Time to end the landlord's tax break says NAB

22/08/08
Time to end the landlord's tax break says NAB

People who put their money into savings accounts should get the same tax breaks that property investors get said NAB chief executive Ahmed Fahour.

Tax policy favouring property investment had contributed to low rates of saving.
Banks are looking for new sources of funding in the wake of the liquidity crisis in global debt markets.
The amount of money in property is now 26 times the rate of 20 years ago said Mr Fahour.
Experts said the governments would be unlikely to take away a tax benefit and repeat the Keating experiment that had driven up rent and dried up supply.
An academic said negative gearing on investment property had increased demand without stimulating a supply response because most investors buy existing homes.
Tax policy was therefore encouraging the turnover of existing properties.

Source: The Australian Financial Review/AAP

 

That's not true, many investors buy new because of the benefits of higher rent and depreciation.

For the supply to be increased property prices have to start moving up again, and/or gov. charges plus interest rates have to drop to make property affordable again.

Cheers

 

Negative gearing applies to any investment.

The bank gets security over the property.

It's funny that the very banks that were falling over themselves and cutting due dilligence to lend to investors are now blaming the investors for their largesse with easy credit.

Maybe the banks prefer shares, since margin lenders then on-lend those shares to make even more profits.

They can't exactly on-lend your IP for further multiple profits.

Just another example of corporate spin to distract voters and legislators.

Cheers,

Rob

 

In fact the banks have the solution ...

When an investor and a consumer both apply for a loan, refuse to lend to the investor who can afford to pay a higher interest rate due to their tax deduction.

Instead, the banks can lend at lower rates (and profits) to the consumer.

No need for legislation, the banks risk their money for their moral high ground.

Cheers,

Rob

 

The whole thing also needs to be taken in full context - negative gearing applies to any investment, not just Real Estate.
Also with the tax cuts that have been occuring, the tax benfits have been markedly reduced - ?part of whats contributing to the housing supply short fall.
Agree about the illogical bank policies - I have more assets, income and experience than a first home buyer, but they lend me less % wise. From there perspective I can only think that its in relation to overexposure to one single entity. A frustrating obstical - certainly lo docs helped when dealing with multiple income streams but they are loosing there gloss at the moment.

 

I'd be in favour of eliminating negative gearing on residential property all together.

You'd have to be blind freddy not to see that negative gearing has significantly contributed to the over inflated property prices we see today.

For those who can't, imagine this scenario: two couples are at an auction, both couples are the same age, have the same income and have the same Deposit. Both couples desperately want to purchase the house and will bid up to what they can afford to borrow. The first home buyer will always be out bid the Investor as the investors costs are offset by rent they recieve, tax breaks and the fact that they will pay interest only. So the investor will push the price of the house up and above what a normal home owner would be willing to pay / afford and hence you have an affordability crisis. (and when you have investors bidding against eachother thats when the problems really start).

if you think as a property investor your increasing supply by purchasing existing homes your sadly mistaken. only the construction of new homes increases supply. perhaps a solution would be to allow negative gearing only on the construction of new homes. Or even eliminating interest only loans to somewhat reduce the artifical demand for housing.

and for those that say they are providing subsidised housing for renters, without negative gearing, rents would still be fairly similar and they certainly wouldn't sky rocket. As property prices would fall significantly, rents could stay the same and thereby provide a greater yield as a proportion of the then reduced property prices.

The system is broken, no amount of government grants / reduced stamp duty and tax breaks will fix it. Negative gearing is a big problem, I'd even be willing to *gulp* give up the tax breaks on borrowing to invest in shares, if this would happen.

If property is a good investment, it will still be a good investment without it. If claiming a tax deduction is all that makes it worthwhile than you should be looking elsewhere for an investment.

the big question you've got to ask yourself is "Would I invest in property if I couldn't get a tax deduction for the interest on the debt and expenses of maintaining the property?"

if your answer is no, than your demand for IP's has been artifically created by our tax system.

 

Yep ... the developers will allocate their resources to the most profitable projects.

If residential does not pay enough, they will look to commercial where there are tax breaks for the purchasers as well.

Incidentally, what is the First Home Owners Grant if its not a tax break ?

Also, what about the extra grant for first time buyer/occupiers in regional areas ?

Don't forget that this mess of a taxation system is often due to Taxation Law being used as an instrument of fiscal policy.

The more you mess with it ... the worse it gets.

Cheers,

Rob

 

I'm not suggesting that people wouldn't rent & everyone would just buy "cheap" house.

If house prices were forced lower by this change (I'd imagine the market would **** itself) and rent stayed steady, yields would be higher for new investors (existing IP owners would lose out but new IP owners would benefit).

in addition if you weren't able to claim a tax deduction there shouldn't be a need for the government to apply tax to your rental income or capital gains tax for that matter.

so property would would go from a low yield / medium growth investment to medium yield / medium growth investment.

