The negative gearing election

[coerced]

Absent Malcolm panicking and changing tack based on bad polling, it seems this will be the scare campaign the Liberals will run with. And it is a reasonable chance of working - the Liberals' bailiwick, for their entire existence as a party, has been playing on the Australian populace's relationship with residential property, and it is part of what has delivered for them such a consistent ruing majority at the Federal level. For example, the 2004 campaign was dominated by interest rates, and mortgage rates and property prices are the one area in economics that Labor have never really had the assertive voice in the debate.

There are three problems I perceive with this if Malcolm proceeds with it.

Firstly, the example the PM and Treasurer went with that ran in the major news outlets was a misfire. The Mignacca's, negatively gearing so their infant can own a real estate in 20 years, plays exactly into the notion that Malcolm and the Liberals are only interested in looking after those that can inherit their wealth. Let alone the reality that such a situation signals a dysfunctional market and possibly a top in the bubble, the idea that negative gearing is a necessary policy so today's young adults can ensure their children can buy property is madness. It suggests clear need for reform.

Secondly, in my discussions with the older generations that hold substantial property, they too are concerned about property prices, whereas ten or more years ago they would have seen ever rising property prices as a good thing. My suspicion is that people who are now expecting to become grandparents are seeing the impossibility of their children ever being able to settle down, have children, and do so while remaining financially stable. In fact the only way potential grandparents can be assured that their children will be secure is if they themselves die and leave an inheritance. The widespread notion that many of Generation Y and Millenials may never have children and will have to rent forever must be a chilling effect on the parents of that generation.

Lastly, the mollycoddling of the developer and NIMBY rentier class of property holders represents an abandonment of Menzies's Forgotten People. Menzies knew well enough that the success of a right wing party depended on the involvement of the majority in property rights, which is why the Liberals ruled for so many years under his leadership, despite the labour movement being at its strongest during his prime ministership. If the average Australian becomes a renter, never secure in his tenure, then the likelihood of a right wing party achieving a popular majority diminishes. Or as John Alexander said - we are becoming a nation of landlords and serfs - and a large amount of serfs will never vote Liberal.

So is this the election where the Liberals play on what is traditionally one of their strengths and it backfires? Do people warm to Shorten's policy on reforming the property market by grandfathering and then quarantining negative gearing?

 

[Hank Scorpion]

Well they've already had a couple of weeks at a scare campaign; today's Essential poll had 48% in favour of limiting negative gearing (24% opposed.)

They're toast if this is their plan to beat Labor

 

[coerced]

Well they've already had a couple of weeks at a scare campaign; today's Essential poll had 48% in favour of limiting negative gearing (24% opposed.)

They're toast if this is their plan to beat Labor

I reckon they'll push on regardless, and assert that is an essential part of the property market. National polls might not show the true story.

The interest rate campaign of 2004 was directed at Sydney marginals - Sydney having undergone a boom from 1998-2003 and then tailing off. People on the fringes of the city had paid a lot (at the time) and the threats of interest rates rising to the levels of 1989 was enough to send a chill through those electorates.

Sydney property prices are even more insane now (over a million dollars to buy a house in Lakemba!) so this seems aimed at specific electorates that are sensitive to such fluctuations in the property market.

But as you've pointed out, it has a reasonable chance of backfiring. I know a number of avowed Liberal voters over the age of 60 in paroxysms over how their children will be as comfortable as they are.

 

[Crankyhawk]

I negatively gear and while it is good at personal level it is clearly bad at a society level. I heard jon Caine trying to get a caller to explain why negative gearing is worse than other types of expenses against income or investment. The caller couldn't but he should have pointed out that those who negatively gear property are reducing availability of property, creating demand and raising prices whilst getting a tax break.

 

[coerced]

I negatively gear and while it is good at personal level it is clearly bad at a society level. I heard jon Caine trying to get a caller to explain why negative gearing is worse than other types of expenses against income or investment. The caller couldn't but he should have pointed out that those who negatively gear property are reducing availability of property, creating demand and raising prices whilst getting a tax break.

I too have negatively geared, and while I think its effect on the property market is overstated, it is at least part of the problem of why house prices are ridiculously high in this country.

It is my belief that the Liberals unwillingness to seriously tackle the property price problem in Australia leaves them vulnerable to attack, regardless of whether Shorten's policy does much to change the market (I believe it won't).

 

[Fluro Boots]

I'm all for leaving negative gearing as is. I see the capital gains tax discount as a better target for reform or at least extend it out to 5 years+, deducting losses against income seems fair to me, but paying tax at full tote odds at the end may make people think harder and less likely to jump in for the tax benefits in the short term. It'd also collect a more revenue on other assets.

 

[Pessimistic]

As an aelection issue it all depends if the libs get away with representing the alp policy with lies, either at national level or in local whispering campaigns in seats where it may count.

