Isn't It Kind of Crappy Towards Society to Buy a Lot (if Any) Investment Properties?

Lockdude on 18/01/2021 - 10:48
Last edited 18/01/2021 - 10:49

So, I'm by no means an expert in this, so I thought I'd come to this forum to get some opinions from people who hopefully know what they're talking about, people defending their own behaviour to make peace with their god, and people who don't know what they're talking about, but want to talk about it anyway.

So here goes: Isn't it kind of crappy to buy a bunch of investment properties? I get the feeling landlords feel like they're doing lower income households a solid by providing them with a roof over their head - but I've never understood that. If so many people didn't go out of their way to own so many more properties than they needed, housing would be a lot more affordable right? The supply would be so much higher, and the demand would be lower. The threshold for buying a house would be a lot lower, and people could enter into the market earlier.

It's just a rich get richer thing right? Buy investment properties, and it inadvertently pushes up the price of your own home. You make it harder for people to buy a home, and in doing so, can raise the rent you charge.

I currently don't own any home, but my savings are getting to a point (finally) where I can start to think about the longer-term future. And having been a renter my whole life, as were my parents, the thought of buying extra homes to line my own pockets at the expense of another just seems like a real jerk move.

Knowledgeable experts, unknowledgeable experts, and moral justifiers, please share your thoughts.

Poll Options

  • 594
    Buy as many investment properties as you'd like
  • 213
    Just buy a house to live in - invest in other things
  • 74
    One investment property is fine
Financial

Comments

  • tmcn85 on 18/01/2021 - 10:53
    +123

    Short answer, yes.

    Should also note that I would absolutely love to own one and use the income to fund retirement.

    All for free market etc usually. But this is one item I would prob support a restriction on number of / value of investment homes allowed per person.

    • wiipantz on 18/01/2021 - 11:56
      +51

      Glad this is the first comment. It's painfully obvious it is, yet our policy makers aren't motivated to change it anytime soon. Most of them are benefitting directly from such… uggghh

      • Scrooge McDuck on 18/01/2021 - 15:58
        +23

        It's painfully obvious it is,

        Ah, an assertion without any reasoning. It's a shame this appeals to so many people. Imagine if important matters were influenced in such a way: "It's painfully obvious, that you are guilty," said the magistrate. See Idiocracy (2006) for a future projection of such a society. But unfortunately our current society's democratic processes are influenced in such a way to a significant degree.

        OP was quite accurate to predict such responses in their first paragraph. As readers and participants, can we try to demand more from a debate?

        • Scrooge McDuck on 18/01/2021 - 17:01
          +13

          The central issue of this debate is renting versus home ownership. Avid investment in property should reduce the price of rent by increasing supply when new properties are constructed and to a lesser degree by increasing competition between landlords. An individual with only a small amount of capital can also get their foot in the door [pun intended] of property investment via financial products such as Australian real estate investment trusts (A-REIT).

          There are pros and cons to both renting and home ownership. But some of the pros of home ownership are sentimental. For many people, the capital in their home is the vast majority of their wealth, and is highly leveraged via a mortgage. This carries enormous idiosyncratic risk (disaster, crime, urban blight, rezoning, etc) and systemic risk (property bubble burst, regulatory changes, etc) since the investment is completely focused — undiversified.

          For some, the choice to invest in property stems from a lack of awareness of alternatives. Property investment has been a hot topic in Australia for a while, and it's more intuitive than shares and a lot more than financial products.

          Personally, not to flex but to exemplify my point, I have more than enough wealth to purchase a family house in a first rate suburb in Sydney, but I have zero direct investment in Australian property.

          Another issue is population density. Our lands abound but the vast majority want to live in a capital city. One positive to take away from lockdown is that telecommuting is a viable alternative to either wasting one's life (and patience) in daily traffic or living crammed on top of each other like sardines in a tin.

          • dirtydealdog on 18/01/2021 - 20:59
            +42

            @Scrooge McDuck:

            Avid investment in property should reduce the price of rent by increasing supply when new properties are constructed and to a lesser degree by increasing competition between landlords.

            This isn't what's happening though. Comparing average weekly housing costs for private renters from 1994-95 and 2013-14 there was a 62% increase. Looking at the same comparison for owners and public renters the increases were 42% and 45% respectively. An estimation of availability of affordable rentals for low-income renters by the National Housing Supply Council has shown a deficit of 539k properties. [0]

            This doesn't even get into the negative impacts that government policy has had on the housing market. Purchasing investment properties has been incentivised by certain features of our tax system; primarily negative gearing and capital gains tax-cuts on properties. [1]

            The larger issue here is the growing intergenerational wealth gap [2] which isn't being helped by policies allowing people to dip into their superannuation. You may argue that it's up to the individual whether they access their super and spend it on food delivery. But consider what it says about our leaders when they allow younger generations to undermine their own retirement while doing very little toward solving problems such as housing affordability.

            One of the primary roles of government in a capitalist economy is to act as a mediating entity between the unfeeling market and the individual. My concern here is that we're seeing a pattern indicating our government has forgotten it's purpose, which will come at the cost of the future prosperity of Australia.

            [0] https://www.aph.gov.au/About_Parliament/Parliamentary_Depart…

            [1] https://www.michaelwest.com.au/boomers-millennials-young-and…

            [2] https://grattan.edu.au/wp-content/uploads/2019/08/920-Genera…

            • Scrooge McDuck on 18/01/2021 - 21:29
              -1

              @dirtydealdog:

              This isn't what's happening though.

              I was referring to a comparative reduction not an absolute one. I never anticipated I would need to explain that. Price increases are the result of a multitude of factors (inflation, increased demand, etc). Alluding to the increase in price over time doesn't refute the effect of a specific factor.

              Purchasing investment properties has been incentivised by certain features of our tax system; primarily negative gearing and capital gains tax-cuts on properties.

              Tax deductibility of investment loan interest (related to Negative Gearing) and the capital gains tax discount are not specific to real estate. They apply to and incentivise all forms of investment.

              But consider what it says about our leaders when they allow younger generations to undermine their own retirement while doing very little toward solving problems such as housing affordability.

              They value personal responsibility and want to empower people to finance themselves and the economy in a time of crisis.

              • dirtydealdog on 18/01/2021 - 22:37
                +15

                @Scrooge McDuck:

                I was referring to a comparative reduction not an absolute one.

                According to what is there a reduction? I can't find sources indicating housing is more affordable for either renters or owners, nor can I find sources saying there's an increasing supply of housing.

                Tax deductibility of investment loan interest (related to Negative Gearing) and the capital gains tax discount are not specific to real estate.

                It's had a particular effect on housing though, which is to make it less affordable. My view is that it shouldn't be a luxury to own a home.

                They value personal responsibility and want to empower people to finance themselves and the economy in a time of crisis.

                You can find a collection of articles here highlighting their embodiment of an ethos of personal responsibility.

                • Bjingo on 19/01/2021 - 13:05
                  +14

                  @dirtydealdog: In theory Scrooge is right, increased investment in property should have reduced the price of rent.

