Australian Property – The ‘Good’ Investment Making a Loss for the Nation

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In Australia, the debate rages on about this stupid and inefficient deficit levy. As it should. In what looks like bad timing for property speculators, the ATO just released 2001/12 taxation data showing negative gearing on properties continues to drain the governments’ tax coffers.

From today’s Financial Review:

‘The country’s 1.3 million landlords claimed almost $14 billion in tax losses that offset the tax owed on their other income, the latest Tax Office data shows.’

‘The average loss made per property in 2011-12 was $10,894, but this loss more than doubled for people earning over $180,000 to $22,772.’

We’re not sure how much these losses actually impact budget revenues. But it must be a fair whack. Reforming the negative gearing arrangements to apply to only newly built properties (the whole point of it in the first place) would surely go close to covering the $2.5 billion the government hopes to raise from the deficit levy.

And as the Henry tax review stated, applying a broad based land tax to replace a bunch of inefficient property taxes like stamp duty (which only slugs those moving house) would ensure governments maintain (and grow) their revenue base, only in a more equitable and efficient manner for the whole community. 

This is simply sensible economics. But there are too many vested interests lobbying to keep negative gearing in place because they know it encourages speculation and turnover, which keeps the property gravy train tooting along for many.

Anyway, if property is such a good investment, why are Australia’s ‘property investors’ making a loss on it? And why are other Australians subsidising this loss? In short, it’s because we’re now rocking a finance-based economy…one that relies on a constantly falling cost of credit to inflate asset prices and produce the illusion of wealth. Who needs income when you have rising property prices?

We got another round of evidence of this today. The monthly gauge of manufacturing activity in Australia fell to 44.8, signalling an industry in deep recession (anything below 50 signals contraction). But not to worry, who needs a viable manufacturing sector when you have banks churning out record profits, year after year?

ANZ just announced another record profit, up 11% on last year’s effort. A drop in bad debt charges (again) drove the result. And the fact that year on year income grew faster than expenses is always good news for a highly leveraged institution.

But — and there is a ‘but’ — ANZ’s underlying profit (before tax and impairment charges) fell 1% from the six months to September 2013. This lends further weight to our view that the interest rate juice is beginning to run out. We’ll have to see what the other banks come up with in the next week or so, but we suspect the banking sectors’ good fortunes are coming to an end.

You can take that with a grain of salt. We’ve said the same thing before and been completely wrong. For example, a few years ago we thought a falling terms of trade would negate the effect of low interest rates and NOT cause a renewed asset price boom (which the banks have clearly benefitted from).

But China had one last roll of the stimulus dice and kept the party going. Meanwhile the RBA cut rates anyway…too far and too fast in our opinion, as they now how little left in the tank for when China’s economy really starts to slow (which is underway now) and the mining cap ex drops off in a big way next financial year.

So we’re sticking with our bearish view on the banks…even more so now, given the cycle high earnings and stretched valuations. Let’s see how that call looks in a year?

Regards,

Greg Canavan+
for The Daily Reckoning Australia

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Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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18 Comments on "Australian Property – The ‘Good’ Investment Making a Loss for the Nation"

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Anton
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As there is already land tax on investment and commercial property, a call for further land tax means a land tax on principal private residences. This is another tax on individuals while business with its power is calling for a relaxation of taxes on business eg payroll tax.
A land tax so far has been a state tax not a federal tax so calling for a widening of land taxes to home owners does nothing for the federal government.

Jason
Guest
‘If property is such a good investment in Australia,then why are so many ‘landlords’ doing it so tough that they need a handout (negative gearing)?’ The answer is simple-too many landlords are defrauding the tax payer, too many property developers and slimy, dishonest real estate agents are ripping off the population, dodging taxes and basically defrauding the nation. Negative gearing is nothing more than a socialistic handout for rich landlords who charge rip off rents. Parasites who produce NOTHING but cancerous inflation. The lack of anti-fraud policing, government figures with conflict of intrest (i.e they are high rent-charging slumlords) and… Read more »
Rose
Guest

Oh, and I understood that rent prices were driven by ‘the market’ not greedy landlords! If the Govt disallows negative gearing, many private property investors will drop out of the market, leaving the Govt to house many more ppl who need to find rental accomodation. How well are they doing atm!!??

smallcap
Guest
Comrades,comrades when is the revolution starting? I thought thought this was a forum for people who wanted to learn how to make money and secure their retirement. Suddenly its political and making money is dirty. I dont remember anybody complaining when I paid my 3.5k land tax bill of the 4 x the regular rates on the units I an letting. But hey, lets all get outraged, go off at the mouth and follow the Steve Keen school of investing (hey what a good idea it was for him to sell his house). Sorry I didnt know there were good… Read more »
Harquebus
Guest

Plan for your retirement: Grow some vegies and raise some chickens.
Super and savings will be lost. They are just fiat paper or in most cases, just fiat bits in a machine. All fiat currencies have failed. Every one of them and ours and others will be no exception.
EROEI and the destruction of our environment is what should be concerning us.

