negative gearing changes | The Australian The BROWN COUCH: Negative gearing is not your friend I have just purchased my first property, and intend to pay interest only for the next 2-3 years and then use it as an investment property, negatively geared, when I switch into a new PPOR. After readings articles like above, how do other people view the future for negative gearing? It seems like an unstable time at the moment.. - Also, why don't people rent out their investment houses for $1 a week and claim the 'loss' in tax? Sorry for the dumb question, the concept is new to me, and I am wondering how people come up with rental prices? is it a value that is strategically chosen?
Just remember that: "That which is unsustainable won't be sustained" - Joseph Stiglitz, Nobel Laureate, economics. and "Markets can remain irrational longer than you can remain solvent." John Maynard Keynes. So betting against momentum can be very costly and riding the wave of a bubble can be very profitable as long as you sell before the market works out that it is "irrational". Negative gearing is neither "sustainable" nor "rational". So when will the penny drop on negative gearing... I suspect it will take both a desperate and oppurtunitic govenrment, ie a government that needs to solve a budget deficit (given that negative gearing costs the country billions in tax revenues each year) and the political environment allows for the possibility of removing welfare without too much voter backlash. My speculative guess would be that this will likely occur when interest rates are low (which should mean that the majority of investment property owners will have lower interest payments will be less negatively geared) which will only occur when the economy is weak, but it should make it politically possible. That's just my two aussie cents...
The gradual wind back I think the most likely scenario for negative gearing is that the government will be weaned off stamp duty and other real estate taxes over the next few years while property continues to fall in value. Once we are in recession and budgeting cutting becomes more necessary (And as long an an election is at least 2 years away), the government of the day will limit negative gearing to two properties affecting around 294,000 (ABS, 2010) people initially. They will then tighten the criteria, most likely restricting it to one property and also only make new dwellings eligible.
Spending $1 to save 50c in tax isn't a strategy as such when it comes to investing in property. Most investors spend their money in the hopes of achieving sufficient capital growth to override the losses incurred after their expenses outweigh the income via their rental properties. Rents are determined by supply and demand and the renting public- its pretty simple when you think about it.
Renting a property for $1 wouldn't be commercial and so the ATO would deny any deductions. It would also be silly to throw away $499 or so per week????
I believe I would be very happy if the government took away -ve gearing in some fashion or even completely if at the same time they removed some of the excessive costs with buying a property. -ve gearing is viewed incorrectly I think. Much more effective to view it as a tool or consequence rather than a strategy which I don't think it is. I'm told by some that it didn't affect rents when it was last removed, my Brisbane rents went up nicely whatever the reason was!
I don't see it going away anytime soon. It's a lot of votes that would be lost from investors, and not necessarily gained from renters. Partially because you wouldn't see a reduction in rents (because what landlord will now go further in the red, seeing as they're paying more tax) straight away. If removing negative gearing does reduce rents (and it's an IF) then it would surely be a case of rents staying flat for a while (i.e. lower yield). My point of view is that I'm buying property that costs me today because I know that the capital and income will increase down the track. The fact that I can get a 30% reduction of those costs is nice, but I'd still be doing it even if I didn't get that.
So what you are basically saying is that you are buying because you think there will be inflation down the track. What happens if down the track we have deflation not inflation, would you still be buying then? PS - Negative gearing isn't an issue when it comes to deflationary times because interest rates will be low.
