Negative Gearing Debate

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Forgetful_Lion
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Negative Gearing Debate

Post by Forgetful_Lion » 23 Feb 2016, 13:05

As requested some of my thoughts on the topic...

Since the capital gains tax (CGT) discount was introduced by the Howard government in 1999, negative gearing (NG) and the CGT have combined to inflate the largest real estate bubble in Australia since the 1880s. They have highly distorted the real estate market and have resulted in a massive allocation of Australian capital into unproductive assets and a massive increase in household debt.

Australia now has the accolade of having the second most expensive housing in the world, second only to Hong Kong, which unlike Australia has a land shortage. Australian house holds are also the most indebted house holds in the world.

Vested interests (hello FIRE) means an impartial and sane debate will be next to impossible, such as our treasurer Scott Morrison being a former Property Council Australia (PCA) Research Manager, who is spouting a lot of fear and nonsense in the NG debate. And the PCA's own [url= [url=http://dontplaywithproperty.org.au/ads/]campaign against NG changes[/url] (I think the the house of cards symbolism is poetic irony).

Let's not forget other people with vested interests flip flopping on the NG topic such as Mark Bouris, of Wizard Home Loans and Yellow Brick road fame. Who in 2003 supported reviewing changes to NG saying: "negative gearing is being used for incorrect taxation purposes" and that it "could be overhauled without producing a drop in the market." Then fast forward to this year Mr Bouris assertted that changing NG will "will kill the investment market. I think it’s a terrible idea".

Similarly John Symonds, founder of Aussie Home Loans, in 2014 called for "a review" into NG saying that NG was a "tax break [that] favoured investors and was ­distorting the property market". And like Mr Bouris, this year after the ALP's NG policy announcement earlier this month "slammed" the proposed changes and that NG changes "would most likely result in unintended, negative consequences for the housing sector".

Even our Prime Minister Malcolm Turnbull has back flipped on the issue, penning a taxation paper in 2005 that stated that:
Malcolm Turnbull notes that his own experience as Chairman of Goldman Sachs Australia confirmed this conclusion. Combined with high marginal tax rates, or rates that are too high becoming effective too low in the income distribution causes many distortions in the tax system. The Australian recently editorialised “.. our top tax threshold .. is far too low as a multiple of earnings. This in turn, distorts economic behaviour, sending honest taxpayers scurrying towards sheltering havens – such as negative gearing, a capital gains tax regime that was halved in 2000, or the 30% company rate – and skewing national investment away from wealth-creating pursuits, towards housing. The result- a property bubble”
But just like Scott Morrison, Tony Turnbull attacked Labor's NG changes as "very dangerous" and would result in a decline in property prices. Obviously the Liberals must think there a more people (votes!) who want property prices to either stay where they are or to go up rather than address the affordability issue.

Finally, the three arguments used against removing NG:
  • It'll affect Mum & Dad or ordinary Australians who use NG.
  • It'll push up rent.
  • NG promotes new housing supply.
Are demonstratively false, I'm too lazy to write up the details here but this Grattan institute report and The Conversation article give a good overview.

As for what changes should occur to NG, I feel like Labor's proposed changes of limiting NG to new properties and halving CGT are overall steps in the right direction. Grandfathering the current NG properties, whilst I wish it wasn't there, is necessary to make NG changes at least somewhat palatable. However, I feel unsure about what will constitute a "new" property in the proposed legislation, so it could be open to abuse. And what about trusts or businesses that invest in property? Will they still be able to NG?

I also still think limiting NG to only being able to reduce your taxable income from only property would be best.

I could mention a few other things such as CPI methodology change in 1999, the ineptness of the RBA, but that's probably a long enough rant for today. :P
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Makena
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Re: Negative Gearing Debate

Post by Makena » 23 Feb 2016, 13:15

I can see how this topic might go, so play nice everyone.

EDIT: removed comment asking Forgetful Lion to post his thoughts if he wanted to discuss and it and not just cause drama
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Re: Negative Gearing Debate

Post by Yurtles » 23 Feb 2016, 13:22

I learnt what negative gearing was once. Then I forgot again. You could say I'm pretty involved.
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Re: Negative Gearing Debate

Post by Nitephyre » 23 Feb 2016, 13:40

I thought negative gearing was driving in reverse.
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Re: Negative Gearing Debate

Post by Ralph Wiggum » 23 Feb 2016, 14:17

Whenever I hear of negative gearing I'm reminded of this skit

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Re: Negative Gearing Debate

Post by Disco » 23 Feb 2016, 14:52

Yeah, no idea what negative gearing is.. just going to continue living my life over here
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Ralph Wiggum
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Re: Negative Gearing Debate

Post by Ralph Wiggum » 23 Feb 2016, 15:12

In a nutshell in layman's terms: the losses you incur from property investment is given back to you during tax time.

