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Canning negative gearing could cause 'havoc', says Aussie chief

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Julia Corderoy | 09 Oct 2014, 07:38 AM Agree 0
As the debate continues over negative gearing, one industry stalwart has said that the unintended consequences of scrapping negative gearing could be “quite horrific” on the housing market
  • Allan Faint | 09 Oct 2014, 09:59 AM Agree 0
    once upon a time home loan interest was tax deductable for the owner occupier. Maybe a silly idea but why not go that way and help people buy rather than think of ways to make it difficult.
  • Saul Eslake | 09 Oct 2014, 10:06 AM Agree 0
    John Symonds has made an enormous contribution to the mortgage and housing markets, and I respect him greatly for that. But I respectfully disagree with what he says here. The RBA's Financial Stability Review shows that, far from 'negative gearing' being largely the province of 'mum and dad' investors, some 60% of the debt owed by property investors is owed by the wealthiest 20% of households. He suirely can't have meant to say that "first time buyer activity is low because interest rates are so low" - that would imply that the way to help first-home buyers is to raise interest rates! 'Negative gearing' doesn't do anything to boost the supply of housing because 93% of investors buy established properties, as opposed to 70-75% of of owner-occupiers. 'Negative gearing' allows those investors to push up the price of the properties that owner-occupiers are trying to buy, with what amounts to a 49% subsidy from other taxpayers.

    I'm actually NOT advocating that 'negative gearing' be taken away from those who already have it (and who undertook their investments in good faith under the law as it now stands). What I am saying is that it should be henceforth denied to any new investments. That would be a much more effective way of dealing with the 'unbalanced' market that the RBA has identified than either raising interest rates or untried and possibly ineffective 'macro-prudential' measures, without hurting anyone who isn't a cause of the 'imbalance'.
  • Pete | 09 Oct 2014, 11:13 AM Agree 0
    Negative gearing was scrapped many years ago i think in the keating years.It was such a disaster & caused a huge shortgage in the housing market because investors stopped buying & builders stopped building it actually forced prices up & other major ramifications that i cant recall. Essentiaally it was such a disaster it was brought back in only 6 months later
  • Incognito | 09 Oct 2014, 11:18 AM Agree 0
    Other way around John.

    We have the unintended consequences of negative gearing.

    Now it's time to make it on new property ONLY.

    B. Frederick
  • Jeanine Phillips | 09 Oct 2014, 12:48 PM Agree 0
    Agreed....Why pick on negative gearing in property, the rules there are similar to all investments. What about margin lending on shares, which is deductible AND fully franked dividends. What about business investment deductions, equipment leasing etc etc. It's just that property has been the "comfortable" investment for Australians. Don't forget it underpins the rental market and any major modifications could see investors dumping their property investments due to less attractive tax provisions. This will then have a flow on effect to reducing owner occupied house prices generally....or the recession in housing we didn't need to have because someone decided to tweak the fundamentals....be wary...be very wary. It was tried once, and reversed very quickly. Let the market take its natural course up and down, as the case maybe...
  • Papery | 10 Oct 2014, 10:31 AM Agree 0
    Thank you Saul.
  • Tom | 10 Oct 2014, 10:37 AM Agree 0
    Saul, as a mortgage professional who is on the ground seeing First Home Buyers, Upgraders, Refinancers and Investors, I figure I'm in a very good and well qualified position to comment on this topic.

    And I beg to differ with your opinion.

    The problem we have in the market place is that the buying statistics have been heavily distorted by the changes to the eligibility requirements for the First Home Owners Grant.

    In my experience, most first home buyers would much prefer to purchase an established property than buy new. An established property is available now, they can see it, touch it, and it will suit their needs now. An off-the-plan purchase scares them - and there is such limited stock of completed new product that it becomes difficult for them to find a suitable property.

    The restriction placed on first home buyers now means that we brokers do not record them as first home buyers if they buy an established property, so their purchase is not recorded in the statistics. Given their inability to access the Government Grants for purchasing an established property, they often decide to make their first purchase an investment. Thereby allowing them to access the property market now, and still remain eligible for the Government Grants in future years if a suitable property that meets the eligibility requirements comes along.

    So in my opinion, a fair chunk of these so called Investors, are actually First Home Buyers. And that once again has distorted the facts that you and your colleagues are relying on.

    I'm pretty sure that most of my professional broking colleagues would agree with me on the distortion that is now evident within the official statistics.

    Statistics never replace actual experience from real life practitioners, but without accounting for actual experience, what you are being provided is wrong.

    Statistics however do make it extremely easy for economic professionals to base a judgement or recommendation on inaccurate information, and to provide guidance to Government that is both misleading and dangerous at best. And all this from purportedly reliable information - remembering of course that the quality of data out is only as good as the data provided.

