One step economic analysis seems to be common out there. An analysis of rent pricing that omits demand from a flow of 300,000 immigrants per annum requiring private rental accommodation is reminiscent of Keenish analysis omitting government intervention in economic downturns. Bizarre!
Potential negative gearing changes
- Thread starter pickle pickle
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One step economic analysis seems to be common out there. An analysis of rent pricing that omits demand from a flow of 300,000 immigrants per annum requiring private rental accommodation is reminiscent of Keenish analysis omitting government intervention in economic downturns. Bizarre!
If the benefits are grandfathered how would existing owners lose the benefit? I haven't seen any serious commentary that suggests NG should be removed without leaving the rules unchanged for existing investors.
But for the sake of the argument, who would investors be selling to in order to change the supply:demand ratio? Either they sell to another investor (potentially at a lower price where the yield makes sense) or to the pool of owner occupiers (which would result in a smaller number of renters).
The only way removing negative gearing has an impact on supply is if it impacts construction of new homes...
Many who advocate an end to negative gearing think that it should remain for new builds to encourage investors to remain in the market sector that does actually add to supply.
As pointed out above, if NG was removed (only for established property) and it discouraged loss making investors, we'd just see more interest from yield based investors or an increase in the rate of home ownership.
If NG is grandfathered in, which is the most likely scenario, investors aren't going to up and sell all their stock. Why would they? However new investors will look at property investing as not so attractive anymore. This will mean less rentals and coupled with rising population will create upwards pressure on rents. Then after rents go up property investing looks attractive again, which will make property prices increase.
You should read my previous post more carefully:
"Grandfathering option is meant to minimise impact on existing investors, leaving its full impact on future entry of investors. Hence, abolition of NG acts as a disincentive to existing investors to continue investing in rental properties and curb expansion in their portfolios, as well as discourage entry of new investors. "
The full impact of any new policy will fall on new entrants and new investments. The intention of any new policy is to be implemented as widely as possible. So, to the extent that negative gearing has been claimed, a grandfathering option will at its basic intention prevent retrospectivity of force of the proposed policy. However, potentially, grandfathering option may not extend to creating additional negative gearing situation even in the existing IPs.
As I have explained in an earlier post, existing investors will still be impacted:
"Availability of or lack of NG has another impact on rental housing - its quality. If NG is not available on residential housing ie any effort and expenses exceeding revenue would not be readily recognised. It would bias landlords negatively from maintaining their rental properties. It would be a disincentive towards maintaining quality or renovation in rental properties. Something long term tenants would likely experience over time."
Abolishing NG will tend to influence the financial feasibility of renovation even in existing IPs which has negative gearing. Grandfathering merely prevents retrospectivity, it does not prevent prospective enforcing of new policies even on existing IPs.
Those who say that removing NG only has impact on new stock needs to rethink. Read above and read See Change's post #32.
Renovation of IPs is part of the strategy of investing in IPs. As small business needs to refurbish their shops from time to time so do landlords. Active landlords need to schedule maintenance and to update to create equity, greater cashflow and competitiveness. Removing access to NG for landlords is an immoral way of saying that your expense is ignored or deferred but your profit will be recognised immediately.
As I said before, the real victims of a misinformed policy of abolishing NG is the genuine tenant (not closet and aspiring new FHB who are the proponents of abolishing NG), notably new immigrant.
Not really, it's just restricting your ability to claim any losses against profit in the same asset class.
If an investors entire property portfolio is (net) negative cash flow then there is no profit to speak of.
I'll admit that inability to deduct losses from other income may deter some investors from updating their properties (if they are running net negative), but likewise an investor might be less inclined to hold a property empty for a period of time waiting for higher rent (for which they'd be partially reimbursed EOFY or as they go with a tax variation), so negative gearing may also be artificially inflating rents (renters could benefit from the removal of NG).
More one step analysis, a landlord may improve the property to improve the rental return and not be taxed on this as per neKs post.
Not a tax regime that will ever happen.
Ng
Scott Morrison's views on NG. Thank God someone knows the truth.
There is an urban myth running around that negative gearing is the province of the rich and should be for ?the high jump?.
The facts are that negative gearing is used by middle income Australians, particularly younger Australians, to try and get ahead and build a financial future for themselves and, their families while providing a much needed capital injection for new stock into our housing market.