The truth is:

Alp policy allows the same breaks on new build property

They do not intend to remove negative gearing now or in the future

 

[Ratts of Tobruk]

Let's not forget Howard's first home buyer's grant was all about trying to lock young people into the Liberal Party's supposed strength on keeping interest rates low (which is a BS claim - as was shown as soon as the GFC hit when suddenly having higher interest rates with which to help control the economy was seen as ideal and a part of the reason why Australia was able to avoid a recession).

The ridiculous idea that people are buying houses for their one-year-old also goes against the whole economic idea that getting people to buy houses makes them work harder as they have hundreds of thousands of dollars to pay off. The Liberals whole, unbelievable approach, essentially says 'hey all you hard-workers without well-off tax-minimising parents, the reason you're finding property so expensive is because this little cutsie is going to get a free house when she's old enough'. How does that sit with our egalitatian society?

Not to mention that whole 'debt and deficit disaster' crap the Liberals were spinning. Do they not realise we need taxes to pay down the devt? Letting people pay no tax so they can buy a house for their one-year-old doesn't fit with that either.

Infuriating.

 

[Gough]

Standing back, and saying Labor are terrible at everything won't work for the Libs this time around.

 

[Frank Grimes]

Everybody is saying that removing negative gearing is going to make housing more affordable. It isn't really going to make much of a difference (less than 2% drop) according to the Grattan institute report released a few days ago.

If there is a reason for altering the NG it's more because it's a waste of tax payer money. There doesn't doesn't appear to be much benefit for having it.

I think Turnbull was open to the idea of altering it. He proposed the idea of limiting the amount which can be claimed or something late last year. I think his party quickly shot it down and effectively dug their own graves as far as campaigning over this subject.

 

[Taylor]

The government subsidizing the rent of people who can't afford to buy is a huge waste of taxpayers money.

Negative gearing requires running the business of owning the property at a loss, the only income that a property generates for the week on week/year to year business is through rent. If the ability to have that loss offset against tax you would otherwise pay, effectively treating the individual as a whole business, then the property portion will need to cover it's costs better - which means higher rent.

OR

Regardless of the fact that the investment property values are tied to the retirement plans for people who own them, putting aside the pension savings in later life that it will bring, to have the market filled with previously negatively geared property being sold for no longer being cost effective is a bit drastic.

I expect there to be a period of time when those investment property owners would attempt to increase the rent, pushing some people out to find new places before the properties are sold, possibly pushing the renters out anyway.

I don't think it would settle until most of the rental properties were purchased at the new low price, and able to pass that lower rent on.

 

[RW]

There are bigger problems with the tax system than negative gearing, I don't think taking it away is going to magically make property more affordable.

Having said that, if you were looking to save taxpayers' money, one quick fix might be to quarantine rental losses in the same way business losses are for sole traders. To make it more palatable you could give people a small income tax cut, for example by raising the tax free threshold from $18,000 to $25,000 so low income earners would no longer need to lodge a tax return. It shouldn't be that costly to do.

I will agree with removing the CGT discount, all capital gains should be treated the same. Once again you could use some of the money saved to reduce income taxes for low and medium income earners.

 

[Frank Grimes]

I will agree with removing the CGT discount, all capital gains should be treated the same. Once again you could use some of the money saved to reduce income taxes for low and medium income earners.

From my understanding the idea of the CGT discount being introduced is to offset, in a simplified way, the increase of the property price due to inflation. No doubt they were overly generous by making it 50%. I wouldn't have a problem if they made the deduction from actual inflation over the years.

 

[yibbida]

Some reading

http://www.macrobusiness.com.au/2014/07/how-the-cgt-discount-fueled-property-speculation/

it does point-out that the decision by the Howard Government in 1999 to halve the rate of capital gains tax for investments held for more than year has fueled negatively geared property investment:

http://www.smh.com.au/articles/2004/07/25/1090693834175.html

Before then, capital gains had been taxed at a person's marginal tax rate (up to the top rate of 48.5 per cent), but only the "real" or after-inflation gain was taxed.

When Mr Costello moved to providing the 50 per cent discount, however, he also switched to taxing the full, before-inflation gain, not just the real gain.

 

[Frank Grimes]

Some reading

http://www.macrobusiness.com.au/2014/07/how-the-cgt-discount-fueled-property-speculation/



http://www.smh.com.au/articles/2004/07/25/1090693834175.html

Pretty much what I was getting at. The 50% CGT discount was introduced in place of determining the profit after inflation. While the 50% CGT is easier to calculate and convenient, the older system of calculating the actual increase of inflation appears fairer.

 

[RW]

Yep - it's actually not that difficult to calculate the amount of the gain that's due to inflation.

 

[JoseMourinho]

There are bigger problems with the tax system than negative gearing, I don't think taking it away is going to magically make property more affordable.

