Labor’s negative gearing changes & why they won’t achieve what’s promised.

I’m biased, of course, but I do have some serious concerns about Labor’s negative gearing changes. We love to find a culprit for why our kids can’t afford to buy a home. First, we blamed Chinese investors, then SMSF investors, now it’s “the wealthy”, or what I call “attack the fat cat”. It’s a highly emotive topic, perfect for electioneering.

That said, there are a lot of very educated people who think removing negative gearing is a good thing for Australia and they make some very salient points. I just wish they’d educate themselves on the property market and buyer behaviour before they finalise their position.

You won’t get any argument from me about the impact investors have had on housing affordability in Sydney and Melbourne. It had to be curtailed – not just for the sake of first home buyers, but stability is desirable for the property market as a whole. Neither will I argue in favour of buying property just so you can get a tax deduction. That’s misguided in the extreme.

I will, however, argue with a number of claims and assumptions made by those who support Labor’s negative gearing changes. I think the policy is poorly crafted and the political spin is misleading. In the short term, it will create a two-tiered market funnelling investors into buying new property, which is proven to have a high chance of underperforming. In the long term, it will cause a shortage of rental properties and lead to increasing rents. Overall, I believe that this policy will hurt more of Labor’s core constituents than it will high income earners.

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Three reasons why Labor’s negative gearing changes won’t deliver on housing affordability.

1. Spruikers will target unsophisticated buyers and savvy investors won’t flock to new.

I can hear the sales pitches now: “roll up, roll up, buy your negative gearing approved investment property here.” How convenient, a ready-made customer base, hand-delivered by the Labor Party.

You know what makes a really bad investment? Buying brand new, claiming negative gearing and then finding out the property is worth less than what you paid for it. Existing property makes a better investment because it’s more likely to go up in value than a brand new property. There is a load of evidence that shows the high probability of value loss with off-the-plan and brand new property. This means that smart investors won’t take advantage of Labor’s offer to negatively gear a brand new investment property.

“And for those worried about equity? Negative gearing and capital gains are both skewed towards the better off. Almost 70 per cent of capital gains accrue to those with taxable incomes of more than $130,000, putting them in the top 10 per cent of income earners.” SMH 9/2/19

Negative gearing and capital gains are two separate issues. Plenty of people make capital gains without ever utilizing negative gearing. Plenty of people negative gear and make no capital gains. Those higher income earners are likely to accrue higher capital gains because they can afford to buy better quality (lower risk) investments that are more likely to perform well. They can also afford to pay for expert advice. They are also less susceptible to the “get rich quick” promises of spruikers and as a consequence are more likely to buy existing over brand new. I know this from my hands on experience dealing with buyers and sellers for nearly 20 years. Has the ALP investigated the proportion of new property that is bought by those earning under $80K versus those higher income earners? If it turns out to be a much larger percentage, then this would also skew the capital gains percentage.

In fact, the high income earners and people with multiple property portfolios spoken about so scathingly by Bill Shorten and his supporters in their politicking will still be able to negatively gear. Why? Because, they are more likely to have other investments that provide them with an income and the policy allows them to use their losses to offset these gains.

2. Of course rents will be impacted.

Economic theory has it that every investor will sell to a first home buyer and therefore rents won’t rise. This sounds so logical until you think about it. Not all first home buyers are renting. How many house share? Upwards of 30% of all first home buyers live with their parents. Every property one of these buyers takes off the rental market will reduce the stock available for tenants who can’t afford to become a first home buyer.

Negative gearing would affect rents only if it reduced new housing supply. Any effects will be small: around 90 per cent of investment lending is for existing housing” SMH 9/2/19

This figure needs investigation. That 90% originates from the ABS and refers to the total amount borrowed, not the proportion of new versus existing properties that were purchased. My research suggests that around ⅓ of investors currently buy new rather than existing. Modelling by the Parliamentary Budget Office predicts that investment in new properties will double following implementation of this policy. So there will be a shortfall. Simply speaking, out of 100 investors buying a property today, 33 of them buy a brand new. So, after Labor’s negative gearing changes, 66 will buy brand new. What about the remaining 34 investors? Will they decide property is not their bag? What will that do to the supply of rental properties?