                  However, that has clearly not occurred, my belief is that its due to a combination of a few things. firstly negative gearing in combination with low interest rates, loans requiring very small deposits, and the fact the government continues to prop up the market (don't want to lose money on their own investment properties).

                  This has led to a lot of people taking out overleveraged loans (because you can deduct the interest anyway) to get investment properties because they have heard its a "sure fire investment" and "even if it makes a loss now, you can offset it against your ordinary income anyway". As far as I have seen as a tax accountant an investment property owner always sets rent to be at least the mortgage payments so that it "pays for itself" in addition due to the inevitable cash flow issue that would have ensued.

                  The cashflow issue is the reason the renters memorandum almost ruined a lot of landlords, however the government was well aware of that which is why they organised the mortgage holiday with the banks. If hundreds of thousands of people defaulted on their investment loan, the bank would be left with a massive number of houses they don't want and to sell them as quickly as possible they would have to make a massive loss. The mortgage holiday was so much more profitable for them and all they had to do was weather the downturn in cash flow, which jobkeeper made pretty easy.

                  This all only works because the government time and time again props up the market with things like the FHOG, homebuilders grant, bonus building grant, stamp duty reduction/omission and other schemes like the FHSSS to supports continued property growth. Most of these schemes just lead to the price of houses going up by that amount anyway. The point of them is not to make it cheaper, it is just to make it more attractive getting into the market. When the homebuilder grant came out there was a massive issue with builders suddenly charging 25k more to build a house or do a major reno.

                  A few solutions off the top of my head which might help would be;

                  • make rental losses carry forward to later years to offset future rental gains instead of being offset against current income.

                  • Have interest add to the cost base instead of being deductible for rental properties.

                  • Government owned property available for rent at a lower rate (add competition to property market making over leveraged loans hard to sustain due to cash flow + added bonus of indirectly keeping rent affordable without legislation)

                  • rgr on 19/01/2021 - 13:49
                    +3

                    @Bjingo: wonderfully written and concisely explained. mathematics and intelligence isn't a common trait for property speculators here in australia, people seem to fail to understand that negative gearing works well in a consistently rising market.

                  • ozbjunkie on 19/01/2021 - 19:36

                    @Bjingo: I'm not even sure the theory is right. Can't we just spin the demand supply analysis another way and say that by investing in many properties the supply of available properties to purchase goes down, which means more people are unable to buy, which means that they increase the demand for rentals, resulting in rising rental prices?

                    • Bjingo on 19/01/2021 - 20:44

                      @ozbjunkie: That is one of the reasons I said in theory, the supply and demand theory in which I was responding to is a basic analysis of a competitive market, it only measures a single market so as rentals increase, rent decreases. What you proposed is another theory rather than supply and demand you are talking about substitute goods as renting and buying a house serves the same purpose (a place to live) when there is a change in one it will effect the other.

                      An example of substitute goods is phones.

                      say iphone and samsung are both priced $1,000
                      suddenly iphone increases the price to $2,000
                      The demand for Samsung would increase as many people would not pay $2,000 for a phone.

                      So what Scrooge said is not wrong, but you are also completely correct.

                  • Bargainz on 22/01/2021 - 00:08

                    @Bjingo: You really need to also talk about immigration in regards to "investment properties" and the effect it has on both supply and demand. Specifically in Sydney and Melbourne, international students, new arrivals etc etc all pooling resources to pay the ever increasing rents in houses while locals are stuck in "cheaper" units and in some instances forced out of the market all together. The whole thing is a ponzi scheme across many facets of manipulation as you rightly mention. No ones of course will mention immigration because of the immediate connotation of racism, meanwhile we are being sold out from within and without.

          • dsar on 18/01/2021 - 21:03
            +12

            @Scrooge McDuck:

            Avid investment in property should reduce the price of rent by increasing supply when new properties are constructed and to a lesser degree by increasing competition between landlords.

            Myth 2: Negative gearing promotes new housing supply
            The property industry argues that tax incentives for investment housing encourage more homes to be built. If so, it is a very inefficient way to do it. More than 93% of property lending is for existing housing.

            Because negative gearing increases the price of homes it may encourage a little more building. But the big restraint on new building is not a lack of profitability in housing, but the availability of land and the planning permissions required to increase density in inner and middle suburbs. Tax concessions in this supply constrained environment mainly just bid up prices for the limited new supply.

            • leiiv on 19/01/2021 - 10:12
              +4

              @dsar:

              availability of land and the planning permissions required to increase density in inner and middle suburbs

              Exactly. Something that the government can do but won't do anything to fix it.

        • JoJoker on 19/01/2021 - 13:02
          +2

          It's obvious the market isn't at all free. We have things like negative gearing, FHSS, FHBG etc as well as all sorts of accounting bullshit contributing to price growth of housing.

          Without these schemes I am bearish on property but the reality is that these schemes are here to stay, and many more will be added in the coming years to keep the marketing trending up.

          We can't even begin to have a debate about the ethics of owning multiple properties until the market is in rational place.

      • OzzyOzbourne on 18/01/2021 - 22:26
        +9

        Because the policy makers make a lot of money from their investment properties, they have a vested interest.

        • Boogerman on 19/01/2021 - 09:14
          +7

          Yep. LNP politicians own far more investment properties than Labor, Greens & One Nation pollies. As per freedom of information release.
          Look at Home Builder during the pandemic. Other industries have been hit far harder than construction, but got nowhere near the support. Home Builder was to pump pollies investment property prices. Grifters, plain & simple

        • Pretzel_Ninja on 19/01/2021 - 08:19
          +13

          Housing in Australia is extremely affordable.

          Lol you haven't heard of Hobart then…

          Spare me the morals. Everyone is in it to make money. Don't pretend like you're not.

          This statement alone shows how completely out of touch you are, a typical extremely conservative response and no surprise with a government that's mismanaged the economy. I'd argue the point that "investment" properties should not even be referred to as an "investment" but a way for those well off to stick their money somewhere that's safe while they look for other investment opportunities.

          I agree there are people out their to make money and that's the only point you were right on. There is no chance that low income and now even middle income of achieving the "Australian Dream". It's a fact that there are people out there that are having too much of that pie and a government that's been borderline corrupt has helped create this (look no further than the Royal Commission on banks to see how corrupt it is). I do feel sorry for those on middle income who have been roped into purchasing new apartments as "investment" properties when they probably should never have been approved loans, or have bought into apartment buildings riddled with defects as builders/contractors cut corners to generate more revenue.

          After the mining boom, an incompetent government relied on a housing boom to maintain our GDP instead of more tangible areas such as renewable energy.

          • p1 ama on 19/01/2021 - 11:58
            -5

            @Pretzel_Ninja:

            Lol you haven't heard of Hobart then…

            I'm referring to Sydney and Melbourne where most of the discussion about inflated prices are centred. There are plenty of rentals in fantastic suburbs for ~$400 or so per week, well within the realm of affordability for the average family.

