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Property investors painted in a “negative” light

As a property investor, it’s likely you would not be too keen on the suggestion from NSW labor leader John Robertson that Australians should engage in a debate about the “effect” that negative gearing is having on our property markets.

Despite Robertson’s concerns that negative gearing is potentially driving house prices up and adding to the affordability issues facing new generations of first home buyers, Treasurer Wayne Swan has assured investors that the government has no intention of altering present tax arrangements.

In an interview on Sky News, Robertson said, “Everyone, I think, is concerned about how their kids are going to buy a house, how they’re going to get into it.”

“In many circumstances, these are people who’ve got two or three investment properties and there’s no real appreciation of what negative gearing is doing in terms of putting pressure on housing prices for their kids to get their first foot in the door.”

A Property Observer reports that according to figures from the Australian Tax Office, approximately 1.7 million property owners used negative gearing to claim a net rental loss of $6.5 billion for the 2010/2011 financial year.

Among Robertson’s supporters is chief executive of the Australian Council of Social Service, Cassandra Goldie.

She claims that a report produced by the McKell Institute entitled Homes for All, highlights that “negative gearing is at the heart of the problem with inflating house prices” and therefore is a potential area of reform to address the ongoing affordability crisis.

Speaking on Channel 10’s Meet the Press, Goldie said, “We’ve got a crisis here so let’s have a little bit of courage to deal with it.”

Negative gearing has long been used by property investors to secure high growth property, while at the same time reducing their tax bill by claiming the loss that often results in acquiring this type of asset as a deduction.

But according to the McKell Institute tax reform, with federal and state government policies that favour an increase in housing supply to meet the growing demand and in turn, address the ongoing dwelling shortage in Australia, needs to be considered.

The report says, “all politicians of all parties recognise that negative gearing and untaxed capital gains add wealth to existing home owners to leverage for second homes and investment properties without any evidence that they increase overall supply significantly; and that increasing effective housing demand in a constrained housing supply results in an increase in house price inflation and in problems of affordability for those seeking to buy”.

In other words, the finger is pointed squarely at property investors who leverage off their own home to purchase more investments for their portfolio in a bid to self fund their retirement.

“Tax exemptions such as negative gearing have allowed many people to purchase second, third or even more properties”, says the McKell report.

“In the past, these may have supported the rental market, but in a market where supply is constrained it simply increases the price of housing for everyone.”

So what is their idea for a solution to this apparent problem?

Basically, the institute says consideration should be given to “phasing out of negative gearing over the long term in relation to existing properties but perhaps retained for new properties to stimulate supply”.

But isn’t this simply an argument that allows the state and federal governments to slink away from their responsibilities with regard to the affordability issues facing young Australians?

What about the reams of red tape that developers face when attempting to create more supply? Or the restrictive cost of things like land tax that makes potential developers think twice about laying the foundations for new residential housing?

Not to mention the cost of living that seems to be increasing at breakneck speed!

Investors who use negative gearing strategies actually increase the supply of much needed rental accommodation and help to sustain Australia’s property market.

They also aim to create a high growth portfolio that allows them to be financially self-sufficient once they cease work, thereby easing the government (and taxpayer) burden of increasing pension costs.

I think its high time we stop trying to “fix” the so-called affordability crisis with knee-jerk solutions that potentially penalize investors and start looking to our government for real, long term answers.



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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


'Property investors painted in a “negative” light' have 15 comments

  1. Avatar for Property Update

    June 25, 2012 @ 9:08 am Peter Ormond

    How about giving tax relief on Primary Place of Residence? Now that would stimulate the building industry and address the affordability issue in one hit! It probably wouldn’t need to be the full tax offset to have the desired effect.

    Reply

    • Avatar for Property Update

      June 25, 2012 @ 11:20 am Michael Yardney

      Peter
      That’s what they do in America isn’t it?
      Currently the govt stimulates the building industry with short term benefits such as first home owner grants, stamp duty concessions etc.

