Financial Standard Comments - Negative gearing property distortions here to stay

Comment by Rubbish ()

Rubbish () — Wed, 18 Apr 2012 12:48:30 +1000

Rental availability to fall if neg gearing is dropped? What rubbish. Thats a total myth peddled by property spruikers only. If prices on houses dropped their would be less demand for rentals because more people would be able to buy. Go figure.

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Comment by Sean ()

Sean () — Wed, 18 Apr 2012 13:26:20 +1000

I think its wrong to state that a clamp down on real estate negative gearing, which may force investors out of the market it would lead to an even tighter rental vacancy rates. Presently many people rent becuse they can't affrod to buy or it is just that much cheaper to rent compared to buying. If investors are forced out, property would become more affordable, thus reducing the demand for rental properties as more people buy their homes.
I also agree with Saul Eslake's observation that the government initiatives have only boosted or maintained demand. I also suspect that most of this demand has been from investors, particularly those who have been encouraged to borrow to buy due to low interest rates. The solution to the 'supply' issue could be to reduce demand from investors and not buidling more houses.
One thing the current regime has bred is a plethora of dodgy property developers who are building low quality propery that has been window dressed under the pretext of affodability. I have seen so many new houses/appartments/unit that won't last the duration of the mortgage without significant upkeep.
Negative gearing also presents an arbitrage opportunity, where one can buy a house as an investment while renting a similar property to live in. i.e. It encourages people who don't own their residency to invest in property while continuing to rent.

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Comment by Fitzyswife ()

Fitzyswife () — Wed, 18 Apr 2012 15:27:25 +1000

Very interesting article, however, I query the implication that people are using SMSF's for negative gearing. Whilst I can appreciate that SMSF's investing in property will have an effect on the market, my understanding is that SMSF's have limited potential to negatively gear.
As it was explained to me, because the lender cannot come and take the SMSF's other assets (nonrecourse loan), the lender will only lend at lower LVR's, and where the property is self funding (eg: neutral-positively geared) to reduce their risk. Thus far, all the lenders we have looked at for SMSF lending also don't count our super contributions (eg: the 9%) as income, so the property would pretty much need to pay for itself for them to lend.
If all this is true, then I am unsure how SMSF lending is going to effect the market the same way as negative gearing, as SMSF property investors will be seeking investment grade, non negatively geared property.
Also, investment grade, neutral-positively geared property is usually an indicator that there is high rental demand in an area, so investors taking up these opportunities should, theoretically, improve supply...
Lastly, negative gearing means that the investor is actually losing money on an investment for every year that it is overgeared and underperforming. That is why they get a tax deduction- because they are claiming the loss, as any business owner would get to do in their initial start up period. Given that this growth may not occur at all, and we need cheap rentals, are we all sure that negative gearing is such a horrifying thing for the supply side?
Isn't is possible that the fact that Australia has the highest rate of home ownership in the world a likely contributor to our property market's high values?
I'm a bit tired of everything being a bad news story. I would love to see articles touting the good things and innovations happening in Australia- there are lots of them!

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Comment by CJ ()

CJ () — Sat, 21 Apr 2012 10:16:37 +1000

The most important point if negative gearing is removed is that the money saved is directed at new supply. This then lowers pressure on existing housing. It also creates a boom in jobs and construction. So prices and unemployment go down.
Where you remove money you spend it somewhere else. Most people seem to miss the point about what you do with the savings. They just focus on one part of the equation.

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