            This statement alone shows how completely out of touch you are, a typical extremely conservative response and no surprise with a government that's mismanaged the economy. I'd argue the point that "investment" properties should not even be referred to as an "investment" but a way for those well off to stick their money somewhere that's safe while they look for other investment opportunities.

            I'm actually quite left wing in my political views. I just don't view "owning a home" as anything that is particularly important, nor should it be particularly desirable for the majority of people.

            This idea of owning a home being the "Australian dream" is something that's uniquely Australian (and perhaps also American) to the point of it being completely out of touch with the majority of the world, particularly in Europe and other "old money" places where the majority of people are renters, not owner occupiers.

            Furthermore, let me explain why I think you're being disingenuous with the "Australian dream" idea. The reason why owning a house is considered the "Australian dream" is primarily because it's a pretty good investment. Owning property is a great investment not because it's "safe", but because you have access to huge amounts of leverage and because it's not marked to market. Thus, it's the "Australian dream" because once you buy a house, you're sitting on an investment which will generate solid returns for the next 30 - 40 years until your retirement.

            Again, get off your moral high horse. You want to buy a house to make money. Everyone else wants to buy a house to make money. All real estate bought is an investment, regardless of whether you live in it or not. It's an asset increasing in price that either earns you rent income or saves you rent income (which is the same thing from a cash flow perspective).

            It's a fact that there are people out there that are having too much of that pie and a government that's been borderline corrupt has helped create this (look no further than the Royal Commission on banks to see how corrupt it is).

            Also has to do with the fact that the majority of Australians are home owners and will have a financial incentive to vote for policies that increase prices.

            I agree with everything else you say, but it's completely irrelevant to my original point.

              • p1 ama on 19/01/2021 - 14:07
                -1

                @wiipantz: I don't see the real point of making this overtly political. I never insinuated anything about OP's (or anyone else's) political beliefs and I don't really see this discussion as personal.

                I merely corrected someone else's assessment of my own politics (which was to call me a conservative). I've voted for the ALP my entire life. I even support policies such as abolishing negative gearing and other tax concessions.

                None of this changes the fact that almost everyone who purchases real estate (even to live in) actually want to invest and hope their property goes up in price. I'm simply pointing out this hypocrisy. Seems like I've hit a nerve with those who fall into this exact category.

                • Pry on 20/01/2021 - 09:38
                  +1

                  @p1 ama: I can't afford to buy a house, but I would love to so that I can do what I want with it, not have to worry about damaging someone else's property, and not have to worry about things like house inspections, the types of pets I can/can't have, etc. I used to always just want to rent for life when I was younger, I liked the flexibility of being able to afford to live close to the city, and live in different suburbs to get a change of scenery. But as I get older I would just like a quiet place that is mine, and wish that I had saved more so that I could afford to do so.

            • Emerald Owl on 21/01/2021 - 20:38

              @p1 ama: People want to own their home for so many reasons beyond investment. It leads to people caring about the community, they can work on it during the weekend, they can decorate how they like, they don’t have to live in fear of being kicked out, etc.

        • BigBirdy on 19/01/2021 - 08:58
          +11

          Housing in Australia is extremely affordable.

          Where are you looking, abandoned mining towns? Where I live, the vacancy rate is less than 1%. Locals with full time jobs and kids in school are living in cars, tents and couch surfing.

          • modiika on 19/01/2021 - 09:25

            @BigBirdy: where are you living?

            I'm in the inner east of melbourne, and there are endless properties for rent around here atm.

            • baldur on 19/01/2021 - 10:28
              +17

              @modiika: "Housing in Australia is extremely affordable"

              Joke of the day?

              • frewer on 19/01/2021 - 11:36

                @baldur: Bad joke*

              • dtc on 19/01/2021 - 12:44

                @baldur: dont conflate buying a house with being able to afford to live in a house. Rental in bigger cities is quite affordable (cheaper than buying). Some of the smaller cities not so much.

                • baldur on 19/01/2021 - 12:48
                  +1

                  @dtc: Oh, we must be grateful that we are able to shelter in Australia in the year of 2021?

                  Wow.

                • Emerald Owl on 21/01/2021 - 20:39

                  @dtc: Australians who rent have far far less rights than Europe. Compare rental prices and you will understand that it is unaffordable.

      • ozboygsl on 19/01/2021 - 08:18
        -2

        the only thing painful is your inability to use logic or construct a valid argument.

      • kev98 on 20/01/2021 - 14:58
        +1

        Rich can easily avoid any restrictions on number of IPs by purchasing property through Trusts, Company’s, etc

    • Other on 18/01/2021 - 16:40
      +34

      Most people own only 1 (or 2) investment properties.
      Very few people own more than this actually.
      Those that do are usually developers who own a block of units (because they built them).

      The biggest issue we should have is overseas buyers who then keep their property empty!!!

      Empty units should get charged a punitive vacancy surcharge, like in Singapore.

      Its very easy really - If you invest in Australia then we require you to use those assets for your or others benefit.
      Or don't invest here.

      Or ban buyers from purchasing unless Australians can purchase from their country (fair!).

      • GG57 on 18/01/2021 - 16:44
        +13

        Empty units should get charged a punitive vacancy surcharge

        Seems reasonable to me, but I would make that a blanket surcharge regardless of where the owner lives (i.e. overseas or in Australia).

        • Scrooge McDuck on 18/01/2021 - 17:28
          +2

          I can't see the point of leaving a property vacant. They're just losing the opportunity of rental income. I guess this practice is from less sophisticated "overseas" investors who just want to get their money the hell out of "overseas".

          • modiika on 19/01/2021 - 09:28
            +2

            @Scrooge McDuck: I had a friend who did this, (although the property was in Asia, not Australia). Basically, they just didnt trust renters not to (profanity) up the place before they could move in, in a couple years and enjoy it.

            Even for myself, I've looked occasionally at jobs interstate, but I don't really want to rent out my apartment for only a year, it only seems worth the potential risks if its for a few years.

            But I do agree, there seems to be some other reason teh majority of these overseas buyers leave these places empty, just saying there can be understand able reasons why you might for a year or two. But dont have a probably with a vacancy tax.

          • GG57 on 19/01/2021 - 11:08

            @Scrooge McDuck: Holiday homes? Vacant for ~80% of the year?
            As well as missing out on rental income, they are denying the opportunity for someone to live in an area that they want to live in, perhaps at a lower rent than some alternatives.

          • Jules_d1 on 19/01/2021 - 15:31

            @Scrooge McDuck: I have heard that some overseas investors are better off leaving them vacant as the loans that they are financing with have income clauses that state if the income from the investment is less than $X annually, the loan defaults.

            Not having tenants in mean the income is NA. don't ask me how it works.

          • Gumster on 19/01/2021 - 19:17
            +1

            @Scrooge McDuck: Its easier.

            Owning property can be used as an investment relying purely on capital gains or loss for other investment.

            • You can sit on it you don't have to worry about tenants trashing the property you just lock it up and wait 10 years and hope to sell at a profit if your
              buying inner city suburbs this is possible not really viable in out of city areas.

