A blog I enjoy, but don’t visit often enough, is The Preston Institute. The author, PrestonTowers, has qualities I appreciate, including insight and quirkiness. The piece I am republishing today was written a couple of weeks ago. PrestonTowers’ analysis of negative gearing – with lived experience – is definitely worth reading.
There’s been a great deal of chatter about negative gearing in the wake of the new ALP policy in relation to the tax break. It’s a brave thing for the ALP to take on a policy instrument that is essentially middle class welfare, making it easier for those with some means to get into Australia’s wildly over inflated housing market. But it’s a necessary move, in order to address a gross generational inequality and help out the Australian construction and steel making industries.
In terms of the issue of negative gearing, I am part of the audience being pitched to by both major parties. I am someone who uses negative gearing. As I wrote in my post about selling my old flat, I have, for the first time, bought somewhere purely as an investment. I also – completely by chance – have fallen into the pattern that the ALP want investors to follow, as in purchasing a new property. Hence I will be able to take advantage of the taxable reduction afforded by depreciation on that new property, as well as other benefits that will come with the reduction of my taxable income. Reflecting on the process of buying the new property, I can see the advantages of Labor’s plan to have people being encouraged to buy new housing stock and making it available to tenants – as well as keeping the other benefits of negative gearing.
Where the problem is negative gearing, however, is that there’s something questionable with the current system where people are encouraged to buy existing properties, rent them out until they accumulate in value, sell, and gain a 50% discount on the Capital Gains Tax made on the property. It’s a pretty sweet, low risk deal, especially if the rental yields are low and you can reduce personal income tax to well below Scott Morrison’s magic $80,000 figure. From my personal experience, it encourages the type of investor frenzy caused by the selling of Preston Towers.
My old flat in South Penrith should be the type of place that would be perfect for first home owners. It’s 30 years old, with no depreciation potential. It’s close to shops, schools and public transport. It’s also small, in the middle of an area filled with apartment blocks of varying ages and should be cheap, as it was for me as a first home owner in 2009. I did ask my real estate agent during the process the type of people who would be buying the property – I was thinking of the tenants, who had taken great care of the property, but were also of Indian heritage, which may have made finding another property in Penrith difficult (I remember being asked when I was renting out the property whether “it was ok that they were Indian”). It was made very clear to me early on that only investors would be in the market for it, as only they had the means necessary for an offer battle.
So it came to pass. On the day of the first open home, there were multiple offers, and at prices I could barely believe. The “winner” was a baby boomer investor using superannuation proceeds. So that small flat will continue to be a rental, out of reach to first home owners, as will any other property in that area. There will be negative gearing, as the price that was paid cannot be covered by the rent for that area for some time. Under the current system, whenever the market goes up again in the same way it did between 2013 – 2015, the investor will sell, pocket the half of the gap with the discount and move onto somewhere else, denying even more first home owners a chance for a foot in the door. With the ALP system, the owner will be forced to be very sure that he is ready to shift his investment to new housing stock, with its reduction of the CGT discount. Or he will just hang onto the current place under the grandfathering provisions and be happy with the rental returns and reduction in taxable income – one day still being able to pocket the CGT discount.
For this kind of problem to occur in Penrith, its should show us that negative gearing policy change is a generational shift that should occur. It’s wrong that baby boomers are able to swoop in and deny Gen Y first home owners chances to buy their first home. There will be ridiculous scare campaigns directed at boomers and Gen X middle class voters, such as Malcolm Turnbull’s “Middle Class People, Your House Value Will Drop!!!!!” Even if that happens, that would be a good outcome for younger generations wanting to buy. It is difficult to see, however, with the grandfathering provisions for the people currently using negative gearing, how prices would drop dramatically. It would be hard to see why people who own investment property would panic sell before the changes come, risking a dropped value in their properties. The shift might be more gradual, however, as people investing in property will have to consider how to do their investing in the future.
Another criticism of the plan will state that may also be a bit of an increase in value in new developments, but that will also be interesting to see – there’s a great deal of building going on around the country which will need investors and it’s difficult to envisage a huge battle between investors driving up prices artificially. This way, channelling investor cash towards new property will have the impact of helping to grow working class jobs in construction and steel, rather than just helping to artificially driving up prices on existing properties.
There’s more qualified people than me to be looking at such things, using graphs and data. This is just one taxpayer’s questioning of funnelling possible taxation receipts into the pockets of wealthy property owners from the Baby Boomer and Generation X just willing to get more low risk cash. Meanwhile, the younger generation wait while such people count their tax breaks and advantages.