As Social Services Minister I have an interest in this issue. The more Australians take responsibility for themselves, the less they will call on taxpayers in the future to draw down on welfare benefits.
We already require eight out of ten income taxpayers to go to work every day to pay for our welfare bill. Where Australians try to build their wealth and finances for their own retirement we should just say thanks, rather than putting them in our tax sights.
According to statistics from the Australians Taxation Office and cited by the Property Council, of the almost 1.26 million Australians who declare a net rental loss, 883,325 earn around $80,000 or less a year and around 80 per cent of them negatively gear. Also, of the 1.87 million people who declare a net rental interest, over 70 per cent earn about $80,000 or less.
The majority of Australians who declare a net rental loss, almost 73 per cent, only own one investment property. A further 18 per cent only own two investment properties ? hardly property barons.
A breakdown of net rental losses by occupation shows average workers make up the majority. They include 62,000 clerical staff, 54,000 teachers, 47,000 salespeople, 36,000 nurses, and tens of thousands of hospitality workers.
Most people who declare a net rental loss are also aged 40 or under.
Middle-income earners declaring net rental interest are also providing housing for other Australians through their investment and at the same time looking to provide for their own retirement incomes, reducing reliance on government.
To gain a better perspective of the role negative gearing plays in our housing market it is worth looking at how things work in other parts of the world.
In the US, institutional investors, pension funds and listed real estate investment trusts (REITs) are key investors in residential accommodation. Apartments represent around 13% of REIT holdings and of the major pension funds in the US who invest in real estate, 20% of their allocation to real estate in 2012 was invested in apartments.
European research shows institutions own 17% of all rental housing stock in Germany, 23% in Switzerland, and 37% in the Netherlands. In the UK, some of the largest institutions invest in rental housing.
By contrast the Australian stock exchange does not have one listed property trust providing residential rental accommodation and super funds owning residential rental accommodation are also absent.
Sure, Stockland and Mirvac, as well as Australian Super and CBus develop property, but they sell it off to investors including mums and dads.
The industry has said tax laws make it difficult for institutions to invest in residential properties as the tax office sees residential property as more a capital than income investment. Also the yield on residential is too low compared to commercial property. This means our institutions favour commercial property.
Thankfully, negative gearing has given mums and dads on modest incomes an incentive to invest in residential property and take up the slack. Given the tax treatment they seem to be happy to accept a lower yield than institutional investors.
So before we all get too carried away with seeking to further extend the reach of the tax base to Australians who are out there having a go, working hard and making the most of what they have got to make a future for themselves, let?s think again.
Whether they be superannuants simply drawing an income from investments they have accumulated that Labor now propose to tax, or to target mum and dad negative gearing investors, we need to remember these are the people who are actually out there having a go. They are acquiring these investments by working, earning an income, and then investing it after paying tax on it. These Australians are the solution, not the problem.
The arguments to tax them more may seem attractive to Labor and those who assess these policies in the hermetically sealed confines of academic offices and econometric models, but when it comes to assessing it against the lived experience of Australians, it?s not hard to come to a different conclusion.
Scott Morrison's views on NG. Thank God someone knows the truth.
There is an urban myth running around that negative gearing is the province of the rich and should be for ?the high jump?.
The facts are that negative gearing is used by middle income Australians, particularly younger Australians, to try and get ahead and build a financial future for themselves and, their families while providing a much needed capital injection for new stock into our housing market.
As Social Services Minister I have an interest in this issue. The more Australians take responsibility for themselves, the less they will call on taxpayers in the future to draw down on welfare benefits.
We already require eight out of ten income taxpayers to go to work every day to pay for our welfare bill. Where Australians try to build their wealth and finances for their own retirement we should just say thanks, rather than putting them in our tax sights.
According to statistics from the Australians Taxation Office and cited by the Property Council, of the almost 1.26 million Australians who declare a net rental loss, 883,325 earn around $80,000 or less a year and around 80 per cent of them negatively gear. Also, of the 1.87 million people who declare a net rental interest, over 70 per cent earn about $80,000 or less.
The majority of Australians who declare a net rental loss, almost 73 per cent, only own one investment property. A further 18 per cent only own two investment properties ? hardly property barons.