            • Some people also buy for retirement options this is really common in regional beach cities where you have houses that are empty 9 months of the year and might have people holiday in over Christmas/school holidays.

            • Some people will buy an older house inner city with the plans to demolish and build townhouses. It might take them a year to get the land subdivided and plans drawn up. During this time its cheaper to leave the house empty as it may not be up to code eg. Lots of asbestos, old wiring and switchboard. rotted footings. Sure you could spend $10000 to fix it but you will be bulldozing it at the end of the year anyway, so cheaper to leave empty.

      • SpotTheOzzie on 18/01/2021 - 16:49
        +19

        I’m not a fan of overseas investment in residential estate period. The number one defence I always see is that it’s good for the economy. I don’t disagree flushing money though the country is bad for the economy, but so what?

        Trading a better economy so the average local citizen struggles to buy in their own backyard is such a bad trade-off for starters.

        • Other on 18/01/2021 - 17:09
          +4

          SpotTheOzzie - IMHO I don't think it is good for the economy. In fact I would argue that it can be the exact opposite:

          • Makes property prices (and land) higher than they need to be, as creates a false demand (not driven by natural demand and supply) but rather the demand of foreigners, who might have too much cash sitting around and need to move it offshore because of their own jurisdictional issues.
          • can cause massive issues if those "investors" need to Sell in mass to pull back money home

          So higher prices for residents and higher risk of a crash in property prices.

          Even so called economic activity (which provides employment) is BS. This is because construction is a one off proposition.
          High demand will lead to more tradesmen and then when it falls back to its natural, normal constant, we will have unemployment in those trades / construction industry.
          Kind of like if the Federal Government spent $250Bn on roads in one year and nothing the year after.
          Yeah it might be good for 1 years GDP figures, but how is it good for Australia (and the workers themselves) long term?

          In the end though, we have to be fair - so lets be reciprocal to those countries who allow us to buy.

          My first concern however is Homes/Units that are non producing and sitting Vacant (as they will be sold off first, as the asset is less viable and as such will receive a bigger discount so the foreign investor can bring back their cash home faster and stop any bleeding, therefore leading to a bigger drop in prices).
          Either invest in Australia and help us prosper more or just don't invest at all here.

      • legendary-noob on 18/01/2021 - 18:35

        Source?
        Why buy an investment and leave it empty?

        • brendanm on 18/01/2021 - 19:51
          +3

          I deal with plenty of people who buy houses here and leave them empty the majority of the year, they come and use them every once in a while.

          • legendary-noob on 19/01/2021 - 01:53

            @brendanm: Isn’t that like vacation houses?

            Maybe I was thinking more like properties closer to cities etc where property prices are exorbitant

        • Other on 19/01/2021 - 11:11
          +1

          Go to the gold coast and walk around at night! But I was talking more about the recent Chinese buyers:

          https://www.smh.com.au/business/companies/up-to-half-of-chin…

          https://caanhousinginequalitywithaussieslockedout.com/2019/1…
          (probably a little too much hyperbole, but still).
          etc.

          In China once a place is lived it, it is cheaper - as such many Chinese, who have bought the unit for cash, follow the same mentality and just keep their purchase empty. My guess is partly they just want to dump the cash somewhere 'safe' (ints not really about return). Real estate in Australia is pretty safe.
          Hence it stops following a natural supply and demand.
          200,000 vacant places is a lot. Even 100,000 is a lot.

          If it was Not a problem, why would SIngapore also introduce a vacant property tax?

          • Cluster on 19/01/2021 - 16:44
            +1

            @Other: I have some Chinese relatives by marriage and can confirm they have investment properties in China that are kept empty. Making a place livable means furbishing it (lots of costs) and those furbishments will never be to the exact taste of the new buyers. Property will be 'used' instead of new, so the value is decreased.

            There are tens of millions of Chinese all sitting around with empty property porfolios, all waiting for the price of their apartments to go up. It's a really weird situation that may lead to the biggest property bubble bursting in history.

            • Cartman2530 on 19/01/2021 - 19:07
              +1

              @Cluster: Is that why there are a lot of cities being built in China that are pretty much empty? People buy them as a safe place to park their money and leave them unoccupied?

              That's fascinating if true.

              • beyondtool on 20/01/2021 - 16:10
                +1

                @Cartman2530: There was an abc doco about it a few years ago. Showed whole cities built but no one lives there.

      • frewer on 19/01/2021 - 11:38
        +2

        ATO, lawyers, real estate agents, conveyors are those loves easy 💰 laundry from oversea buyers. It is a well known thing

    • frewer on 19/01/2021 - 00:43

      Google it to see how much LANDS Mr Bill Gate own …

    • jmi on 20/01/2021 - 09:28
      +4

      https://www.savings.com.au/home-loans/investing/many-aussies…

      There are about 2,150,000 property investors or about 8.6% of the population.

      90.2% of Australia’s 2,150,000+ property investors held only one or two properties.

      The remaining 212,000 investors own between three and six properties, with just 20,000 holding upwards of six.

      This means less than 1% of Australians fit into the ‘fat-cat’ property investor category.

      Of the 1.5 million property investors (71%) that own just the one property, nearly half (43% of them) had an annual taxable income below $50,000 a year.

      Of one-property investors, 77% earn below $100,000 a year, although this data doesn’t seem to account for household income, where two or more incomes can be combined to create greater investment power.

      Meanwhile of the two-property investors, 39% of them earn below $50,000 a year and 73% earn less than $100,000 a year.

      • kbbargains on 20/01/2021 - 17:10
        +1

        The key word here is "taxable income". Taxable income and how much you make can be millions of dollars apart.

        Negative gearing allows you to have a low taxable income whilst making a lot of money.

        • Other on 21/01/2021 - 12:43

          If you have a look at Negative gearing, due to the Government's response to bracket creep, its not as good as it used to be.
          Not saying thats its not useful, but its less of a benefit than it used to be.

      • Bargainz on 22/01/2021 - 00:15

        and how many are long term citizens vs new arrivals in the last 20 years?

    • TheRealCJ on 20/01/2021 - 22:22
      -1

      It's a simple solution: progressive tax rate based on the number of investment properties. You have one? 5%, you have two? 9%, you have 10? 40% etc.

      It discourages investment property hoarding, and those rich enough to basically be a slum lord gets the shit taxed out of them so society benefits from their hoarding.

      • Other on 21/01/2021 - 13:06
        +1

        Why does anyone who owns any amount of property a slum landlord?

        In terms of those with multiple properties - Hamilton island for example owns many units 500+ for staff (staff accom) without nobody could work there (its leasehold to the State Government). Some farms provide multiple units for staff. And what about Mines? They could provide 500 units (and usually just rent them out at cost). What about a developer who builds a unit block (30 units), can't sell them and so rents them out?
        How much should we tax them? 40%?

