off the rails. Worse, part of the home occupier’s taxes are actually going toward helping the investor bid against him.

    What I really hate is the dis-ingeniousness of our politicians. Ten years ago Turnbull was railing against negative gearing but now his focus groups have told him he’s on a winner if he supports it. When sound debate is replaced by desperate scare mongering you know that politicians care more about their survival than the economy. If Malcolm was still Mr. Popularity he’d be making changes to negative gearing (probably not as far reaching as Labor’s) but survival is far more important than the economy or equity, hence his newfound opposition. The argument that it’s available for shares, commercial properties and warehouses is specious in the extreme. We don’t live in shares, factories and warehouses and we differentiate on other items every day. Medical fees and fresh fruit are not subject to GST, and companies producing oil and gas pay additional taxes over and above company tax. For those wanting an independent view of negative gearing I suggest you Google “Saul Eslake.” All parties know that is iniquitous, it’s a drag on revenue and should be removed.

    Michael, you are fond of quoting Warren Buffet so let me give you one of his sayings. “Never ask a barber if you need a hair cut.” With the greatest respect to you and the others on this forum, you are the “barbers” and understandably you don’t want change. And finally, for those of you who are thinking I’m a “left wing nutter,” my politics are to right of Tony Abbott’s. I just hate inequity and our tax system (not just negative gearing) is riddled with it.


    • Michael Yardney

      April 29, 2016 Michael Yardney

      Peter thanks for your frank thoughts. And yes I have vested interest, but I was investing when negative gearing was last removed and saw the results. They were good for me


  7. Avatar

    April 29, 2016 Peter

    How many times does it take Labor to learn their lesson on Negative Gearing. They have tried it at least twice before and it was always a fiasco leading to an about turn. Labor, please learn from history.


  8. Avatar

    April 25, 2016 Jeff

    This is absolutely spot on. Removing negative gearing on existing properties and reducing the capital gains discount can only have a negative effect on the property market as a whole.
    Even if it did help, it would only be a band-aid fix as smart investors will just purchase or develop their own new boutique style properties and hold them for the long term – this would be my way around the proposed changes if they somehow end up happening.
    I think things would eventually return to where they are now and affordability would still be an issue. The real reason property is unaffordable in some areas is because demand is still outstripping supply – AND BECAUSE OF TAXES ! ! ! !
    I seriously think the whole property industry is taxed to within an inch of its life already which is one of the real creators of unaffordabilty.
    I just wish someone would grow a pair and take away stamp duty and replace it with land tax.
    This would single handedly remove the biggest hurdle in every property transaction and be as beneficial to first homebuyers as the first homeowners grant. ( I never could understand giving a first homeowners grant with one hand and taking it away with the other – stamp duty)
    This would rejuvenate the whole renovation industry as well – as properties could be more readily transacted with a lot less expense.
    I am hoping that Malcolm Turnbull makes it through this election and then puts some really smart changes into place but I think he needs to show us some light at the end of the tunnel – soon.
    And don’t make it an oncoming train.


    • Michael Yardney

      April 25, 2016 Michael Yardney

      Thanks for your thoughts Jeff


    • Avatar

      April 29, 2016 Ian

      I agree with the idea of reduction in stamp duty, as it’s obviously a big dis-incentive to buy or sell a house in the current market, and it certainly clogs up the wheels of a supposedly free market system. But there is no doubt that there needs to be an off-setting increase in other taxes, so land tax (which should be reltively simple to calculate and collect) is a good option (albeit not great for those who already have a good property portfolio and have paid the stamp duty to get there).

      On the other hand, even though much of my own wealth is in property, I don’t agree that a reduction in house values is a valid argument against changing the current negative gearing and capital gains tax laws. Yes any property owner would suffer a loss of value in the short-term, but no one can deny that our property values are amongst the highest in the world, making it extremely hard for anyone starting out today. More affordable property (however caused) is surely better for everyone in the long term, as it decreases the cost of living, so I think it’s a bit self-serving to argue against any tax changes simply because they might affect current values.

      In my mind, I think it probably is reasonable to gradually cut back the capital gains tax discount from 50% to 25% (for all investments), perhaps at a rate of 2.5% per year over the next 10 years. That way tany impact would be gradually integrated into house prices, without causing great distortions in any given year. Perhaps there might be some way of doing a similar thing for any changes to neagative gearing, say with a maximum deduction for each property that reduces each year?

      Obviously we do need to find ways to increase overall taxation, as it’s clear that expenditure on health and pensions is going to increase with our aging population, and I believe that investment income (including superannuation) is the one area that is probably under-taxed compared to other parts of the economy at the moment.


      • Avatar

        April 30, 2016 Dean

        The housing market in general terms is reliant on financing as most of us do not have the spare cash hanging around to just go and buy a house with cash. So Just because property values drop that does not necessarily mean they become more affordable. If home values drop it would mean houses wouldne’t be seen as such a safe investment for a bank and they will not lend money for them so willingly. This means that people will still find it just as hard to buy in to the property market. A pretty obvious way the banks would offset a more uncertain housing market is to raise their interest rates therefore lowering their risk in return ratio. So your $600,000 house now that you can get with a 5% interest rate may well drop in value under labours plan to a $500,000 house…. But if the bank puts in their safe guard which they certainly would and the interest rate goes up to even 6% you’ll be paying the exact same amount in repayments… Therefore the house is actually no more affordable.


  9. Avatar

    April 25, 2016 Den

    A good article Michael. All good points, well made.
    The points about pushing down the housing market and stunting economic growth are two that I don’t think are being outlined clearly enough in the public domain.
    If the housing market stalls people will start to lose their jobs in a lot of sectors… That means those people won’t be eating money and paying tax. That also means some of those people will be relying more heavily on welfare payments from the government. It also means a drop in land tax and stamp duties for all the state governments and we all know when that happens they’ll be running straight to the federal government to make up the difference.
    There’s so many things not factored in to labours policy it’s frightening.


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