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Are the Greens on the right track with respect to negative gearing? - Article by Sally Pepper

At first glance The Australian Greens’ announcement that they would abolish the negative gearing 1  tax break, in a bid to increase government revenue through increased taxation and improve homelessness and housing affordability looks like the right move. I have, however a few questions about this.

Firstly it must be pointed out that the Australian Greens advocate that the new tax regime be “grandfathered” so that current negatively geared investors could continue to be so, but that no new investors would be entitled to this. Two sets of tax rules would apply side by side.

I wonder if borrowing to buy a property would be as attractive to a potential investor if s/he could not negatively gear. Presumably, The Greens do not advocate NO tax deduction on an income-generating investment but just to the point where it goes into the red.

I see from the policy document that their ruling would apply to all asset classes. At least here is some consistency.

Negative Gearing applies to non-property investments too

Negative gearing is usually only discussed in the context of property, but of course it applies to other investments too. At present one can borrow to buy shares, which will generate an income since they pay dividends. These dividends are subject to income taxation, in many cases offset by company tax already paid, in the form of imputation credits to the investor. Any shortfall in the income from the shares compared with the interest on the loan is tax deductible. With The Greens’ policy presumably this would only work up to the point that the investor is not going into the red.
One needs to look at why people borrow to invest in any asset. The sensible reason to do this is that the investor believes that the investment will rise in value, such that equity in the asset increases and the loan starts to look small by comparison. The investor can profit in two main ways:

1. With housing, as the value rises, the rent will also increase. Eventually the investor who was negatively geared could become “positively geared” and hence will pay tax to the government.

2. The investor who sees that s/he has made a paper profit can realise this gain, pay back the bank and pocket the profit minus Capital Gains Tax.

I cannot see that abolishing negative gearing will free up housing for non-investor home buyers nor that the tax gains for the government will be as significant as the Australian Greens believe. The abolishing of negative gearing would affect Australian investors, but it would not affect foreign investors who have borrowed from elsewhere. How would that be addressed?

Greens proposal fails to address land-costs – the biggest part of housing unaffordability

The Australian Greens advocate the use of prefabricated houses as a part solution to the terrible problem of homelessness in Australia. I don’t see anything in the document about the land required to put the prefab house on. Land-costs are the major component of housing in cities and these costs are more marked in areas which would be considered to be in a “good position.” The actual house is a relatively minor thing. If people had their own land, probably most would manage to erect some sort of shelter for themselves!

The Australian Greens, in deciding that “negative gearing” is to blame for Australia’s housing woes (and the complete evaporation of “the Australian dream”) fail to address the demand factor which is fundamental to the issue of unaffordable housing.

Where do the demands for Australia’s housing come from?

1. Australians as they reach adulthood tend to need housing apart from their parents . Only about half as many people die in Australia as are born here in any one year so there are roughly only half the number of houses available from that source as there are young Australian people looking for them. Thus there is a built-in shortfall because of our demography.

2. In addition to this, with high immigration, there are likely to be more migrants invited to Australia as business migrants, as skilled workers, students or for family reunion, than there are young Australians looking for their first home.

Penalised Australians would retreat and foreign investors advance

These two groups compete in the same housing market. If Australian would-be investors retreat from the housing investment market because the advantage of negative gearing is not there, I think as long as the total demand for housing does not slump then non-Australian investors will fill the gap left by locals and compete with local home-seekers. With large numbers of people needing housing and a short-fall in supply leading to very high purchase and rental prices, home-seekers and would-be renters will “fall through the cracks.”

Scott Ludlam says that 7,000 houses “for the homeless” will be supplied by 2020. That’s great, but people need housing now. There are 105,000 homeless people on any one night in Australia, according to Salvation Army figures and according to “Kids under cover”. Family breakdown is blamed for a lot of this but if housing were abundant, as it should be, a family breakdown would not result necessarily in homelessness.

Something needs to be done much more urgently about this problem, one which used to be practically unknown in Australia. We all, including The Greens, think we have a silver bullet for this problem but it seems clear that the demand side of the equation still needs to be lightened. This can be addressed easily and quickly at little or no cost. We should not be bringing in large numbers of skilled immigrants to compete against local young people for both housing and jobs. In maintaining very high immigration we are doing our young people a terrible disservice. Surely they deserve better than this?