        For example Triguboff/Meriton used to keep a % of the units in a development - Ha I hear you say - He kept them to rent them = lets tax the shit out of him.
        But why did he keep them? For the rent? No! He did, so that he had collateral for the next project and when the Banks refused him funds he started selling them to continue to build more unit complexes. He was actually helping the economy and keep builders and tradesmen going (of course for a profit motive) while the Banks were pulling back (this was After the crises, Not before).
        And he pays taxes on profits he makes.

        As Jmi said, those with multiple properties (usually 2) are usually not billionaires - hell after their debt alot are not even millionaires.
        Those with ALOT of property usually businesses who own them because they have to or because of some event (usually a Recession!).

        How about we tax those who are NOT using the Asset? How about that instead?

        • Bjingo on 21/01/2021 - 15:54

          that would probably be the difference of rental properties as an investment and rental properties as a part of a business. The tax treatment is already different for the two.

          If someone has 2 or more properties and their net worth is less than a million dollars that's grounds for concern as that means the combined net value of the two properties, their home, assets and super is sub 1 mil, they would have to have a large mortgage on every house, just the interest would be such a huge cash flow issue for them. At that point you would have to think long and hard as to whether having those rentals is even worth it or if you should sell both of them pay the mortgages off and offset the rest against your own home loan.

          I am not saying his idea is good, he basically just proposing a shit land tax.

          I would say most of the people with a lot of investment properties likely don't actually "own" them. Doesn't own any investment properties but is related to 10 trusts/companies with 25 properties between them.

  • dasher86 on 18/01/2021 - 10:57
    +37

    It's the bloody negative gearing that you will now never get rid of.

    • stirlo on 18/01/2021 - 12:14
      +18

      I'm not a fan of negative gearing but the practical effect of it is to make renting more affordable than it would otherwise be.

      The problem is that this increases the gap between the cost of renting and owning property which becomes harder and harder to cross. Take a $600k townhouse that rents for $350pw.

      Income:
      $350*52 = $18,200
      Costs:
      Interest (3.5%) on $600,000 = $21,000
      Rates ($2000), water supply ($600), landtax ($1000), property management ($900), maintenance ($500)= $5000

      $21000+$5000-$18200= $-7800 which is $150 per week.

      So basically if you wanted to fully account for the costs of owning your $600k townhouse your rent should be $500 per week rather than $350.

      If you want to get ahead you'll need to save a minimum $150 per week on top of you rent just to cover the artificial discount you were given on rent through negative gearing. Every negative gearing landlord is betting that the value of this property will increase by more than their $8000 loss each year.

      I'd suggest most renters rather than recognising this discount as an opportunity to save a deposit, instead select a nicer/more desirable property. There's nothing wrong with this but it does help the perception that the gap between renting and owning is impossible to cross. If properties rented for their true value renters would have to select less desirable properties and the gap between the cost of renting and owning would be easier to bridge (but saving a deposit while renting would be harder).

      • friedsnowdays on 18/01/2021 - 13:00
        +39

        I don't think that landlords are going to give renters a discount. Landlords will charge rent according to what the market can afford.

        My inference of negative gearing is that it merely inflates the price of the house. If negative gearing didn't exist then landlords would be forced to meet their cashflow needs from rental income. Since rental income is already sitting at the rate the market will pay this would imply the true value of the house is lower than if negative gearing didn't exist.

        • Scrooge McDuck on 18/01/2021 - 18:25
          +6

          I don't think that landlords are going to give renters a discount. Landlords will charge rent according to what the market can afford.

          The market is competitive — landlords compete on rent prices with each other to fill vacancies. There isn't a cartel of landlords artificially holding rent prices higher.

          The disfavour of Negative Gearing seems to stem from envy and fear, by the less knowledgeable populace, of the unknown. I.e. I don't know what it is, but it benefits rich people and not me, therefore it's unfair. This has been covered before on OzBargain.

          Negative Gearing is simply a term used to describe an investment in a property where the loan interest cost is greater than the rental income. This is not qualitatively different to other leveraged investments in speculative or growth assets. E.g. investing in shares on margin. The actual discrepancy is that investment loan interest is tax deductible, but home loan interest is not. However, investment properties are subject to capital gains tax, but an individual's home is not.

          • Bjingo on 19/01/2021 - 15:32
            +5

            @Scrooge McDuck: I would disagree with the disfavour of negative gearing being envy or fear. My personal issue with negative gearing in the property market is it drives up the housing prices due to being able to absorb the losses into ordinary income which makes purchasing your own house harder which forces people into the situation of having to rent.

            Landlords might up the rent but they wouldn't be able to do it drastically as with decreasing house prices owning becomes more affordable (and if negative gearing was removed a lot of investment owners would sell while the market has yet to accommodate to the change which itself would bring on a change rather take 20k less now than 50k less later) . There would be a shift into buying as those that could afford the higher rent would likely just buy at that point.

            Based on the median house and median rent in Perth I will do a run down of what I mean

            Median house in Sept 2020 = $480,000
            Median Rent in Sept 2020 = $395 pw
            Assuming a investment interest rate of 3.5%
            and owner occupier interest rate of 3%
            Both properties have put a deposit of 5%

            monthly mortgage to pay interest and principle over 30 years for landlord =
            456000 [ 0.0029167(1 + 0.0029167)^360 ] / [ (1 + 0.0029167)^360 – 1] = $2,047.653958 or $2,048

            Including council rates and maintenance (what the renter would have to pay if they bought) (2048*12+2500)/12 = $2256.33 or $2256 or 520pw

            Monthly rent = 395 * 52 / 12 = $1,711.67 or $1,712

            Hypthetically they remove negetive gearing and house prices drop 10% or in this hypothetical 50k =
            408,500 [ 0.0025(1 + 0.0025)^360 ] / [ (1 + 0.0025)^360 – 1] = 1722.252478 or $1,722

            Including council rates and maintenance (1722+2500)/12 = 1930.33 or 445pw

            If Landlords tried to increase rent by mortgage interest amount which is around $250 that would make the rent $645 at which point the renter would just buy a place.

            What is likely to happen is rent would stay the same for the first year then after they see their tax returns, they would either try increase the rent only to realise no one will pay $645 rent for their house, then they will either sell or default on their loan depending on whether the house price is more than the loan or not (for a lot of Australian investment properties that would probably be default on loan)

            If I missed anything let me know

            • CrowReally on 22/01/2021 - 13:14

              @Bjingo: I don't know why you're singling out mortgage interest in this. Let's keep in mind that "negative gearing" just means if at the end of the year, when you're doing your tax return, all of the expenses for your rental property (land tax, mortgage interest, repairs, rates, etc) are more than the income the property made, the overall loss reduces your overall taxable income from other sourced (e.g. salary, other investments etc), and then, after multiplying that figure by your tax rate, you end up paying a lower amount of tax. Once a year. Overall.

              No one is extrapolating from how much tax they saved to an annual 'budget' of what they need to charge on their properties. I'll take a bet most property investors wouldn't know what their amount of tax payable would have been if negative gearing was disallowed.

              Landlords make price decisions based on what their actual expenses are (the land tax they pay every January, the mortgage interest they pay every month, the electricians they hire every eight months) and what the market will bear. As to whether this results in sustainable investments or not, that's another story (and market based).