Often the rent you receive from your investment property won't cover the maintenance cost, real estate agent fees and more likely the interest charged by the bank if you borrowed money to buy the property.

Positive gearing is when the money you earn from the rent covers all the above expenses. Basically profit!

The debate covers who benefits or uses from negative gearing: your "mum and dad investor" who has one investment property on top of the family home, or the big boys who accumulate a multiple properties. And then there's the question of whether these big boy investors are causing a rise in housing prices, and the taxpayer is effectively subsidising them to do so.

Lots of random figures being thrown around, I generally rely on the articles on the ABC website for accuracy.
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Re: Negative Gearing Debate

Post by Anon. E. Moose » 23 Feb 2016, 15:14

Ralph Wiggum wrote:Whenever I hear of negative gearing I'm reminded of this skit
Hahaha, damn I miss The Late Show.
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Forgetful_Lion
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Re: Negative Gearing Debate

Post by Forgetful_Lion » 23 Feb 2016, 15:20

Mod edit: put all this in the OP as well make it easier for newcomers to the thread to follow
As requested some of my thoughts on the topic...

Since the capital gains tax (CGT) discount was introduced by the Howard government in 1999, negative gearing (NG) and the CGT have combined to inflate the largest real estate bubble in Australia since the 1880s. They have highly distorted the real estate market and have resulted in a massive allocation of Australian capital into unproductive assets and a massive increase in household debt.

Australia now has the accolade of having the second most expensive housing in the world, second only to Hong Kong, which unlike Australia has a land shortage. Australian house holds are also the most indebted house holds in the world.

Vested interests (hello FIRE) means an impartial and sane debate will be next to impossible, such as our treasurer Scott Morrison being a former Property Council Australia (PCA) Research Manager, who is spouting a lot of fear and nonsense in the NG debate. And the PCA's own [url= [url=http://dontplaywithproperty.org.au/ads/]campaign against NG changes[/url] (I think the the house of cards symbolism is poetic irony).

Let's not forget other people with vested interests flip flopping on the NG topic such as Mark Bouris, of Wizard Home Loans and Yellow Brick road fame. Who in 2003 supported reviewing changes to NG saying: "negative gearing is being used for incorrect taxation purposes" and that it "could be overhauled without producing a drop in the market." Then fast forward to this year Mr Bouris assertted that changing NG will "will kill the investment market. I think it’s a terrible idea".

Similarly John Symonds, founder of Aussie Home Loans, in 2014 called for "a review" into NG saying that NG was a "tax break [that] favoured investors and was ­distorting the property market". And like Mr Bouris, this year after the ALP's NG policy announcement earlier this month "slammed" the proposed changes and that NG changes "would most likely result in unintended, negative consequences for the housing sector".

Even our Prime Minister Malcolm Turnbull has back flipped on the issue, penning a taxation paper in 2005 that stated that:
Malcolm Turnbull notes that his own experience as Chairman of Goldman Sachs Australia confirmed this conclusion. Combined with high marginal tax rates, or rates that are too high becoming effective too low in the income distribution causes many distortions in the tax system. The Australian recently editorialised “.. our top tax threshold .. is far too low as a multiple of earnings. This in turn, distorts economic behaviour, sending honest taxpayers scurrying towards sheltering havens – such as negative gearing, a capital gains tax regime that was halved in 2000, or the 30% company rate – and skewing national investment away from wealth-creating pursuits, towards housing. The result- a property bubble”
But just like Scott Morrison, Tony Turnbull attacked Labor's NG changes as "very dangerous" and would result in a decline in property prices. Obviously the Liberals must think there a more people (votes!) who want property prices to either stay where they are or to go up rather than address the affordability issue.

Finally, the three arguments used against removing NG:
  • It'll affect Mum & Dad or ordinary Australians who use NG.
  • It'll push up rent.
  • NG promotes new housing supply.
Are demonstratively false, I'm too lazy to write up the details here but this Grattan institute report and The Conversation article give a good overview.

