Should negative gearing be scrapped?
by Peter Ricci, on 24th January, 2007 • 8 Comments
I have been thinking about this for a while now and have spoken to some agents (clients) about this. So here goes. I think that something drastic has to be done in relation to property prices across Australia. No-one is game to say it, but I think it has to be said. Negative gearing is going to cost the industry dearly in the long run and here is why.
A recent survey by Wendell Cox Consultancy has pointed to the fact that it now takes more than 8 years of salary to buy a home in Sydney, up from 3.5 years in 1980. To me this would mean less first home buyers in the market. Now even if this is exaggerated, it is still bad for the industry. Yes agencies claim more commissions the higher the prices go, so do banks, so do governments, but who actually wins? Rising home prices only benefits the few, whilst for the majority of Australians it has become harder to buy into the market.
For mine, existence here on planet earth is about a lifestyle for all of us, our friends and family, as each year passes, lifestyles are being effected because most of our resources are being poured into having a roof over our heads, rising fuel costs, grocery bills.
I mean are we better off after all of these years of economic growth?
It seems that most people in the industry are only concerned about when a market booms - however having affordable homes means more buyers, more commissions, more turnover. If negative gearing was scrapped - yes there would be a few years of downturn, but we go through these cycles anyway. The good to great agencies would survive and yes some would flounder, but on the whole I think it would be a positive thing. If it ever were introduced it would be a slow introduction, but it would have an immediate effect. Negative gearing costs Australia around $3 billion a year, this money could be used to help first home buyers and be put to better use on infrastructure for land etc. Rising home prices puts upward pressure on wages and many other things. So maybe it is time for some brave decisions. If nothing is done all you will see are 50 year loans and even generational loans like in Japan. Surely this is not good for tomorrows kids entering property markets.
I am sure I will be picked to death on this one, banks, agents, governments and investors have a bit a stake here, but so do the millions of middle and lower income Australians. Many places today are still relatively affordable, but that will soon change unless something critical is done and done soon. Ditching negative gearing would have an immediate impact, many people would exit the market and yes there would be a flood of properties, but I bet there would be a flood of buyers as well.
So there it is, I feel I would be providing a disservice if I only wrote articles that would be popular, and I am sure this will draw some criticisms and possibly silence from some quarters.
But this forum is for discussion across a variety of subjects. So I would be interested in all of your views.
Further Reading
Wikipedia - Pro’s and Con’s of Negative Gearing
Comments
Good topic, I agree with your sentiments on house prices Peter.
It’s ok for me and my friends but what about my kids and their friends. ?
How are you supposed to save $100,000 for a deposit THEN borrow a further 2 or $300,000 on mortgage ?
It’s ridiculous.
I believe this came about by the extrordinary long period of extrordinary low interest rates. When rates go through the roof again as they eventually will the fallout will be catestrophic for many homeowners.
We have a boom and bust economy and the next bust will be enormous.
High house prices are only good for those who own a number of houses, the average person just has to pay higher rates and pay a fortune in stamp duty if they want to move, I would be happier if my house and everyone elses house was worth half what it is today, that may be the situation in the next 2 years.
I think any correction will be held off by the Gove as much as possible until after the next election.
Sam
25th Jan, 2007
Very true and even for investors it would mean not as much out of our pockets after rent returns. High propertry prices actuallu only benefit very few people and more and more of us are realising this fact!
Emily Yeates
25th Jan, 2007
(I work at realestate.com.au)
As a personal comment, I agree with the sentiment that we should manage the property market to benefit everyone with a stake in it–and that includes everyone who lives in the country.
Thanks for the heartfelt post, Peter.
dave
Dave Platter
25th Jan, 2007
The abolition of negative gearing will simply not happen - unless the federal government completely renovate the Tax Act. Under a Labor government the unions would never support this as real estate is the largest employer in Australia - it would mean a huge reduction in employment.
In 2006, the Australian Tax Office (ATO) challenged more tax payers on their claims than ever before. It is all about tax minimization.
Maybe this thread should have been directed to housing affordability !! Welcome to the real world - as the NSW government has brought this entire debacle on itself as a result of introducing “brain - dead” taxes like the Vendor Exit Tax. Investors left the markets in total disgust and now we have the rental crisis.
Abolish negative gearing and rents will climb 300 per cent as our governments can simply not afford to provide assisted accommodation, ie housing support.
The current price of real estate is exactly that !! If you increase wages (which can’t happen) as the Reserve Bank of Australia (RBA) would immediately fine the ecomony with interest rate increases to dampen increased spending in the economy. The other alternative is a recession, that would bring prices down. Yet - Paul Keating delivered Australia the “one we had to have in 1991 -1993″ and, that won’t happen again either.
In 1991 they moved rates from 11.50 per cent to 4.75 per cent to try and stop the collapse of the economy (Thanks Paul)
Since then the RBA has better managed our economy. However, at the end of the day our property markets need investors. They are the ones who provide housing for those who can’t afford to buy real estate which explains why they rent.
When GST was introduced the states were told to reduce taxes. In NSW the government has continued to increase taxes. Land Tax, Stamp Duty etc etc the federal government should either abolish GST or, ask the states which taxes they will abolish that year - so that they then qualify to receive their annual payment.
NSW need investors, abolishing negativce gearing would render it bankrupt. Hey, NSW is already in the red so officially Morrie is driving an economy that is under the guise of administrators.
Offer peanuts and you get monkeys - that is what Macquarie Street delivers.
The rich get wealthier and the dumb nuts who run the state qualify for the “Dumber and Dumber Awards”. At the end of their tenure nobody would employ them which explains their parliment pension !!
Robert Simeon
26th Jan, 2007
Very true Dave, the standard of people in Govt at State level is frightening, at local Govt level is worse, let’s hope the rot doesn’t progress to Federal level.
The country is close to being run by those with money as is the case in the USA.
The only way to get prices and affordability back into line is another reecession, this one will be global and is long overdue. Unfortunately those with large mortgages (almost everyone who bought a house in the last 8 years) will learn a very tough lesson.
It won’t happen you say ? It always has in Australia, just because this one is late doesn’t mean it won’t happen but the consequenses this time will be greater because the bubble has blown to ridiculous levels.
$1M for a weatherboard in some areas ? It’s BS and will come to an end sooner or later.
Sam
26th Jan, 2007
Sorry very true, Simon NOT Dave.
Sam
26th Jan, 2007
Errrr Robert (it’s too early)
Sam
26th Jan, 2007
Great comments Robert/Dave/Simon. My point is something has to be done. In America the parents save for their kids education - often before they are born, we are heading in the same direction however it will be education and deposits for housing.
If we are paying 8.5 years of wages up from 3 only 30 years ago, it means one thing, something is just not right.
Blaming governments is easy, however more investors leads to higher property prices, I think the solution is somewhere in between all of these ideas, but whatever it is - it must be drastic and have long term stabilising effects on property prices.
I think agents thinking that bubbles are good for them is a complete misnomer and a long term steady housing market would be better for all!
Peter
26th Jan, 2007