              • Bjingo on 22/01/2021 - 16:02

                @CrowReally: I am well aware of what negative gearing is I explained it very concisely in my second sentence "able to absorb the losses into ordinary income". Given the topic at hand was negative gearing although I did not explicitly mention it, the property in the above example was a geared property.

                You're completely right most property investors would know their tax without negative gearing, but if negative gearing was removed they would notice at a later point like maybe -

                ** "after they see their tax return" **

                The reason I singled out the mortgage interest is because 99% of the time it is the reason a rental property is making a loss also I can work out exactly how much a mortgage would cost per month or week. I cannot do that with most of the other expenses so applying them would make this whole exercise convoluted and not as accurate and it is clear people are having trouble understanding what is going on with it already.

                If negative gearing is removed and you can no longer apply the losses on a rental property to your income you create an actual expense, imagine your January land tax but instead its your October income tax. This extra income tax would be directly attributable to your rental property.

                to make this easier to understand;

                I have $6,110 tax owing before applying rental losses, which were $13,000, after applying that I have $0 tax thanks to negative gearing.

                If I am no longer allowed to apply rental losses to income I have $6,110 owing this means I have an actual expense $6,110 all because they got rid of negative gearing.

                Now I don't want to make $6,110 less every year because of my rental and I literally cannot afford that so I need to find a $13,000 deduction that I can claim against my income or earn enough extra income to deal with that difference. For an example I would probably just use a nice round number, something like $250 pw, but if you want the exact amount 6,110 / 0.53 = $11528.3 is exactly how much I need to earn to cover the $6,110 expense which is a rent increase of $221.70 a week.

                If I have not cleared up my reasoning for using Mortgage interest or how this would create and actual expense please let me know I am happy to help.

                • CrowReally on 22/01/2021 - 16:58

                  @Bjingo: "If negative gearing is removed and you can no longer apply the losses on a rental property to your income you create an actual expense, imagine your January land tax but instead its your October income tax. This extra income tax would be directly attributable to your rental property.

                  to make this easier to understand;

                  I have $6,110 tax owing before applying rental losses, which were $13,000, after applying that I have $0 tax thanks to negative gearing.

                  If I am no longer allowed to apply rental losses to income I have $6,110 owing this means I have an actual expense $6,110 all because they got rid of negative gearing.

                  Now I don't want to make $6,110 less every year because of my rental and I literally cannot afford that"
                  [end of quote]

                  Well, let's follow the logic on this:

                  1. You have other investments and salary income (maybe even capital gains) in your personal income tax return, and the tax on that is $6,100.
                  2. Independent of that, you have a rental property that's running at a loss, but now in this example negative gearing is abolished so you're not allowed a tax deduction for the loss. Instead, you just have to put a 0 at the rent section in your tax return.

                  The rental property isn't causing that $6,100 'expense' to you, the other income streams are. Why is the fact your salary/other assets/etc attracting a $6,110 expense now a factor in the cost of your rental property, to be recovered by it? Why make the rental property fight harder for your cash, and "force" you to put the rent up?

                  They aren't connected. It's nice that negative gearing exists (allow current year revenue losses to be applied against other gains, cheers), but people aren't seeking out loss making properties for the One Neat Trick to reduce your overall tax income. If your accountant phones you up and tells you your tax bill is going to be $20,000 this year, you don't say "Gimme a sec, I'll give the bank a call and ask if they can charge me more interest, really bump the rate up, yeah?" or actively seek out the worst finance offer you can find.

                  Negative gearing is a tax concession to encourage people to invest in income producing capital investments, but the "value" of their tax savings aren't directly added onto the price at the market during the bidding wars, and it's not dragging people with tax problems to the market and driving demand up.

                  • Bjingo on 22/01/2021 - 18:51

                    @CrowReally: Calling it a tax concession is a stretch as it works like a work related deduction rather than a tax concession, I would even call it a tax planning tool before a concession. It does not actually matter whether the other items are attracting that much additional tax I just used that as it was the easiest was of showing the benefit. If you ended up with a tax refund before applying rental losses you would get an even bigger refund.

                    I would say having an extra $6,100 because of negative gearing on the rental property is thanks to the rental property given that amount is completely dependent on rental property. People absolutely make a loss on rent intentionally, people who can afford a house outright often get a loan instead. let me run you through a fun little example.

                    Family A has 2 parent and 3 kids aged 15, 18 and 21, They want to buy an investment property so they make a loan contract with the Family trust to borrow 1.5m to buy a house with 5% interest on the loan. They pay the 75k each year which is distributed 50% among their two adult children. After rent and expenses they make a 55k loss on their rental, damn. they apply the loss to their income and save $25,850 in tax the trust makes a profit of 75k and "distributes" it to the kids who have to pay $7,469.00 tax combined

                    Having this loan means Family A has profited an additional $27,781 as opposed to if they did not have this loan.
                    75,000 x 47% - 7,469

                    Good thing the $27,781 is not connected to the rental property and there was definitely no seeking out of a loss to reduce overall tax income.

                    • CrowReally on 22/01/2021 - 20:04

                      @Bjingo: You've shown that a family of high wealth individuals on the top tax rate, who own a family trust that has a spare $1.5 million sitting in it, and two adult children who have zero income otherwise (because sure, if we're going to do a worked example, we might as well maxxxxxxxx out the savings to prove our point, right) can structure their affairs to get a tax saving of $27,781.

                      Note to onlookers, yes, if you make yourselves 'the bank' (so you don't suffer a cash loss from paying the interest), assume you're on the top tax bracket and you can distribute to people on the bottom tax rate (and literally have no other income, like I said), this is the magic number. I'll leave it up to you on how realistic it is.

                      But have you actually proven your point?

                      1. Did it increase the price of the property by (checks notes) $27,781? Or anything? How exactly did paying $1.5 million for a property listed for $1.5 million 'drive up the price of the market'?
                      2. Also, this scheme, being negative gearing, can be applied to any income producing investment, can't it? You'd get the same tax result if you'd put the $1.5 million into shares, right? (Maybe better, lololol franking credits)

                      None of of this is a tax advantage for investing in rental property, it's just a tax advantage for investing.

                      • Bjingo on 27/01/2021 - 14:17

                        @CrowReally: It does not instantly drive up the prices, no market instantaneously adjusts when one person buys, but in theory any money saved on negative gearing allows an individual to pay that amount more than they would have for the commodity. Taking it to the most fundamental economics, Negative gearing is a decrease in the cost of investing in property, which increases the demand for properties to invest in, increased demand leads to an increase in cost.
                        Coupled with the fact the government fights tooth and nail to make sure the property market does not go down (fhog, homebuilder, bonus builder, reduction in stamp duty) then you take the CGT reduction into account and you can understand why everyone has said property is a sure fire investment for the past 15 years.