As for what changes should occur to NG, I feel like Labor's proposed changes of limiting NG to new properties and halving CGT are overall steps in the right direction. Grandfathering the current NG properties, whilst I wish it wasn't there, is necessary to make NG changes at least somewhat palatable. However, I feel unsure about what will constitute a "new" property in the proposed legislation, so it could be open to abuse. And what about trusts or businesses that invest in property? Will they still be able to NG?

I also still think limiting NG to only being able to reduce your taxable income from only property would be best.

I could mention a few other things such as CPI methodology change in 1999, the ineptness of the RBA, but that's probably a long enough rant for today. :P
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Forgetful_Lion
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Re: Negative Gearing Debate

Post by Forgetful_Lion » 23 Feb 2016, 15:26

Disco wrote:Yeah, no idea what negative gearing is.. just going to continue living my life over here
From Moneysmart:
Negative gearing is when your income from an investment (such as dividends or rental income) is less than your interest and/or other expenses. If you negatively gear your investment is initially making a loss which you hope you will make up with a capital gain when you sell your investment.

A loss can be used to reduce your taxable income which will reduce the amount of tax you pay. Remember, you are only reducing your tax because the income from your investment isn't covering your expenses. You will still need to cover the negative cash flow from other sources.
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Re: Negative Gearing Debate

Post by Mugsy » 23 Feb 2016, 23:21

I'm in two minds about this Forgetful. I do acknowledge that housing prices are climbing faster than income is.

But as someone who does have an investment property (the first home I bought) but isn't super well off, I'm relying on negative gearing to make it feasible to keep the property as a worthwhile investment.

Inner city property prices in Sydney and Melbourne are insane but still achievable in other states/territories. So what new laws work for one part of the country won't necessarily be good for another part and this ultimately needs to be considered.

At the end of the day, I believe housing affordability depends on what FHBs are willing to sacrifice to buy. I bought my first 2brm unit after lots of saving and when I was on $44k p.a. salary in 2007. I started off with what I could afford and worked up from there. It was close to being paid off before I refinanced to get my second place (and I'm only on average income). So yes, when I see 20-something y.o. colleagues complain about housing affordability whilst blowing $100+ at Friday night drinks I do wonder if housing affordability is really an issue for FHBs.

Likewise, if one can't buy something worthwhile in Sydney, one might have to think about buying an investment in another state if they want to continue living/working in the big smoke or move to a more affordable part of the country.

My views is probably due to my rather strong opinion that if one wants something, one has to make it happen no matter the situation.
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Matty
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Re: Negative Gearing Debate

Post by Matty » 23 Feb 2016, 23:32

Disco wrote:Yeah, no idea what negative gearing is.. just going to continue living my life over here
TL:DR for you
  • Person: I don't earn enough money to own 15 investment properties at once but I want to own 15 investment properties at once.
    Government: Well here is a bunch of tax benefits so you can afford it.
Then you end up with this
http://www.domain.com.au/news/what-to-d ... 23-gn086p/

It's a tax loophole imo and I don't really see how it provides an economic or social benefit, therefore I support it's proposed removal or reduction or whatever.
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Re: Negative Gearing Debate

Post by Mugsy » 24 Feb 2016, 00:18

Matty wrote:Then you end up with this
http://www.domain.com.au/news/what-to-d ... 23-gn086p/
Funny, my colleague and I had a chat about that article just today. Probably the most extreme of cases that one. Those two put all their eggs in one basket and that basket relied on a single industry. Had they invested in a capital city a) the rental return wouldn't have let them over leverage, and b) it's not dependent on a single industry further reducing risk.

The social benefit of negative gearing is pretty simple. An investor would be silly invest in property if they couldn't at least get the property to cashflow neutral or close to it - that's when on paper it's a loss but after the relevant deductions, your cashflow breaks evening. Capital gains means jack when you can't sustain the mortgage repayments.

If an investment was to lose money, no one in their right mind would invest in it... and then it becomes the Government's responsibility to supply the bulk of the rental properties for those who don't/won't save up a deposit to buy. And the Government's not going be able to do that without either raising taxes or cross subsidising in some way. Much more effective and simpler to give investors a tax break and let them satisfy the rental demand (except inner city Melbourne... overseas investors are leaving their properties untenanted but that's not a negative gearing issue).

