Yesterday’s article on negative gearing sparked a few great responses. Let’s see what you had to say…
‘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.
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!
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.
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.
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.
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.
‘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.
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…
for The Daily Reckoning Australia