                        Either way why would you want to keep something that allows people with a lot of money to very easily dodge tax by just buying a house (per the previous example), that alone seems like enough of an issue to consider a reform on it. You don't even need to completely remove negative gearing, You could even go for an angle where in order to offset current year losses against ordinary income you have to satisfy some tests like making a profit on the rental in 3 of the last 5 years plus whatever other tests could be implemented. Or just have interest be applied to the cost base on sale instead of immediately deducted.

                        • CrowReally on 28/01/2021 - 17:13

                          @Bjingo: "but in theory any money saved on negative gearing allows an individual to pay that amount more than they would have for the commodity. Taking it to the most fundamental economics, Negative gearing is a decrease in the cost of investing in property, which increases the demand for properties to invest in, increased demand leads to an increase in cost."

                          Sure, in the same way if Dominos pizza were offering a "$5 off your electricity bill in 6 months' time" coupon with the purchase of a family meal pack, it would decrease the cost of ordering that meal pack, increasing the demand in that meal pack, and then an increase in cost of those meal packs. That's the theory at work. Notice how ridiculous it sounds when I change the names of a few nouns?

                          Theory aside, is it realistic for people to use a future discount on another cost to influence their buying decisions to this extent? Are people factoring in a saving on their overall tax bill in 8 months' time to the specific decisions they make today? No, they are not. People are not trying to avoid future tax bills by taking on large capital investments of any type today.

                          "why would you want to keep something that allows people with a lot of money to very easily dodge tax by just buying a house"

                          Because it's not a house-specific issue? Why allow it to be done for shares but not for houses? The current tax law is this can be used for any deductible expense that's attached to any income producing investment, regardless of how much or little income you have - unless you're coming towards a concept of deductions matching income on a means tested basis (a separate idea yet to be mentioned), what's your point?

                          • Bjingo on 28/01/2021 - 21:34

                            @CrowReally:

                            Sure, in the same way if Dominos pizza were offering a "$5 off your electricity bill in 6 months' time" coupon with the purchase of a family meal pack, it would decrease the cost of ordering that meal pack, increasing the demand in that meal pack, and then an increase in cost of those meal packs. That's the theory at work. Notice how ridiculous it sounds when I change the names of a few nouns?

                            That entire paragraph is a false equivalence, Dominos and the entire housing market are not interchangeable, to even propose that they are is a ridiculous notion. Yes, when you change the context, content and scale of an example the result does sound ridiculous.

                            Theory aside, is it realistic for people to use a future discount on another cost to influence their buying decisions to this extent? Are people factoring in a saving on their overall tax bill in 8 months' time to the specific decisions they make today? No, they are not. People are not trying to avoid future tax bills by taking on large capital investments of any type today.

                            It is called tax planning and yes people do it all the time, in fact, they even pay a lot of money for it.

                            Obviously people do not try to avoid tax by buying assets, they want make as much money as possible and avoid paying as much of the associated tax as they can.

                            Because it's not a house-specific issue? Why allow it to be done for shares but not for houses? The current tax law is this can be used for any deductible expense that's attached to any income producing investment, regardless of how much or little income you have

                            It causes issues in the housing market that are not present in the share market due to the nature of the product itself. housing is a finite resource limited by habitable space, housing or shelter is a fundamental need for humans and there are also non investors in the housing market looking for a place to live. These details are unique to housing which is why treating it like any other investment has caused issues.

                            I am well aware of the tax law surrounding deductions and I don't have an issue with deductions, you are correct you just phrased it kind of weirdly so I will reiterate; the current tax law with relation to deductions is that,

                            you can deduct any expense you incur with the sole purpose of earning income.

                            So if you have to buy non-slip shoes for work you can deduct it, but if you have to buy black leather shoes, you cannot as these can be used outside of a work setting.

                            For a rental property there are more restrictions, so anything that is an improvement to the property is non deductible (but capitalised). Any cost from acquisition or disposal are non deductible (added to cost base), cost incurred when not available for rent (when someone is using their holiday house, if it cannot be rented because damages caused by prior tenants are being repaired expenses are still deductible) and more recently, travel to and from your rental property.

                            So rather than remove negative gearing you just tweak it a little, you say that getting the financing to purchase an investment property is an acquisition cost much like broker fees or the likes. I do not think this is far fetched personally as the mortgage was an agreement reached with a bank in order to get the funds to acquire the asset, rather than a cost of the asset itself. and you have them apply mortgage interest to the cost base of the property instead deducting it.

                            This would prevent a lot of nonsense gearing like in my prior example would be avoided but if an issue causes losses in a year (like a tenant leaves the house a mess and they have to repair it) they can still offset it against their other income and recoup losses from tax.

                            If you don't know what I mean I can explain in more detail.

                            • CrowReally on 29/01/2021 - 10:05
                              -1

                              @Bjingo: You don't get to quote supply and demand theory at me (and lean very heavily into it, may I add - weasel word alert) and then throw in the towel when I change a few nouns on you. It's not the "The Theory On Housing Demand As Relating To Finance Supply". If an incentive allows someone to pay more for a commodity and that affects its cost, you're going to have to wear it when someone shows you up for mixing loose theory with specific outcomes. This is the motte-and-bailey fallacy at play for (any remaining) interested onlookers - say something very specific ('negative gearing causes the housing market prices to increase') and when challenged on it, fall back to a vague position that's easier to defend ('well, demand drives supply, which drives price').

                              I've never argued there isn't a tax advantage to negative gearing (or that tax planning exists). I likely know more about tax than you (though thank you for that explanation about what a deduction was, and that fascinating segue into footwear, it really added a lot to the housing discussion). What I'm arguing is negative gearing isn't a house-specific tax deduction, and people don't "very easily dodge tax by just buying a house". Is it possible to structure your affairs so that you GET a tax deduction for buying a house? Yes, you provided that example [all you need is the have the money already, a family trust, some minors you can distribute to, and run it as an investment property with you as the bank etc etc etc]. Is that "very easily dodging tax"? No, it isn't. Is it something that can only be done for houses, or affects the pricing of the housing market? No, it isn't and no, it isn't.

                              Here's a report on some modelling to back up what I'm saying: https://theconversation.com/confirmation-from-nsw-treasury-l…

                              The housing as a finite resource stuff smells like special-pleading nonsense (please list investments that are infinite resources as a counterpoint to prove me wrong).

                              I can almost appreciate your thinking on the requirement to capitalise investment interest on property (weird flex but OK, but .. not on all investments, just on property? does this rule apply to commercial property too? what about properties in under-developed areas where there isn't a housing crisis, are we selectively restricting their tax deductions too? followup question: …why?), but then right in the next sentence you say you'd still allow losses on a property (e.g. bad tenant mess cleanup) to be applied to other income, which is what negative gearing is (????).

                              So, you're still allowing negative gearing on a property, you just have a hate boner for interest deductions? Fine, the adult investors from your earlier example don't do the family trust mortgage trick to channel an interest expense to their minor adult children (as income to them). Now, they just hire their children outright as a property manager for their property at a market rate. Boom, non-interest tax losses relating to a property, being applied to other assessable income, identical result.