    I can't argue with your opinion given the information it's based on, but I do feel that it's time a more thoroughly researched position is warranted, and if your opinion remains, then at least it would be based on a more accurate assessment of the current market, and not a distorted one.

    Without reliable and correct information, how can such an important topic be rationally discussed and considered?

    And then of course you get to the subjective topics such as the impact on the rental market, the provision of Government housing etc.
  • Saul Eslake | 10 Oct 2014, 12:19 PM Agree 0
    Tom's point is a really interesting one, I thank him for it and I will investigate it further. I am certainly aware that fewer FHBs are being classified as FHBs because they don't get grants if they buy an established property - but I have not previously heard any suggestion that they are being classified as 'investors' as distinct from 'repeat buyers' (and I wonder what the point of that would be). I would note in passing however that if he and others in his position are intentionally misreporting the classification of their clients, then they are contributing to the mis-diagnosis which Tom alleges here.

    To Jeanine Phillips' point, I argue that negative gearing should be removed for new investments in all asset classes, after the announcement date - not just property. And remember that dividends have already had company tax paid on the income out of which they've been paid, whereas rental income hasn't.

    "Pete"'s allegation about what allegedly happened in the mid 1980s when negative gearing was temporarily abolished is just plain wrong, although "Pete" has no doubt heard it so often that he, like so many others, sincerely believes it to be the truth (Josef Goebbels once explained how this works). Rents only rose significantly in Sydney and Perth during that period - and they rose there because in those cities the rental vacancy rate was 2% or less (negative gearing hadn't done anything to fix that) and hence they would have risen anyway. If the abolition of negative gearing had "caused" that surge in rents, it should have happened in the other cities as well - but it didn't.

    Allowing home-owners to deduct their mortgage interest expenses would probably only encourage them to borrow even more - and hence push prices up even further. And allowing them to deduct interest expenses without also subjecting owner-occupied housing to capital gains tax would be a drain on the budget (to be made up by increased taxes on others, or more cuts in government spending) and unfair.
  • Positivity | 10 Oct 2014, 12:51 PM Agree 0
    Imagine the investment in new housing if tax breaks no longer applied to established housing.

    (while grandfathering exiting investments of course).

    Now watch for the political campaign by the REI and other gravy trainers, while homebuyers wilt in Australia's two biggest housing markets.
  • marty | 10 Oct 2014, 02:48 PM Agree 0
    Good on you @ Tom. I have been trying to tell anyone who mentions the death of first home buyers the exact same thing for the last few years. Clearly misrepresentation of the data, even the ABS is investigating.
  • Positivity | 10 Oct 2014, 06:15 PM Agree 0
    Imagine the investment in new housing if tax breaks no longer applied to established housing.

    (while grandfathering exiting investments of course).

    Now watch for the political campaign by the REI and other gravy trainers, while homebuyers wilt in Australia's two biggest housing markets.
  • Tom | 13 Oct 2014, 11:51 AM Agree 0
    Saul, thanks for considering my opinion, and being interested in reviewing further.

    Happy to meet and discuss my view next time you are in Canberra.
  • Tom | 13 Oct 2014, 11:55 AM Agree 0
    Saul, further to my commentary, the reason I'm classifying First Home Buyers as "Investors" is that they are buying established property and renting it out, whilst continuing to rent themselves.

    So whilst they are not officially classified as "First Home Buyers" they would be if the Grants assisted them. But in the meantime, the are becoming home buyers - which is their desire- via the "Investment" path rather then the "First Home Buyer" path.
  • Old Broker | 14 Oct 2014, 04:36 PM Agree 0
    Saul I speak from broking and also from a Fin planning background.
    Here is my two bob
    I understand that institutions compete for funds and mum and dad investors putting their money in Real Estate worries a lot of people as they lose that income to the Property sector. I will explain to you one big advantage of real estate for my clients. When billy blogs buys a home these days as an investment he has a roof that can be rented out to his family and also for him to retire on and scale down in the future. Im not talking Darwin or Geraldton I am saying sydney metro.
    Once you move out of this area and you have to commute , buy new cars , spend 10 hours a week commuting things get hard ... see the picture , so for Sydney Metro Real Estate is very attractive.
    what I feel the govt has to do is to build reliable , quick transport feeding into Sydney metro and building a mix of housing as the UK have done with their affordable housing scheme. scrapping neg gearing will only push people into insecure enviroments that will compete for their investment dollar. It still is an open market. Not one have any of your type ever spoke about a Maglev train or affordable housing for any sector. And at the end of the day the govt makes money on the Capital Gain when the investor sells. If you really want to throw a cat out there why don't you suggest an inheritance tax only on Real Estate on passing through executors. Then no one is missed and everyone dies paying. If your fair dinkum . Remember a tax is only effective if you raise money from it. As a client said to me once "my family cant sleep under a share certificate!"
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