Wednesday, April 15, 2009

Your landlord's not that mean

...and doesn't much care for negative gearing

Negative gearing is disappearing as a tax strategy for landlords, and it seems it won't be missed.

Falling interest rates and rising rents over the course of the financial crisis have made it increasingly hard for landlords to make deliberate losses in order to offset their other income for tax purposes, and the government's Henry Review has the practice under the microscope.

But if we are to believe what landlords themselves have told a research project conducted for the Australian Housing and Urban Research Institute, they won't much mind.

The in-depth telephone and face-to-face interviews with 20 to 40 landlords from each Australian state paint pictures of "amateurish" and "emotional opportunistic" decisions dictated by circumstance and familiarity rather than economics.

"This very amateurism can be problematic policy-wise, because investors are not easily susceptible to policy levers," say the researchers from Swinburne, Monash Queensland, Western Sydney and NSW universities...

"But it can also be a positive, in that many such investors appear not to be as reactive to market fluctuations or poor short-term returns as more professional investors."

Only one of the investors interviewed nominated negative gearing as the chief reason for deciding to become a landlord.

Many did it in order to have somewhere to live when they retired or to be near other members of the family. They distrusted complex investments and could understand "“bricks and mortar".

Most were primarily concerned what they called the "long term" returns or "capital gains". Many year-to-year outcomes were not that important.

"I have only made a tax loss of about two grand maximum a year over the whole time I have been a landlord. I have been telling myself that the negative gearing is important, but now I think about it, it doesn’t sound as if it is," said one.

"Negative gearing isn't essential. It is a bonus," said another.

Some actively opposed the concession saying that "governments do enough" without it. Others thought it wouldn't last but took advantage of it nonetheless.

"I think it’s crazy, but I’m in it if it’s there,” said one.

"You sit back and rub your ears and say goody,” said another.

Launching the Henry Review consultation paper in December the head of the Treasury Ken Henry said he "still wears the scars" from an short-lived experiment with limiting the negative gearing tax concession in the mid-1980s.

The views of landlords themselves suggest that this time they might be more receptive. The changing financial environment has forced more and more into "positively gearing" - actively making money, as an alternative to attempting to make deliberate losses.

But the interviews also paint a picture of landlords reluctant to raise the rent.

"I've got the same tenant as when I bought it. She’s a pensioner. I’m not interested in an extra $20 or $40 a week - it's nothing to me as what it would be to her," said interviewee.

"There’s a lady who is a sole parent with five kids and she fell over herself to rent the place. She is still only paying $230 and she rang me up two weeks ago and said it’s about time you put the rent up. And she’s the tenant! I nearly drove off the road," said another.

While stressing that landlords were not driven by any sense of a moral imperative the researchers report that many were aware of their role in providing a social service and took it seriously.

Kinder, gentler landlords

"I'm a bricks and mortar person. I know it doesn't have the returns, but I can see my investment."

"We actually don't believe in negative gearing, so it wasn't as if we went and found something we could negatively gear - it was just coincidental."

"I intend to retire in a few years and I looked at Bendigo as a good place to retire and my wife is happy with that too."

"I work on trust. I've told the tenants if there's any repairs need to to be done, to do it, nothing over two or three grand - to treat it like their own home."

"If a tenant moves out you immediately lose a week's rent. Even if you get someone straight in you've lost the re-renting fees, so I don't tend to raise the rent."

Australian Housing and Urban Research Institute, Understanding what motivates households to become and remain investors in the private rental market, March 2009


Marek said...

landlords reported $5 billion in rental losses in 2006, is this amount set to go down?

Peter Martin said...

Way down.

Anonymous said...

When negative gearing is dead and buried few will miss it. I read that only about 1% of investors buy property for that reason.

With neg gearing gone, the winners will be the general public (less wastage of tax revenue on propping up leveraged house prices) and FHB who will not have to go so far into debt to match current highly subsidized bids of investors.

Losers, that will be the banks with less debt to palm off onto home buyers (investors and OO).

Future commentators will look back and ask: What did negative gearing create? Physically it creates very little. Next to zero new homes, but quite a lot of debt in sales of existing homes. Not a brilliant tax strategy if the plan is to have a productive economy that uses debt to foster building and construction and associated business.

Adrian W said...

I have not visited your blog in a few months. This was a good read.

CuriousGeorge said...

Is the abolition of neg gearing really going to impact housing prices much though? Only about a third of the market is owned by investors (private rental properties), and, as the article state, most investors aren't relying on negative gearing anyway. So property prices aren't really that leveraged, and as such have no reason to drop sharply. Of course, we would expect average prices to stagnate for a few years (much like the 1990s), but sharp drops seem to me unlikely for the mainsteam market, especially first home buyer target properties.

Anonymous said...

Exactly CG. Now is the perfect time to phase out negative gearing. As you say, most investors do not rely on it. Removal will save about $2B per year from govt revenue.

The 2008 Senate inquiry Housing Affordability made the following recommendation 4.2 (p. 69) 'that Australia's Future Tax System Review Panel consider the implications for housing affordability, as well as the overall fairness of the tax system, of the:
 tax discount for capital gains on investor housing;
 exemption from land taxation of owner-occupied housing; and
 current negative gearing provisions.'

'The combined total of capital gains tax arrangements, land tax exemption and negative gearing arrangements is estimated to be in the order of $50 billion per year.'

That is $50B every year - year in, year out. Perhaps the govt will actually do something this time around .

If nothing changes then possibly too many vested interests who can't see the bigger picture - you know, a functional harmonious social economy that produces something other than debt that gets written off by a dodgy tax system.

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