Thursday, March 27, 2008

More on the negative side of negative gearing

From Tim Colebatch in Tuesday's Age.

"Treasury estimates that even now two-thirds of Australians' wealth is invested in houses — and in the past six years, that wealth has doubled as house prices soared.

But house prices are a zero sum game. When prices rise, those who own houses grow richer, while those who don't grow poorer.

The crisis in housing affordability, over the long term, owes more to house prices outpacing income growth than to rising interest rates.

And what sent house prices soaring was the invasion of the investors, driven by the tax breaks for negative gearing and capital gains. Landlords used to own 20% to 30% of the housing market. But by 2003 they were taking almost 50% of housing loans (excluding refinancing), and even now, they take close to 40%, outbidding the first-home buyers."

Read the full thing.


swio said...

We're going to become a nation of renters. That statistic about the percentage of loans going to investors is quite depressing. When I look at the incomes of some of my friends and family who are not working as high paid professionals and compare them with house prices I can just see that they will probably never own a home. That is a big generational shift. These people's parents worked in the same type of jobs and were able to get into the property market.

Anonymous said...

If landlords are growing as a proportion of property owners, why is there such a rental crisis?


Anonymous said...

Wouldn't it make sense to reverse those negative gearing and capital gains tax changes that were made by the Howard Government?

That would drive some of the investors out of the market and slow future housing price increases, making it easier for people to afford their own home.


Graeme said...

Re making changes to property investor tax treatment, the problem is always about the step-change to effect a new regime. Last time all investment in housing collapsed for a few years when NSW attempted such changes... so it is hard to do without causing 'shocks' to the market.

Anonymous said...

some thoughts on comments:

It is the intention of the govt to maximise the number of renters. Not only are they more easily controlled by fear than home owners but a greater portion of their labour (in the form of rent) can be transferred to investors.

If that appears neo-feudal, that is because it probably is.

Re the question that if landlords are growing as a proportion of property owners, why is there such a rental crisis?

The answer is investors take the easy root and buy existing dwellings. Unfortunately negative gearing does not differentiate between existing or new dwellings.

For a good description of negative gearing try Dr Putland article:

On 04March 2008, PM Rudd announced that a $60,000 ($6k x 10yr) tax credit would be given to investors building new dwellings.

On the surface that sounds good.

However, I wonder, why was this tax credit not given to FHO. Surely they deserve our assistance, not well heeled investors.

In effect, PM Rudd announced a $60,000 slap-in-the-face to potential home buyers on the 04March 2008. Another gift to investors!

How can anyone be proud of that?
Due to the advantage of discriminatory tax breaks, investors are almost always going to outbid home buyers. Treasury sanctioned tax rulings are responsible for this situation.

Re the comment on reversing negative gearing & capital gains tax changes without causing 'shocks' to the market – I agree.

Due to lack of reasonable action, the debt bearing down on Aus now is a force to be reckoned. There are basically 2 choices.

1. Address the main driver of debt – tax breaks and the virtual breakdown of the progressive tax system.

2. Or nothing - just continue on, blame the RBA for rate rises (courtesy of tax breaks for DEBT LEMMINGS, aka, tax-breaks-r-us brigade of residential property investors)

Option 1 seems the hardest and would probably bear out the IMF comment that Aus property is 25% over valued. The main problem with this option is not the eventual drop in prices but the volatile reaction that might occur. Think of what happens when you take a piece of candy off a spoilt child – big tantrum, big noise. But in time it will settle.

Option 2 seems easier. Possible big problem here is not a wailing spoilt child (DEBT LEMMING) but the temperature in the community at large reaching a kind of spontaneous ignition point. A whole generation kept out of affordable housing by the glass ceiling of inequitable tax rulings favouring the DEBT LEMMINGS with nothing to lose and no allegiance to a morally bankrupt govt.

In this day & age we can ill afford, in the words of previous RBA Chief (I. McFarlane) “an intergenerational conflict”.

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