A breakdown of net rental losses by occupation shows average workers make up the majority. They include 62,000 clerical staff, 54,000 teachers, 47,000 salespeople, 36,000 nurses, and tens of thousands of hospitality workers.
Most people who declare a net rental loss are also aged 40 or under.
Middle-income earners declaring net rental interest are also providing housing for other Australians through their investment and at the same time looking to provide for their own retirement incomes, reducing reliance on government.
To gain a better perspective of the role negative gearing plays in our housing market it is worth looking at how things work in other parts of the world.
In the US, institutional investors, pension funds and listed real estate investment trusts (REITs) are key investors in residential accommodation. Apartments represent around 13% of REIT holdings and of the major pension funds in the US who invest in real estate, 20% of their allocation to real estate in 2012 was invested in apartments.
European research shows institutions own 17% of all rental housing stock in Germany, 23% in Switzerland, and 37% in the Netherlands. In the UK, some of the largest institutions invest in rental housing.
By contrast the Australian stock exchange does not have one listed property trust providing residential rental accommodation and super funds owning residential rental accommodation are also absent.
Sure, Stockland and Mirvac, as well as Australian Super and CBus develop property, but they sell it off to investors including mums and dads.
The industry has said tax laws make it difficult for institutions to invest in residential properties as the tax office sees residential property as more a capital than income investment. Also the yield on residential is too low compared to commercial property. This means our institutions favour commercial property.
Thankfully, negative gearing has given mums and dads on modest incomes an incentive to invest in residential property and take up the slack. Given the tax treatment they seem to be happy to accept a lower yield than institutional investors.
So before we all get too carried away with seeking to further extend the reach of the tax base to Australians who are out there having a go, working hard and making the most of what they have got to make a future for themselves, let?s think again.
Whether they be superannuants simply drawing an income from investments they have accumulated that Labor now propose to tax, or to target mum and dad negative gearing investors, we need to remember these are the people who are actually out there having a go. They are acquiring these investments by working, earning an income, and then investing it after paying tax on it. These Australians are the solution, not the problem.
The arguments to tax them more may seem attractive to Labor and those who assess these policies in the hermetically sealed confines of academic offices and econometric models, but when it comes to assessing it against the lived experience of Australians, it?s not hard to come to a different conclusion.
His version of the truth perhaps (p.s. he's a politician, do any of them tell the truth?).
http://www.macrobusiness.com.au/2015/04/coalition-defends-negatively-geared-battlers/
http://www.macrobusiness.com.au/2015/04/negative-gearing-tax-shelter-fat-cats/
"...negative gearing was significantly under-represented at the lower income levels and over-represented at the higher income levels in 2011-12."
I'm curious how much financial education plays a role in this. That is, even if all other things were equal, would the same demographic invest in property anyway? I know many people that if you gave them a million dollars, the first thing they would "invest" in would be a new Holden HSV.
The properties will mostly go to O/O's, and/or a few cashed up investors who can whack down a large cash deposit, or who are crazy enough to take a massive cashflow hit.
So, most of them will go off the rental market, as will the renters who bought them (if they were renters).
Initially, this could mean no change to the rental demand.
But, as I said; there are more renters arriving into the market every year for various reasons (many of them younger folks).
Given that the rental property stock is no longer increasing due to investors staying away, it should result in an increase rental demand increase in year 2, and so on.
Fast forward to say; 5 years time, the increasing rental demand would have pushed rents up, and assuming they outstrip cap growth over that time, the yields will be better, and may entice investors back into the market....
Yields will then decrease as the prices go up with the sudden purchaser demand, and the whole cycle will begin again.
Bottom line; rents will be more expensive across the board, otherwise investors will stay away from the market.
Silly rent yields such as 3, 4, 5% in major Cap cities will disappear, and will need to rise to at least the mortgage rates of the day or even higher; otherwise - why would anyone bother going through all the grief and pain of putting up with tenants for a pathetic cashflow return?
Horses and water.
All of us old dogs here on SS have stories of trying to help and advise others about the "how to", and the benefits of property investing, but most times folks don't pull the trigger.
Further to above; a large proportion of the representations would be due to the higher income earners having better financial intelligence, but it can also be that the lower income earners cannot find the ready dollars necessary to start their investing journey (partly due to lack of financial intelligence, of course)
This has been debunked since the 80K figure is AFTER their gross income has been reduced with property investment losses and depreciation.
the-myth-of-mum-and-dad-negative-gearers
This is the simple point I keep trying to make.