David
Guest

I don’t why people are complaining so much about the income tax levy. It is clearly unfair to those productive members of our society. However, the reduction in the RBA cash rate over the last 3 years from 4.75% to 2.5% is a far greater heist. The income tax levy is a wealth transferal from productive people to non-productive people whilst the reduction in the cash rate is an even greater wealth transfer from responsible savers to property speculators and the real estate industry. Yet it receives no attention because it is theft by stealth

smallcap
Guest

This is paranoia central, the cash rate is monetary policy controlled by the RBA mainly to stop the currency being over valued relative to others and hence ruining our exports (like it was at > parity) so inerest rates are lowered the bring down the currency value (reduces overseas investment in our currency due to the high interest rate returns). B 4 U blog, try learning just a little about enonomics, makes u look a bit less silly.

Harquebus
Guest

Economics is what has got us into this mess in the first place. It does not factor physics nor the environment (externalities in ecospeak) and “the economy is a wholly owned subsidiary of the environment”. – Gaylord Nelson
Economist yearn to for their wizardry to be regarded as a real science. It’ll never happen.
Eggonomist: A financial eggspurt.

Libretto
Guest
It may increase export earnings, but it decimates incomes of people who rely on interest from savings to survive. This forces them into the dividend market which increases risk (particularly given the demographic cliff we’re about to fall off where nobody will want to buy inflated assets like stocks and, particularly, property) A better option is to increase the cash rate (SLOWLY) to ease the pressure off property yet encourage offshore money for investmest and therefore infrastructur improvements. An added bonus is to lower the fear felt by many retirees! This can’t happen too quickly or the (inevitable) property Bubble… Read more »
smallcap
Guest

So its safe to say that you have never studied business or econonics as well??????

Harquebus
Guest

Me, business plus computer and “information” science.
Economics is just voodoo and will end up killing many because of the faith based thinking of its worshipers who, can not think logically or comprehend the consequences of perpetual growth.

Nexus789
Guest
I have studied economics extensively. Much of it is a load of rubbish – based on simplistic models of human behaviour veneered with fancy mathematical models. Much of it has been used to underpin political agendas – Friedman’s stupid ‘Monetarism’ was used to demonise the public sector/public debt and ‘validate’ privatisation which is the theft of the ‘commons’ and ‘public goods’. I have time for the work of Mises and Minsky. Like accounting/finance simplistic mainstream economics does not take into account the finite limits of the Earth, rules of physics or external constraints. It does not even take into account… Read more »
Jason
Guest

First lesson of economics should be the limitations imposed by a finite resource. We don’t have microfusion generators we don’t have anti-matter reactors and we don’t have magic perpetual growth pixie dust, what we have is 1 trillion barrels of oil, we have already used 1 trillion barrels so production has peaked. No growth in cheap oilmeans no growth in economics and demographics, it is simple math. But many ‘economists’ still live in a fantasy land of perpetual economic growth.

md
Guest

But what we do have is an almost infinite number of Chinese investors wanting to park their money in Australian real estate and we are only too happy (as a nation) to let them if it means propping up the housing bubble. As long as real estate prices are rising, then Australia looks healthy, even if everything else is collapsing.

Mickeysofine
Guest

What should i do ? i am a greedy landlord who owns 3 properties negatively geared to offset my tax 100% legally am i smart ? :P

toeknee
Guest
Probably too late to have any1 read my reaction to the passed few comments on the subject but, Looks like the smallcap guy had no more valid arguments to the other comments of which I mostly agree with. But maybe that is a sign of composure in the face of adversity.The type of adversity which includes real world common sense and disregards that smoke, mirrors and vested interests of which seem like they will always be involved in political economics so long as us stupid humans are dreaming up ways to keep the vested few oligarchy and capitalists in control.… Read more »
ChrisY
Guest
I have no vested interest to protect, but I doubt that property investors make a loss, long-term. Change the rules on negative gearing, but do not abolish the principle, or else you will create new anomalies. If you must change the rules, ensure that all RE sales profits are taxed either at the company rate or at the personal rate schedule. I do not agree that the political purpose of negative gearing is or was to encourage construction, though such sophistry may be the response advanced by amateur politicians and unworthy treasurers. The fundamental tax principle here is that a… Read more »
Sagar
Guest
Negative gearing is good for banks.Loans not repaid quickly enough,this is big loss to the investor whatever saved on taxes that should go to government goes to banks. More the property more the tax loss. though in the long run when property value increases there is some benefit to investor. It is a loss when bought at the wrong time. Governments long term benefit is less pressure on housing. Kid can inherit some assets that with time becomes difficult to purchase.Purchasing power declines and those without have problems even having deposits. Some tax allowance for two children may be ok… Read more »
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