They are only getting rid of negative gearing on properties. They aren't getting rid of it on Margin Lending.

I don't think the negative gearing aspect has been a major factor on why property prices have increased.

The property developers will adjust on how much land is released after the act has gone through to meet demand of new home buyers and keep the current prices.

The problem with these reforms is that people don't understand that certain businesses involved with this will change their behaviors along with the change in laws.

 

[Ratts of Tobruk]

It's only being removed on old properties. It is still available for new builds. There's also no surprise that property is treated differently in the economy. It is key to many people's ambitions in life.

Pretty much what I was getting at. The 50% CGT discount was introduced in place of determining the profit after inflation. While the 50% CGT is easier to calculate and convenient, the older system of calculating the actual increase of inflation appears fairer.

I think we all know it was introduced to give a big tax cut to home-owners, without the bad press that would come with actually cutting the top tier of tax.

The government subsidizing the rent of people who can't afford to buy is a huge waste of taxpayers money.

Negative gearing requires running the business of owning the property at a loss, the only income that a property generates for the week on week/year to year business is through rent. If the ability to have that loss offset against tax you would otherwise pay, effectively treating the individual as a whole business, then the property portion will need to cover it's costs better - which means higher rent.

OR

Regardless of the fact that the investment property values are tied to the retirement plans for people who own them, putting aside the pension savings in later life that it will bring, to have the market filled with previously negatively geared property being sold for no longer being cost effective is a bit drastic.

I expect there to be a period of time when those investment property owners would attempt to increase the rent, pushing some people out to find new places before the properties are sold, possibly pushing the renters out anyway.

I don't think it would settle until most of the rental properties were purchased at the new low price, and able to pass that lower rent on.

They are 'grandfathering' the current rules. The only something would become less coss-effective is if it was so tightly negatively geared that the cut in CGT made it uneconomical. Those sorts of investments aren't what we want anyway, I don't think.

 

[JoseMourinho]

It's only being removed on old properties. It is still available for new builds. There's also no surprise that property is treated differently in the economy. It is key to many people's ambitions in life.

And other people use share portfolios for their ambitions in life, not everyone favours brick and mortar now.

And they are grandfathering the old properties and the new ones aren't allowed to negatively gear?

 

[Ratts of Tobruk]

And other people use share portfolios for their ambitions in life, not everyone favours brick and mortar now.

And they are grandfathering the old properties and the new ones aren't allowed to negatively gear?

No any property investment under the existing scheme is grandfathered. In future you can only neg gear on a new build.

EDIT: Due to HFC feedback two posts down

 

[Crankyhawk]

Everybody is saying that removing negative gearing is going to make housing more affordable. It isn't really going to make much of a difference (less than 2% drop) according to the Grattan institute report released a few days ago.

If there is a reason for altering the NG it's more because it's a waste of tax payer money. There doesn't doesn't appear to be much benefit for having it.

I think Turnbull was open to the idea of altering it. He proposed the idea of limiting the amount which can be claimed or something late last year. I think his party quickly shot it down and effectively dug their own graves as far as campaigning over this subject.

Agree that the housing won't become cheaper (no one will sell at a lower purchase price unless forced) but it may slow the future rate of increase. Of course construction could also slow and therefore continue artificial supply constraints and prices continue to rise...

 

[Long Live HFC]

No any investment under the existing scheme is grandfathered. In future you can only neg gear on a new build.

they're only looking at changing NG for property investment. i don't think most australians even get the fact that gearing = borrowing to invest, and is not some magic option that occurs only with property.

 

[Ratts of Tobruk]

they're only looking at changing NG for property investment. i don't think most australians even get the fact that gearing = borrowing to invest, and is not some magic option that occurs only with property.

Yes, my apologies. We were already talking about it in the context of property, but I can see how that could be confusing. I'll edit the original.

 

[coerced]

Regardless of the fact that the investment property values are tied to the retirement plans for people who own them, putting aside the pension savings in later life that it will bring

Nonsense.

If there is a reason for altering the NG it's more because it's a waste of tax payer money. There doesn't doesn't appear to be much benefit for having it.

It's often cited that it saves taxpayer money by reducing the need for public housing, and increasing supply, but given we have long had an undersupply in the private housing market, as well as overwhelming demand for public housing, is it really doing what it is supposed to do?

I think rather than banning it outright for established housing it would be preferable to cap it. I think a small amount of negative gearing is fine for average investors to ride through dips in the rental market and fluctuations in interest rates. I don't think those who deliberately set out to write off a lot of their tax through negatively geared established housing should be encouraged to do so.

 

[Long Live HFC]

Yes, my apologies. We were already talking about it in the context of property, but I can see how that could be confusing. I'll edit the original.

i knew you knew what you meant!