Negative Gearing – Why So Negative
Coming as it does on the back of one of the strongest residential property markets we’ve seen for sometime it’s no real surprise to me that Negative Gearing has created so much news lately.
For most of last year we saw a rare combination of high demand, rising prices and in some markets almost frantic auction results. Plus the market is characterised by historically low interest rates and while they may have slowed somewhat recently, there’s also healthy rentals and good demand for rental accommodation. Plus we’ve had anxious buyers outside of new apartment projects lined up and ready to snap up an off the plan purchase.
All combined I think this has created the perception that the time is right to get even more revenue out of the property market, and so why not start by getting stuck into investors and either by design or accident, paint the sector as the bogeymen of the market, responsible for pushing up prices and locking first home buyers out of the market and into a lifetime or renting! And somehow implying that renting is only a last resort, which it is not.
I suggest that if the residential market had not been so strong, that there would have been far less or no motivation to think about getting rid of or, at least partly reining in negative gearing.
Despite the endless figures being published, I suggest there’s little solid or reliable evidence that negative gearing distorts the market and so just maybe the entire argument really comes down to a grab for more revenue, and possibly a little social engineering, fuelled to a big degree by the sense the market is overheated.
I do not question that the community sees rising house prices and low affordability as something that needs to be solved, but mainly fixed by changing a long established taxation policy is the question. On a wider scale I suggest, like others have also done before me, that a shift of negative gearing policy will do very little to change the underlying character of the housing market.
It’s a single half-hearted policy idea in an area that needs much more forward thinking and deeper structural change. Development costs are simply to high and the approvals process is a labyrinth of rules and regulations often moving at snails pace.
The first point I would like to focus on is that much of the conversation about high prices is very narrowly focused, it’s really a Sydney conversation, and while this does include parts of Melbourne, but it’s really Sydney driving this trend and it’s by no means across all markets here either. Moreover when you go outside Sydney to other markets including regional cities you’ll find that prices increases have been far more moderate.
Sydney tends to grab most of the attention and the headlines, we need to keep this in mind because just as we see across other big cities like New York and London or closer to home Auckland as expensive, those insular market conditions are not repeated across the country.
So I feel there’s an immediate argument that suggests some sectors of government see the real estate market as over inflated, even bloated and so an easy and opportune target to drag in more revenue from.
It’s a very limited and I suggest ill-considered policy and so ask the question as to why all of a sudden people’s desire to create personal wealth has become such a critical target. Along with questions hanging around the government’s unpredictable superannuation policies, I find myself questioning why such an antagonistic perception that the creation of wealth, via real estate (or superannuation for that matter) is somehow a bad thing?
Australian’s have always used real estate to create personal wealth, from the family home sure, but also from property investments and the property sector creates a huge amount of tax revenue and economic activity. The tax take from a new home has been estimated by the HIA at a staggering 44% of the end price. The area is already heavily taxed and at times paying tax on taxes, so taking even more revenue from the area simply looks greedy, but judging from the reaction thus far not a popular idea.
Real estate has always been an attractive personal investment option and it’s based upon many reasons other than taxation policy and benefits. We know that property is usually held long term and from the activity I see when we market a new building even if 70/80% of sales are made to investors, after 5 years at least 50% of the original investors have retained their units. These are not what you would think of as short-term speculators.
This is an area that people understand, property is tangible you can feel and touch it and individuals should have the choice of how they invest their money without too much government interference or being over-taxed.
If the rules around negative gearing are changed this looks like imposing a penalty on that choice and this leads me to suggest the motivation is driven by the idea that prices are out of control, with prices being artificially inflated by investors. But I think its reasonable that we should take a wider view of how real estate investments not only add vital rental stock, but this is also a time-honoured and sound way to create wealth for future retirement.
Not forgetting that all the while how these investments contribute to the wider economy plus the extensive government revenues generated, including the multiple takes of stamp duty already associated with property transactions.
I believe that negative gearing does pass ‘the test of fairness’ and one ordinary example might see an individual rent in a market they cannot afford to buy into, so they invest in another location, one that they can afford. This creates rental stock and possibly a future retirement income or capital.
Against this perspective I am left asking why go after so called mum and dad investors, or even high-income investors just in relation to property.
If we had a more can-do attitude to wider reforms we would not be left recycling this idea over and over, it’s a lack of vision and policy that’s the real negative, not property investors who are playing by the rules and who are already operating in a very high tax environment.
To put this simply changes to negative gearing is a change of taxation policy, aimed at a sector that is already over-burdened with tax and regulation. If the policy changes are somehow designed to trigger lower house prices then I suggest it’s a poor outcome, that might have a negative impact on current property owners without doing anything to help isolated pockets of affordability. A much wider more ambitious housing policy is what we need and one that does not simply target genuine investment.