3. It hurts the people who need it most and won’t make Sydney and Melbourne more affordable.

For negative gearing, 38 per cent of the tax benefits flow to this group [earning over $130K]. But people who negatively gear have lower taxable incomes because they are negatively gearing. If we look at people’s taxable incomes before rental deductions, the top 10 percent of income earners receive almost 50 per cent of the tax benefit from negative gearing.” SMH 9/2/19

This does not change the fact that 66.6% of taxpayers who take advantage of negative gearing have a taxable income under $80K. Even if their incomes have been reduced by, say, $20K, courtesy of the deductions, that means ⅔ of those using negative gearing earn under $100K. Hardly fat cat territory. These people NEED negative gearing in order to be able to invest. To shunt them into buying brand new is irresponsible. There is far too much evidence that a brand new property does not make a good investment.

The political spin is misleading. Shorten says “why should a first home buyer be shut out of the market so an investor can buy their 6th or 7th property?” On the surface of it, who can argue? However the fact is that less than 1% of property investors own 6 or more. Fewer than 1% own 5. In fact, 73% of investors own only one investment property.

Many first home buyers use negative gearing through rentvesting in order to get onto the property ladder. It’s negative gearing that has allowed them to afford to buy an existing property, which is a much safer investment. First home buyers who buy brand new run a very real risk of experiencing negative equity for years. They may never recover financially.

The change to the capital gains tax concession is the one part of the policy I have no issue with. In the 10 years following the introduction of the 50% CGT concession, the use of negative gearing doubled. I believe that this is the main culprit, coupled with ease of getting finance. APRA and The Royal Commission into Banking have had a significant impact on investor borrowing. Prices in the cities where unaffordability has been a problem – Sydney and Melbourne – have already corrected.

If you’re compelled to agree with the need for Labor’s negative gearing changes because of all the other things the government can spend our money on, there is another school of thought to consider. That the short term cost of negative gearing is a small price to pay for helping retirees self-fund instead of relying on the pension. The cost to the public purse of a couple on the pension has been put at $800,000, whereas that same couple might claim back $25,000 in their early years of property investment. That’s a pretty big saving for future governments.

In summary, my prime concern with this policy is that it’s been crafted by those with a bias against high income earners. This bias has blinded the architects to the risks the policy poses to the most financially vulnerable property investors and tenants. It will hurt the people who need it most and won’t make Sydney and Melbourne more affordable.

References:

https://www.alp.org.au/negativegearing

https://grattan.edu.au/news/negative-gearing-the-economic-reasons-why-government-must-kill-this-sacred-cow/

https://grattan.edu.au/news/three-myths-on-negative-gearing-the-housing-industry-wants-you-to-believe/

https://www.theelephantintheroom.com.au/podcasts/045

https://www.ato.gov.au/uploadedFiles/Content/CR/Research_and_statistics/In_detail/Downloads/cor00345977_2011TAXSTATS.pdf

https://www.finder.com.au/first-home-buyers-by-state

https://www.abc.net.au/news/2016-03-03/fact-check-negative-gearing-scott-morrison/7180812

https://www.yourinvestmentpropertymag.com.au/news/how-many-propertys-do-investors-own-258529.aspx

https://www.smh.com.au/politics/federal/negative-gearing-changes-will-affect-us-all-mostly-for-the-better-20190208-p50wjn.html

https://www.mcgqs.com.au/blog/detailed-analysis-of-the-budget-changes-to-tax-depreciation-on-plant-and-equipment-budget2017/

Further reading:

Not All Sydney Property Prices Fall When The Market Slows

 

Is it a good time to buy property in Sydney?

Published: 1 March, 2019

DISCLAIMER: Good Deeds buyers tips are intended to be of a general nature. Please contact us for advice that is specific to your individual circumstances. You may also need to get advice from other professionals such as an accountant, mortgage broker, financial planner or solicitor.

 

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