Your Responses to Why Negative Gearing Must Go

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Yesterday’s article on negative gearing sparked a few great responses. Let’s see what you had to say…

Greg,

I rarely write comments and when I do they are not always positive. However with the above article you hit the point with unusual precision.

Hopefully one the masses, if not elected officials will get their collective heads around this and act accordingly. Given the dearth of interest from new home buyers of late, perhaps change will be driven from the ground up.

DG

Unusual precision? We’ll take that as a compliment. Thanks!

I appreciate that you are negative on property – as long as I have been investing in the stock market I have been exposed to brokers negative on property – that’s in their own interests and fair enough. However every asset class has its day in the sun and life goes on. To put you in the picture on negative gearing here you must appreciate that interest on owner residential property in USA and other countries is tax deductible – it is not here!

Cheers,
Joe

We are only negative on property because as an investment it sucks. And regarding the taxation, owner-occupiers here may not get a deduction on interest paid, but they don’t pay capital gains tax on a sale. That encourages speculation.

I too believe negative gearing is counterproductive, but if we look back when Mr Keating was Prime minister, he abolished negative on investment property’s only to reinstate it when the consequences were realised

The result was, rental property’s dried up very fast, driving up rent .

Negative gearing is a way of subsidising rental markets; who would bother investing in property without the tax incentives, unless It’s your own home.

Unfortunately house prices are over the top and negative gearing is one of the major causes.

Peter

We hear a lot of comments about what happened when Keating abolished negative gearing back in the 80s. Frankly, it’s time to move on. To think that negative gearing still favours construction for rental properties is like still believing that Agadoo was a good song.

a

Like Agadoo, such a belief is not cool. We searched for a chart to back up our claim and found this excellent one below from Macrobusiness. It shows that since the late 1980s, the vast majority of investment property loans have gone into pre-existing housing. Back in the time of Keating it was 50/50.

So if you’re a negative gearing sympathiser based on your recollection of the 80s, it’s time to put down your cocktail and move your thinking forward a few decades. Nearly all new property investment goes into the existing housing stock, doing nothing to increase the supply of rental accommodation.    

b

Our final reader response is a good one, as he points out the considerable costs and red tape added to the development of properties by local government. What can we say? Government degenerates as it moves through the states to the local level.

But he errs in thinking that Agodoo is still cool.

Hi,

I strongly disagree that negative gearing is the cause for the Australia’s high Real Estate prices.

Negative gearing was brought in for the private sector to provide more rental accommodation which the State and Federal Governments do not provide.

Rental accommodation is not the largest sector is housing. Owner occupiers dominate.

In the 1980s negative gearing was abandoned and rents sky rocketed. I was a property manager at the time and I would say they doubled within 12 months. The queues to rent the properties were huge and bribery by prospective tenants to be the winning tenant or even offering more rent was amazing. (Ed comment: in a properly functioning market these higher rents would have increased the return on housing as an investment, which would have eventually increased supply, no?)

It became such a huge problem they brought back negative gearing.

When they abolished negative gearing property prices did not collapse so I doubt abolishing negative gearing now would cause properties to be more affordable.However rents will go up and then the tenants will not have the savings to purchase. (Ed comment: They don’t have them now! More to the point, think about the price signal. Back then, the removal of negative gearing increased rents to send a signal to encourage more non-tax assisted housing. Prices didn’t collapse back then because they weren’t wildly overvalued. Now, we reckon if you abolish NG you’ll see price falls to increase the yield for potential investors, rather than rent rises)

Property is so expensive in Australia for a number of reasons

1 Not enough land to buy that has density to build. Do yourself a favour and try to buy a development site especially in Sydney

2 Once you get one try to get an approval. The developer is public enemy number 1. Council will do whatever they can to stop you from developing.They will drag out the process and add unnecessary costs to the development by requiring you to provide report after report and then add their fees which are exorbitant. It takes longer to get an approval than it does to build the building. This is all done for the community. (Ed comment: See above re local councils)

3 When you do a feasibility see the effect of GST. Now that is a killer.

4 Construction costs. As you mentioned look at the labour costs. It’s a catch 22.
Properties are cheaper in areas where there is an oversupply. We will never have an oversupply in Capital cities because no one wants development in their backyard.
As we know local councils and State governments will not make the necessary changes to allow more development so the problem will never change.

What we need is interest rates to skyrocket. That is not going to happen unless the major economies stop printing money.

Also I think you should write an article about property funds. They are now paying 30% more for properties than a year ago. They can financially engineer a deal to make the investment look good.

However the buildings they buy could be good but the businesses that occupy are not good. Rents are dropping incentives are going up but these smarty fund managers are as the media quotes “snapping up” properties.

There are whole lot of Babcock and Brown Geniuses lining up and the punters are falling for the same old beat up.

What is happening is a disgrace.

When fund managers starts talking about compression yields you know the collapse is within 6 months.

It’s getting interesting and I look forward to what unravels.

Luke

Great comments, thanks Luke. We may disagree on the merits of negative gearing, but your last bit proves our point that lower interest rates simply encourage speculation rather than investment. Yes, fund managers buy because of ‘yield compression’, which simply means when you put a lower interest rate into your model a property’s asset value increases, regardless of the quality of the underlying cashflows.

Here we go again…

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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4 Comments on "Your Responses to Why Negative Gearing Must Go"

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paul dever
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To me the biggest relevant question is do tax jurisdictions where negative gearing is not in existence to the same extent as in Australia have efficiently operating residential rental markets….and the answer is yes they do….so why if NG was changed in Auz to something similar would rents skyrocket…..NG is a supercharged tax break to tax paying investors…does it distort investment decisions…I believe so….does it cause a distortion in the value of residential properties…yes….and it gives investors an advantage over 1st time buyers, pitting generations and different sections of society against each other where one generation / section has a… Read more »
truth and integrity
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Luke’s comments are relevant facts that support negative gearing. However the major problem falls back into the economic realm of false GDP figures and excessive government employees and their high wages. Housing is a productive enterprise that reflects the demand for real assets held on Torrens titles by owners to safe guard themselves against corrupt governments. Ironically the government can not afford to be rid of negative gearing because they will lose too much in taxation, rates and all the subsidiary rates and taxes the government collects which are a very high contributor (30%) to the high cost. With negative… Read more »
Mick
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Negative gearing is not the issue by itself. After all, it allows individuals to claim tax deductions for the costs of investment. Companies do it and have done it for many years. That also applies to margin lending and any form of lending to invest in any type of asset class.As an example, I could take out a line of credit, stick the money in the bank or buy bonds or gold and claim the interest I have to pay as a tax deduction. Negative gearing ONLY refers to those investment properties where the costs outweigh the income. What about… Read more »
Joe
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In a market the availability and cost of money is the main contributor to all prices set. If you make money cheap, then more of it will chase the same asset base. Make money expensive and less money will chase the same asset base. Greenspan started it with the 2000 correction the U.S didn’t want to have. Since then the price of money (new money created by the state) has got even lower in order to allow the Banks and other highly indebted financial institutions to borrow the free money and invest in any inflating asset class in order to… Read more »
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