      Reply

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      June 25, 2012 @ 10:40 pm vasilija wilson

      Peter
      I do agree with your comment hardly and ther are so many people that would like to have some properties investments for they older age not to depend on Social Securities.
      To recive Government pensins is not very plesant.
      Thank ypu Peter

      Reply

  2. Avatar for Property Update

    June 25, 2012 @ 1:20 pm Bernie Kroczek

    I don’t think the finger can be pointed at negative gearing as the reason for higher house prices and affordability. With the current tax rates negative gearing is not as attractive as it used to be and in my experience as a real estate agent I have found very few investors buy for the purpose of reducing tax. They are buying to secure their financial future through the potential for substantial capital gains at some point in the future. Tax relief is a bonus.
    Ther are many reasons why property prices increase and negative gearing is a minor one.
    Having said that, I am opposed to negative gearing purely on the basis of equity in the tax system.
    It doesn’t seem fair to me that tax paying renters, who may or may not be saving for a deposit to buy a property to live in should be subsidising those who, more often than not already own at least one property and as such can afford to grow their wealth by investing in more property.
    If I were a renter I wouldn’t be too happy about it.
    I’m all for investing in real estate as a way of growing wealth over a long period of time, but not through through inequities in the tax system.
    One another angle, would you invest in a business which was losing money every week, and expect the tax payer to pick up the tab, with the possibility of picking up a substantial capital gain in the future?
    Investing in property should be treated like a business because at the end of the day that’s what it is.

    Reply

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      June 25, 2012 @ 3:29 pm Michael Yardney

      Thanks for your comments Bernie
      You are right – property investment is a business and provides a service- accommodation for those who chose not to or can’t afford to buy their own properties. In some countries the government provides this service.
      As any other business we take on a risk and expect a fair return. If I opened a Jims Dog Wash business I’d be able to borrow to buy my trailer and use it as a tax deduction. It’s the same with legitimate expenses for property investors

      Reply

      • Avatar for Property Update

        June 26, 2012 @ 6:47 am Q

        investors “invest” mainly in existing dwellings (96% if i remember), they are not adding to the pool therefore they are not providing a service accommodation as you say it.When governments provide the service they build new accommodations.
        currently investors are just displacing home owners to home renters.pointless exercises.
        As a country we do not create wealth be selling existing dwellings to each others.

        but you know all that Michael isnt it 😉

        Negative gearing should be on new dwelling only.But whatever as capital gains disappear for a foreseeable future and baby boomers retire, NG not be used anymore.

        if negative gearing was to be removed today it is quite safe to say that prices would drop significantly (effect would have been more dramatic few years ago) which demonstrates that NG has in fact increased prices.

        if you think a removal of NG would not affect prices why would you be against its removal ? 😉

        Reply

  3. Avatar for Property Update

    June 25, 2012 @ 6:15 pm John Wood

    I run a landscape business and I agree with Michael. I get the claim of vehicle and trailers not to mention numerous tools over the years that I need for the business. These cost me hard cash at the time and so are legitimate expenses that I expect to claim – I also have two investment properties and they have costs that are related to the function of providing the service of somewhere to live for my tenants. I expect to claim them just the same as a spade for the landscape business!
    Having just returned from UK using Bed and Breakfast accommodation – I would also expect to have costs in doing that here as a business in my home and would be claiming them too!
    If the polis want to cut back on negative gearing then I would say they will also have to look at these very expensive 4 wheel drives and sports utes that the tradies claim as an expense for their businesses as well – – I mean do you really need an $80000 ute to do the job that a $30000 Chinese import can do!?

    Reply

  4. Avatar for Property Update

    June 26, 2012 @ 12:53 am Jeff

    These people don’t understand. A negatively geared property is running at a loss – hence the tax deduction. If it is positively geared it is making a profit and there will be tax to pay. If a capital gain is realized by selling the property there will be tax to pay. These same principles apply to any business. I often wonder if the term “negative gearing” isn’t considered by these clowns to be some kind of extra special tax deduction just for greedy property investors. If tax deductibility (a better way of describing it ???? ) were to be taken away from property investing I doubt many investors would be interested in providing rental houses leaving the Government to step in and provide these rental houses at the tax payer’s expense therefore leaving us with less disposable income with which to buy our more affordable homes – or have they just become less affordable because of our smaller income ????
    Maybe the whole reason (or a big part thereof ) homes seem less affordable is because they are not really comparable with a home that was built 40 years ago. My Parents built a new home 42 years ago. It was 1200 square feet (110 sqm approx) in size which was about average back then. The average house is at least twice if not three times that size now with a whole host of gadgets and luxuries never even in existence back then. People used to buy a modest first home and eventually work their way up to a dream home – now people want the dream home first.
    Maybe there isn’t an affordability problem – maybe there is a reality problem.