The reality is that negative gearing needs to be limited for those above a certain asset bracket or not apply to more than 2 or 3 investment properties. This way, mum and dad investors (the ones trying to sort out their retirement funding by investing in a lower risk investment vehicle such as property so as not to milk society via the age pension) aren't screwed over.
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Matty
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Re: Negative Gearing Debate

Post by Matty » 24 Feb 2016, 00:28

Mugsy wrote: If an investment was to lose money, no one in their right mind would invest in it... and then it becomes the Government's responsibility to supply the bulk of the rental properties for those who don't/won't save up a deposit to buy. And the Government's not going be able to do that without either raising taxes or cross subsidising in some way. Much more effective and simpler to give investors a tax break and let them satisfy the rental demand (except inner city Melbourne... overseas investors are leaving their properties untenanted but that's not a negative gearing issue).
This is just supply and demand on any investment/stock. House prices will drop, the bubble will burst and prices will level out and housing will become far more affordable. Tbh, I still only see positives to removing this.
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Re: Negative Gearing Debate

Post by Mugsy » 24 Feb 2016, 00:46

Prices will drop to some degree and mainly in Sydney and Melbourne... but the issue then shifts back to one of cashflow. You'll have some over leveraged investors needing to sell which will drop down prices, but there will be other investors who go "Screw this! I worked hard to get these investments and I'm gonna tighten my belt to keep them!". That's what I'd do at least.

If all those properties sold belong to owner occupiers, and with population growth and migration into this country, rental demand isn't going to ease up but rental supply will drop. This will drive rents up which will make it harder for FHBs to save and create a better environment for investors... lower property prices + higher rents = chance for positive gearing. And then we have investors buying the affordable housing stock yet again leaving bugger all for FHBs still.

Anyway, that's my logic at least. Without modelling the effect of removing negative gearing on the economy and society properly we're just going be throwing our logic back and forth till the cows come home.
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Re: Negative Gearing Debate

Post by n1cholas » 24 Feb 2016, 00:59

I'd rather people invest in productive assets than speculate on existing property and potentially cause a crash. Negative gearing should be removed altogether and then more renters would become buyers.

Abbott turned to the big miners and polluters to find his 2013 election coffers and I expect Turnbull and Morrison to cuddle up to real estate industry to fund their 2016 election coffers.

Turnbull claims to be free market supporter but supports a government subsidy that distorts the market while providing little value to tax payers for a lot of lost revenue.

Will be a sad day for Australia if the LNP win the next election, I predict they'll blow out the deficit even further with unsustainable income tax cuts like Ronald Reagan did in the US in the 80's and Howard attempted in 2007 which Labor foolishly matched and legislated. I expect future cuts will have unintended consequences possibly resulting in a recession.

A recession lead by a property crash might be for the best in the long run, clearly the status quo can't continue and private debt is a ticking time bomb far worse than our current public debt.
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Re: Negative Gearing Debate

Post by Mugsy » 24 Feb 2016, 07:40

n1cholas wrote:I'd rather people invest in productive assets than speculate on existing property and potentially cause a crash.
I agree that there needs to be more productive assets for the majority of Aussies to invest in as an alternative to real estate (which is still a productive asset for smart investors who look for good rental returns rather than take a punt on capital gains) but, unfortunately (and it's a big unfortunately), many productive assets with worthwhile returns don't offer lower risk than property and is prone to larger variations in returns due to speculative behaviour as well. The Brisbane Clem 7 and Airport Link tunnels are a good example. Those tunnels were needed to improve mobility around the city... but their forecasts for daily traffic and thus toll revenue was way off. Someone didn't seem to realise that the inhabitants of Brissie are relatively adverse to paying tolls.

Cost of ownership/investing is another issue that needs to be addressed. Sure, we have shares which are relatively low cost to get into vs real estate... but then we all know how much more risk share investing has vs real estate.

These things need to be considered before getting rid of negative gearing.
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Re: Negative Gearing Debate

Post by Matty » 24 Feb 2016, 09:03

Mugsy wrote:but there will be other investors who go "Screw this! I worked hard to get these investments and I'm gonna tighten my belt to keep them!". That's what I'd do at least.
And they and/or you be without tenants while everyone moves to places with lower rent, this is what happened to those investors I linked. Rents wont go up because investors just arbitrarily charge more for rent, house rent is also supply and demand and worth only what someone is willing to pay for. Again, I still see removing NG as a benefit to most of the population.