NOTES

1. ↑  "Negative gearing is a form of financial leverage where an investor borrows money to invest and the gross income generated by the investment is less than the cost of owning and managing the investment, including depreciation and interest charged on the loan (but excluding capital repayments)." Source: en.wikipedia.org/wiki/Negative_gearing

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Comments

He declared that "If you've got a good job and it pays good money and you have security in relation to that job, then you can go to the bank and you can borrow money and that's readily affordable". The fact that wages are not keeping up with house prices is being ignored by this buffoon, and shows just how callous and out of touch our arrogant politicians really are!

Mr Hockey made the comment at media conference in Sydney where he was being asked about rising housing prices across the country, especially in Sydney and Melbourne. He denied that housing in Sydney had become unaffordable, particularly for new entrants into the property market. Just wonder how the normal people are actually able to communicate with our leaders, in their ivory towers of affluence. How many houses must our politicians have? They just watch their profits increasing, while the masses are struggling to meet mortgage payments, or are thrown onto the streets. Older people now are in danger of homelessness, due to pension cuts and soaring housing and costs of living.

The Treasurer said rising house prices were a good thing because they enabled owners to borrow against the equity to fund new spending. After decades of paying off a house, or even part of it, how are they to see it eaten away with reverse mortgages? Houses can't be used to pay water, Council rates, electricity and everyday expenses!

Joe Hockey's advice to first homebuyers - get a good job that pays good money (9/6/15) | SMH/the Age

Other stories : Joe Hockey pilloried for 'get a good job' remarks (9/6/15) | SMH, [Joe Hockey's claimed] property crackdown 'won't hurt Australia' (9/6/15) | SBS

Joe Hockey and Tony Abbott are skating on thin ice with their defence of stratospheric house prices especially in Sydney. Another Liberal politician, Craig Laundy has defended Joe Hockey's recent remarks on the subject and advised the public that now is a good time to get into the property market. What happens if someone takes on a mortgage which he can just afford and then interest rates rise and he can no longer cover the repayments? Does the government bear any of the responsibility? Abbott said that he wanted prices in Sydney to rise because he has a property there (mortgaged). He is far from disinterested. Hockey says housing is not unaffordable because people are buying but that the answer to the problem that apparently is not a problem is to "build, build, build". He must know that the problem is shortage of land , land land in relation to the huge numbers of people, people, people needing housing in the areas where people want to live. He knows that the average person can only buy where land is cheap or buy in more expensive areas but have little or no land. Members of the government are skating on thin ice because they appear to be interfering in the housing market. Isn't their dictum to let markets be free? They also appear to be giving advice and to have their own interests in the asset case in which they are giving advice to the public. What they need to do is take on the responsibility of a housing safety net. This means "public housing, public housing, public housing!"

Dick Smith, 71, is among Australians receiving the highest of accolades to be awarded in the Queen's Birthday honours on Monday. He was 24 when, with $600, he started Dick Smith Electronics in 1968. "I was fixing the Manly Cabs radios. Twelve months later, my accountant said, 'You've earned more than the Prime Minister.' I had made $30,000."

Smith says he is too old to enter politics, but he is in discussions about lending his name to a political party: Dick Smith's Sustainable Population Party. Mr Smith told The Australian he was considering running under the Sustainable Population Party’s ticket but may also run as an independent. It follows Mr Smith’s announcement in March that he had registered the Dick Smith Party but declared he would not run as a candidate.

The SPP is carrying out a survey to decide whether they should change their name to Dick Smith’s Sustainable Population Party, he said.

Do we really believe our increasing population, which outstrips that of many "third world" countries is a good thing? No national debate is permitted, because there is a three-pronged support for this population Ponzi scheme in the form of the Liberals, Labor and property developers - and the silence of the Greens is also silent collaboration with "big Australia".

I would be overjoyed to hear Dick Smith deciding to enter politics. I've held him in high esteem since I was a young teenager and am continuously impressed by his passion, ingenuity and drive to do right by Australia.

The country needs people like Dick Smith.

I hope he was three sheets to the wind when he said that.

Who would have thought, that if you have more money, things become easier to afford. Thank you Mr Hockey. No one in Australia knew this. Just get more money!

Here I was thinking that getting a job which pays LESS might help. Ahh, there is where I was doing wrong.

Thanks Joe. I'll just get a job that pays $150K. Problem solved. Easy done!

Good to see our best minds are tackling our countries finances.

The Greens are basically a "Social Justice" party, who conflate wishing for the right things with good policy.

Their policy mostly targets social housing, and the poorest of us all. That is, they don't address the problem at all. Poor people have always struggled to afford a home, and the fact someone with no income can't afford a house, doesn't mean there is a problem with the price of the house.