    Reply

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      June 26, 2012 @ 12:19 pm Dave

      Well said Jeff!

      Reply

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      June 27, 2012 @ 8:01 am Peter Horth

      Very well put Jeff. You pay your taxes either while you own the property (if you make a profit, as in any other business) or when you sell (capital gains tax, as with any other business). Without negative gearing rents would rise substantially – what would that do to our economy?? In fact in 1985 the government did remove negative gearing – but this had such a distaterous effect on building supply and the economy that it was reinstated only two years later in 1987 [check out http://en.wikipedia.org/wiki/Negative_gearing_(Australia) ]. I think it is unlikely that any Government would want to try that trick again.

      Reply

  5. Avatar for Property Update

    June 28, 2012 @ 1:32 am Jeff

    I find it quite amazing that these supposedly well educated people in such socially responsible positions waste so much effort trying to change the world to suit a few when their time would be much better spent trying to change the few to suit the world. They say people can’t afford to buy their first homes. I say why not spend the time educating them on why they can’t afford not to and the sooner the better. The sooner they figure out that pretty much everything doubles in price every ten years or thereabouts the sooner they will realise that it’s only unaffordable right now and that will never change thanks to inflation. What they need to teach them about most is the power of compounding and the fact that as soon as you become the owner of an unaffordable first home you are freezing that purchase price for the life of the mortgage while the value of the home keeps on compounding as does your income.
    My parents built a new three bedroom home at a cost of approx $15,000 for both house and land 42 years ago. If they had had an interest only loan over the last 42 years they would still owe the entire purchase price of $15,000 now. See how ridiculously insurmountable that amount seems now ?????
    When they built the house it was to them every bit as unaffordable as it is now and they did it on one income with two kids under five years of age.
    With rising incomes because of reasonably low unemployment , flat house prices and low interest rates I can’t understand how they can say affordability is or will be a major problem in the near future.
    As the economy improves and property prices increase and interest rates increase people’s confidence will increase to the point that unaffordability will no longer be the hot topic even though it will then in all likelihood actually be worse than it is now.
    Do these people have any idea how much damage they would do to the Australian economy if they really did manage to wind back house prices or time or whatever else they think they’re capable of ?????

    Reply

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      June 28, 2012 @ 6:50 am Michael Yardney

      Jeff
      Thanks for your comments on this topic – I love your passion :)

      Reply

  6. Avatar for Property Update

    June 29, 2012 @ 1:53 am Jeff

    There was a report on current affair or today tonight this evening showing exactly how competently the government can provide housing. About twenty houses in Sydney left vacant and destroyed by vandalism !!!! They plan now to bulldoze them and sell the land !!!! An absolutely bloody genius strategy if ever I’ve seen one. Just incredible.

    Reply

  7. Avatar for Property Update

    June 29, 2012 @ 2:17 am Jeff

    Maybe that is the sort of behavior Mr Robertson is worried about – people taking negative gearing way too far !!!!

    Reply

  8. Avatar for Property Update

    July 6, 2012 @ 7:07 pm Greg

    Does any one remember what happened when the Govt took away negative gearing about 20 years ago.?
    I owned a few properties at the time and most investors just decided to sell up.
    No house prices did not suddenly go through the floor. People purchased these homes at what the market price was. BUT as investors withdrew from the market so to did their properties as rentals. People will say that OK the purchasers and the renters should have cancelled each other out like a simple maths equation.
    But NO. The supply of property available to rent dropped dramatically. Investors and developers that had projects set to go cancelled out. Within a short time demand was hot. I had held my properties and not sold. Rents were going through the roof. Instead of a few people turning up at a open house there were heaps. People demanded the Govt fix the problem and build thousands of homes to fix the problem. Something they could not afford. It was not to long that negative gearing was again allowed.
    If rental property is short in supply now see what happens if negative gearing is withdrawn.

    As a footnote I still own most of those properties. Over the years rents have risen fourfold. So I am now paying tax.
    Cheers

    Reply


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