So if your charging $300 pw for a property worth $400K thats a yeild of about 3.9%, if that property price fell to $300K the yield for a new investor would rise to 5.2%, if that was tax free.. it may be still worthwile for an investor.

house values could fall by as much 19% if you removed the tax breaks for investors, which is strangley close to what most analysts think the market is over valued by....

how did I calculate this? assuming an investor can afford a holding cost of $20K pa the principal = ~$486K, int 9%, yield 4%, costs 1%, MTR 31.5%.
Removing the tax breaks that same investor could only afford a principal of $395K assuming the yield is maintained at the same $ level. so a fall of about 19%. if the yield falls with the property the actual fall is equal to the investors MTR of 31.5%. strange that....

it is in the best interests of existing IP owners to keep their tax breaks, but it would be in the best interests of the country to remove them. High property prices really only benefit banks and local governments.

 

... or not understand the other factors involved.

These could be home owners going in with a 95% loan, versus an investor who is probably paying off their own home and going for 20% deposit because otherwise the holding costs are too high, the loan approval is more complex, and the bank doesn't consider any of their tax breaks.

Making a pretty dumb investor paying more than market price.

... which probably explains why depreciation deductions strongly favour new homes.

Actually investors switch to shares / commercial property, then for a few years home buyers would pick up some offloaded renters, then a massive shortfall of rental properties results, and rents skyrocket. Governments are forced to respond with significantly more subsidised public housing and taxes would be ramped up to pay for it.

With up to 30% of new houses going into taxes, duties and development charges, it probably would make a difference.

In the past, yes you would have kept with property. But now it's getting harder, for example:
20 years ago you could buy a $60k property, near a city, and rent it for $120.
15 years ago I bought for $115k and rented for $180pw.
10 years ago I bought for $210k and rented for $220pw.
5 years ago you could buy for $300k and rent for $260pw.
Now, you might get something for $400k and rent it for $300pw.

Obviously interest rates have also changed, but they're back to where they were almost 15 years ago (after the 17%). Negative gearing wasn't as important when yields were much higher. While capital growth is still worth investing in, yeilds have dropped making the tax deductions much more important to hold the property. ... or we could have a massive rent increase to restore the balance.

With the government charges, plus the cost of labour and materials; developers I have heard of are now working down to around 15% profit. Under 15%, the risks are too high and the return too low, and they don't build.

Yes, construction increases supply and would ease pressure, but developers and builders don't care if they sell to an investor or home owner, it's all money. So if they're at their profitability limits after government charges and construction costs now, how does scrapping negative gearing make houses cheaper to build and sell?

 

have a read of these articles they provide a much more detailed study on the effects of investors and negative gearing on the property market.

an interesting point on the following article, is that outside of Australia property is seen as a high yielding / positive cashflow investment.

page 39 onwards (very good read):

http://www.rba.gov.au/PublicationsAndResearch/OccasionalPapersAndOtherReports/submission_to_productivity_commission_inquiry_on_first_home_ownership.pdf

and this one

Negative Gearing: Future Directions - [2002] DeakinLRev 17; (2002) 7 Deakin Law Review 349

 

Hi Young Gun,

The RBA article is fairly good, and I note that it places the main cause of increased prices was the availability of new and more flexible financing arrangements, negative gearing is somewhat less significant. This I agree with.

It is true that yeilds in Australia are lower, and after having lived in the UK and travelled elsewhere, I have trouble grasping how they pay so much more for rent, other than having fewer numbers of investors and therefore supply is further restricted and rent is huge. As a result they also have large blocks of public housing, which can be considered marginal conditions in many cases - you'd want to pay more to stay out of there! And then there are the large 'trailer parks' in the US.

Negative gearing does allow us to have lower rental returns in comparison. It means that there is some truth in investors subsidising accomodation costs for renters, but it is acheived through negative gearing to offset costs, ie, a significant part of the 'subsidy' comes from the government and is passed through. I think I prefer the more equitable housing arrangements in Australia that our system allows through negative gearing.

The second article is simply myopic. It seems to believe that it is all the fault of negative gearing without even considering the impact of changes in financing. References are selective, eg, yes high prices do lock people out, but it wasn't saying this was a result of negative gearing! It states that renters are locked out of buying as investors have bought the stock, where are they now with investors going quiet?

Other factors should be considered, eg, FHOG came out and price rised 20 - 30k in a week as it helped people pay government charges to go with their 100% loan. Unforetunately this followed 2001 and negative returns in the stock market and superannuation, and there was an investor rush to property as a result (responding to the FHOG blip). This continued the price increase a bit, but it was one off, and occured just before the RBA's 2003 article; which is probably why it managed as much attention in report that it did. Even with the new ability for superannuation to invest in property, I haven't noticed the same rush as in 2002-03 to drive up prices.

It has really been changes to financing, not negative gearing, that has driven the recent boom. The problem is that governments have increased charges to take advantage of the higher prices and reduce what would have been major increases in building profits - if those profits remained there wouldn't be an undersupply, it would be worth building more and cheaper houses. Dropping negative gearing can't fix these underlying costs, question is, how do you wean the government off the massive windfalls in fees?

Cheers, Dave