Saying that poor people can't afford a home is as asinine as saying that if you need more money, you need to earn more.

Their housing policy doesn't even mention that housing is overpriced. Even Abbott acknowledged that! The Greens motivation has more to do with using the tax money to provide social housing and a more equitable tax system. Perhaps middle class home ownership is too bourgeois for many of their supporter base, hence why the Greens rarely seem to say that average middle class Australians's shouldn't be priced out.

That said, Negative Gearing should go. It is essentially wealth distribution, where wealth is distributed from one tax payer to someone else, purely on the basis of what the recipient chooses to do with their money. It is ironic that the Liberals and conservatives, who are averse to wealth redistribution, support negative gearing. They decry Socialism, but practice it using our money. IT is "from each according to their ability, to each according to their needs". The only thing that changes is the basis by which 'ability' and 'needs' are determined. Negative Gearing favours some investment activity (that which can be negatively geared) over other investment activity. The Government, and the Arts/Law graduates who fill Canberra, are NOT in a position to determine efficiently and effectively, where that investment should go. They don't know, and can't know.

A large factor in the housing bubble is the expansion of cheap credit. The Australian housing bubble is only unique, because it continued after the GFC. The other Anglosphere nations also had housing bubbles, but they popped, whereas ours remained due to the capacity for further government interventions through simultaneously increasing the FHG, increasing immigration and opening up the market to foreign investors, all instituted by Rudd. Our housing bubble was primed to deflate in 2008, but action in 2009 kept it afloat. The influx of funny money and cheap credit fuelled these bubbles.

The exact same thing is occurring today. Housing bubbles are growing in Ireland and in the USA, and here in Australia again. We also have immigration rates through the roof, which help prop it up, moreso by increasing the perception that property is a winner, than by actually pumping money into the ponzi. That is to say, the perception among investors that high immigration means capital gains, may have more of an effect on house prices than the actual purchases immigrants make. The government could just fudge the data, bring in no one, and the sentiment alone would still keep prices up.

As for foreign investors, I would guess of the Australian government was to really crack down on purchases made with black or grey money, or made illegally and appropriate their houses, then maybe 20% of houses would be reclaimed, perhaps many more so. The mass investment in Australian property is riddled with criminal and fraudulent activity. I think the number of purchases in contravention of laws would when eventually revealed by quite staggering. The data just doesn't match up with legal activity. How is it so many Chinese can take so much money out of China to buy properties here, when their country limits them to extracting $50K? Our government is perhaps party to one of the biggest financial crimes being committed in Australia. Our leaders are so corrupt and so arrogant, it is a sign of the times that they can do this openly, and not fear repercussion. No doubt corruption in China allows this to occur too. The entire situation reeks of corruption.

http://www.chinalawblog.com/2012/10/getting-money-out-of-china-thats-illegal.html
http://www.macrobusiness.com.au/2015/06/stop-money-laundering-so-our-kids-can-buy-homes/
http://www.whocrashedtheeconomy.com.au/blog/2014/07/australian-real-estate-center-in-chinese-money-laundering-racket/
https://sourceable.net/is-australian-property-a-haven-for-money-laundering/

If the Greens were willing to treat our criminal class for what they are, criminals, then they might get my support. But alas, they don't. Only a party willing to put them in jail, or impose huge fines on serving and ex members can hope to make a difference. Fiddling with Negative Gearing is no longer enough.

If the Chinese stock bubble which is forming now bursts, this will have massive repercussions for Australia. It may solve our 'housing crisis' in a very brutal manner.

Well done Joe. As usual you have gone to the periphery of the problem instead of the core. The fundamental long term problem, leaving aside the current bubble, is that population growth adds to housing demand, but supply cannot possibly keep up at prevailing prices, despite official rhetoric to the contrary. We can build more houses where vacant land exists, but are severely constrained in built-up areas where most land is already taken up, but where most people prefer to reside. And each year the supply of vacant land is reduced by development, but population demand keeps increasing. So land prices rise. Furthermore, in inner suburbs where vacant land is almost non-existent, extra accommodation is achieved by expensive high-rise construction, which adds another layer of costs.

The cruellest blow is to low-income families who are priced out of the housing market and locked into a permanent state of rent dependency and poverty. As house prices rise, so also do rents. As the rich get richer the poor get poorer. All major political parties are complicit in this pro-growth conspiracy, including that so-called champion of the poor - the ALP. Shameful.