Anyway its good to see pressure building against the idiotic policy of negative gearing, with many mainstream commentators now coming out against it, and now finally, one of the main parties hinting at changes to it.
labor-treasury-spokesman-chris-bowen-looks-at-negative-gearing
I think you will find that yes yield will be better but not because of increased rents, but because of lower property prices since speculative demand will be reduced. So short term, bad for property prices but over the longer term people will continue to invest with better yields. So removing negative gearing good for everyone really (except the heavily geared speculators making big tax losses, or people planning to sell up soon).
As available property returns increase/decrease, investors either buy/sell or look elsewhere for an acceptable return.
If you change one of the variables, the acceptable return changes.
I don't think it is idiotic at all.
It encourages anyone to take control of their future, and hopefully not end up on the pensioner stockpile...and the Gubb has encouraged us all to do it by way of tax relief incentives attached to the investment vehicle.
It provides much need housing for those who are not able to buy.
I'm 54, and NG has been in place ever since I have been a real estate purchaser in 1985 (other than the 1987 removal years).
It was available to anyone who wanted to partake in the scheme then, and it still is now.
I have not found it to be a deterrent in my real estate purchasing transactions at all....the lack of affordability has always been there, from my experience.
In fact; a good number of the places I have bought (it is over a 12 properties now - PPoR's and Ip's) have been bought below asking price; so it's not as though I am out-bidding any FHB's.
I have never bought a property at auction.
I have never been a high income earner - together with my wife's income we have never been more than the average household of Mr. and Mrs. Thong household income, who both work, and raise kids and grind away through life.
This argument that NG is killing the housing market is BS - only perpetrated by the whining FHB's, and/or those who want to live inner CBD for their first attempt, and the lefty-bleeding heart sections of the media and the general community who have this misguided mindset that all the rich folks are swallowing up the properties and taking them out of reach of the poor lowly FHB's and average wage earners..
Do high income earners have an advantage? Of course.
But, it doesn't mean they are all out trawling around every Saturday, buying up half a suburb.
The real truth is most high income earners spend on a terrific lifestyle, and a few of them do a bit of r/e and shares buying along the way - most would be in shares, and have a holiday house somewhere and possibly a share in an apartment up at the snow.
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I imagine any impact on the rental market will be segmented. In terms of supply/demand, supply in the rental market comes from investors. So when there's a decrease in supply of dwellings available for rent, there'll be a rise in rental costs.
In cheaper regions with 5-6%+ yields, there'll be an increase in INVESTMENT demand as investors are incentivised to move away from negative cash flow properties. This will in turn reduce rents.
However, in more premium markets, where yields currently sit at sub 3-4%, there'll be a decrease in investment demand for existing stock as the government no longer subsidises the losses that investors make on these investments. This will reduce the supply of rental dwellings available and lead to an increase in rental prices in these regions.
In the premium markets, i imagine there'll be sub segments too. House rental price growth will rise substantially, while units may hold. Investors will be incentivised to buy new stock (any realistic policy won't touch this), and in inner ring suburbs, the overwhelming majority of new stock would be units rather than new houses. More investor activity in this space, more rental supply, slowing any increase in UNIT rental prices in premium markets.
Summing this random guesstimating up, if you own houses in inner ring areas, rents will probably rise faster as a result of policy change.
In cheaper regions with 5-6%+ yields, there'll be an increase in INVESTMENT demand as investors are incentivised to move away from negative cash flow properties. This will in turn reduce rents.
However, in more premium markets, where yields currently sit at sub 3-4%, there'll be a decrease in investment demand for existing stock as the government no longer subsidises the losses that investors make on these investments. This will reduce the supply of rental dwellings available and lead to an increase in rental prices in these regions.
In the premium markets, i imagine there'll be sub segments too. House rental price growth will rise substantially, while units may hold. Investors will be incentivised to buy new stock (any realistic policy won't touch this), and in inner ring suburbs, the overwhelming majority of new stock would be units rather than new houses. More investor activity in this space, more rental supply, slowing any increase in UNIT rental prices in premium markets.
Summing this random guesstimating up, if you own houses in inner ring areas, rents will probably rise faster as a result of policy change.