Forgetful Lion covered this in the OP
Forgetful_Lion wrote: Finally, the three arguments used against removing NG:
  • It'll affect Mum & Dad or ordinary Australians who use NG.
  • It'll push up rent.
  • NG promotes new housing supply.
Are demonstratively false, I'm too lazy to write up the details here but this Grattan institute report and The Conversation article give a good overview.
The fact the government wants to keep negative gearing and cut the CSIRO budget really grinds my gears.
Last edited by Matty on 24 Feb 2016, 09:10, edited 1 time in total.
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Re: Negative Gearing Debate

Post by Disco » 24 Feb 2016, 09:08

Matty wrote:TL:DR for you
  • Person: I don't earn enough money to own 15 investment properties at once but I want to own 15 investment properties at once.
    Government: Well here is a bunch of tax benefits so you can afford it.
Then you end up with this
http://www.domain.com.au/news/what-to-d ... 23-gn086p/

It's a tax loophole imo and I don't really see how it provides an economic or social benefit, therefore I support it's proposed removal or reduction or whatever.
Well then, I have to say I agree with you
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Re: Negative Gearing Debate

Post by n1cholas » 24 Feb 2016, 09:32

Mugsy wrote:
n1cholas wrote:These things need to be considered before getting rid of negative gearing.
Real estate should not be a safe investment, it should be susceptible to market conditions as other assets are and not subsidised by the government when doing so runs contrary to the public interest.

We need to remove stamp duty and make up for the shortfall with higher land tax. The ACT government should be applauded for their moves in the area, I just hope other state/territory governments don't wait years to move in the area themselves.
Matty wrote:
Mugsy wrote:The fact the government wants to keep negative gearing and cut the CSIRO budget really grinds my gears.
Most of the members of the current government won't be around to see the negatives of reduced funding to the CSIRO, the LNP in general are political opportunists and often willingly embrace only looking three years ahead at most (one term) which is why their policies are so poor especially over the medium to long term (Telstra privatisation lead to the debacle of the NBN/MTM which should also be attributed to the LNP).

It's obvious this government is lacking policy that they think they can advocate for and sell to the public and/or that the public will support, I wouldn't be surprised to see a double dissolution election immediately after the budget so people don't have an opportunity to properly analyse said budget.

Status quo + pandering to vested interest hopefully leading to victory > actually doing some reform and potentially losing is how the LNP seem to be now approaching their time in government.

I wonder how much long the public is willing to embrace these governments that continue to deceive and treat the electorate with contempt, I'm not sure Labor will be any better but the LNP have had their chance multiple times with multiple cabinet reshuffles and the dethroning of Abbott.
Last edited by n1cholas on 24 Feb 2016, 09:33, edited 1 time in total.
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Re: Negative Gearing Debate

Post by Nacimota » 24 Feb 2016, 09:33

Matty wrote:The fact the government wants to keep negative gearing and cut the CSIRO budget really grinds my gears.
That sounds like quite a negative way to treat your gears.
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Re: Negative Gearing Debate

Post by Forgetful_Lion » 24 Feb 2016, 09:53

Mugsy wrote: I agree that there needs to be more productive assets for the majority of Aussies to invest in as an alternative to real estate (which is still a productive asset for smart investors who look for good rental returns rather than take a punt on capital gains) but, unfortunately (and it's a big unfortunately), many productive assets with worthwhile returns don't offer lower risk than property and is prone to larger variations in returns due to speculative behaviour as well.
Um bonds? Term deposit at the bank?
Mugsy wrote: Cost of ownership/investing is another issue that needs to be addressed. Sure, we have shares which are relatively low cost to get into vs real estate... but then we all know how much more risk share investing has vs real estate.

These things need to be considered before getting rid of negative gearing.
Removing NG and the CGT discount would remove the distortion that makes investing in property so attractive, which would go a long way to addressing the affordability/cost of ownership issue.
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Re: Negative Gearing Debate

Post by Ralph Wiggum » 24 Feb 2016, 12:11

http://www.abc.net.au/triplej/programs/ ... ed/7192920

Another good explanation with some data/figures
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Re: Negative Gearing Debate

Post by n1cholas » 24 Feb 2016, 20:41

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Re: Negative Gearing Debate

Post by storm84 » 24 Feb 2016, 21:18

Listening to Scott Morrison today during question time, and the thing that disappoints me about the discussion is that it's so easily framed as destroying the financial wellbeing of all those people who have put money into housing. The whole notion of housing as an investment only works if the process stay up, so not only does it mean that the system will stay with its current biases towards homes as investment properties, but that any political will is going to be turned on its head and seen as an attack on the very people who would benefit.
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