                              It's fine to dislike the fact that some rich people are able to get tax advantages for investing in the housing market. Trying to change a general tax law (negative gearing, which applies to everyone, across all investment types) to tackle a very specific social issue ("city residential property is too exxy, I reckon") is misguided at best.

                              • CrowReally on 29/01/2021 - 10:15

                                @CrowReally: I should hasten to add I don't want to come across as overly critical to the concept of the problem (yes, housing prices are nuts) - I just think it's from a wide variety of factors, and demonising a general tax deduction that's available to everyone as the source of it doesn't have a basis in reality. Is all property (of all types, in all locations) too expensive because of this tax advantage - or is another factor at play here?

                                • Bjingo on 29/01/2021 - 15:55

                                  @CrowReally: I was not "throwing in the towel" nor do I believe it is a Motte-and-bailey fallacy, I never altered my assertions to make it easier to defend I said that comparing the housing market to Dominos is the ridiculous part of that statement, allow me to elaborate. Pizza is not an asset, you are comparing perishable consumable that is worth $0 once it has been utilized for it's intended purpose, to an asset, which will last decades when being used as expected. There is no substitution to a place to live, if all the houses are occupied you would have to offer more money to try get one. If Dominos runs out of pizza ingredients, you go to a different pizza store

                                  An incentive does allow someone to pay more for an item and increased demand does increase market value, are you trying to say these things are not true?

                                  What I'm arguing is negative gearing isn't a house-specific tax deduction, and people don't "very easily dodge tax by just buying a house".

                                  I never once said it was housing specific, what I said was "It causes issues in the housing market that are not present in the share market due to the nature of the product itself." Regarding the finite amount of habitable land and your request to list every single investment that is infinite, I was comparing it to shares, and as shares have no limitation in space, extent, or size there is the potential for infinite shares. So what I mean is there will never be a situation where you can create no new shares, which can occur with housing.

                                  What I said was actually said was that it "allows people with a lot of money to very easily dodge tax by just buying a house" which is true, if you have money it is easy to do, if you do not have money then no it is not easy.

                                  I read the article and that is a great article, it says house prices will will fall marginally, 0.5% in 1 year and 1% in 3 years (or 3.3 billion and 6.6 billion dollars) based on the loss of future tax incentives, raise money, stabilise the economy, increase home ownership and finishes by saying "Such small falls in house prices, as the NSW Treasury predicts, seems a modest price to pay for these benefits." does that mean you agree removing it would be good?

                                  Also I would suggest reading the Grattan report referenced in that article as it goes very in depth regarding negative gearing. here is a link as theirs is broken.

                                  https://grattan.edu.au/wp-content/uploads/2016/04/872-Hot-Pr…

                                  firstly I want to say you are completely right in saying "I just think it's from a wide variety of factors" I am aware Negative gearing is not the only force causing issues in the property market, realistically it is a combination of the CGT discount, negative gearing and the government constantly propping up the housing market that causes the issue. It has allowed for people to buy a property with no intention of making income from it because they can offset all the losses, then thanks to the property market being on government life support. annual property growth has been an average of 5-6% for the past 20 years. these investors just sit on the losses for awhile as it increases in value, then when they need/want a huge sum of money they sell it and only pay tax on 50% of the profit thanks to the discount.

                                  So, you're still allowing negative gearing on a property, you just have a hate boner for interest deductions?

                                  The reason I keep mentioning interest deductions is that they make up about half of the costs of property investors, so removing the ability to deduct the interest each year would reduce expenses by about half and for the vast majority of negatively geared properties which would likely make them no longer negatively geared. Negative gearing itself is not necessarily bad it is just that in tandem with the items mentioned above it has caused a lot of adverse effects in the property market specifically. The reason I think capitalising investment interest is a good solution is because it deals with 2 of those things, it will massively reduce the number of negatively geared properties and it reduces the benefit of the CGT discount. Realistically you can apply it across all investments or just property, it is less common to see sizeable loans for investing in shares as it is very speculative.

                                  Now, they just hire their children outright as a property manager for their property at a market rate. Boom, non-interest tax losses relating to a property, being applied to other assessable income, identical result.

                                  The property management fee for the property in that example was $5,068 so assuming they got rid of their property managers and self managed the property paying the $5,068 to their children as income for property management instead, without deducting the interest they are at a 20k profit so there is no losses to offset. but they are self managing they spent $5,068 less (no tax as its under 18,200) but have to manage the property instead. Had they not given the money to the kids they would have only saved $2,686.68. If the ATO ever decided to Audit them they would need to prove that the kids genuinely manage the property and that they actually pay them for that work (a separate bank account in their name which you have access to is enough for that) or it would be considered fraud.

                                  General tax law is changed and altered on a very regular basis already and the ATO will frequently target specific income sources, I mentioned travel expenses for rental properties previously, in the 2018 financial year they removed the ability to deduct travel expenses from rental properties even though you can still deduct it for all other ordinary income. the CGT reduction was introduced in 1999 (which is also around when the dwelling price to income ratio skyrocketed)

                                  Also, bold of you to assume you know more about tax than a practicing tax accountant unless you too work in the tax industry in which case your confidence is understandable.

        • hearitfromhorse on 19/01/2021 - 06:52

          I did. He was a great tenant and I wanted him to sign a new lease. $10 a week less was much better than a vacant property for a month while finding someone new (who could turn out to be a nightmare).

      • dasher86 on 18/01/2021 - 13:01
        +5

        That's if the townhouse still had a market value of $600k if negative gearing didn't exist.

      • TheMindsetTraveller on 18/01/2021 - 13:29
        +14

        That is not always true, capital growth is the icing on the cake - remember that not all call cakes need/want to have icing.

        You are missing a key deduction which is capital depreciation. The logical side is every year the property ages, gets older, wear and tear etc. So for a $600k townhouse, the property value might be $300k. Let's say this year, it might lose $10k in paper value. Next year it might lost $9k. (this is a guide only, but you need a professional depreciation report to get these numbers)

        So your example, it is now negative $7800 and $10,000 = - $17,800

        If you're income is $100,000, you can negative gear $17,800. Hence your taxable income now reduces to $82,200.

        Now if you have two houses that are negatively geared, your taxble income drops to around $64,000. Your payable tax drops by almost 50% and would get a refund of around $12k.

        Now, $100k salary + $18.2k rent property 1 + $18.2k rent property 2 + $12k tax refund = $146.4k gross cashflow …. whereas from a tax view you have a taxable income of $64k. Now if you have another property, you could be categorised as a low income earner even having a cash flow of, say , $170k per annum …. plus if your properties have grown in paper value = #winning

        • stirlo on 18/01/2021 - 14:33
          +2

          Great analysis, I was exploring more the effect it has on rental prices than the tax benefits to investors. If anything the larger perks available means investors will be willing to accept less return from rent (more comes from tax deductions) therefore lowering the rental price even further (and increasing the cost difference between renting and purchasing).

          • TheMindsetTraveller on 18/01/2021 - 15:58

            @stirlo: As an investor for the past 15 years with multiple properties, my personal situation is that cashflow is the most important thing. I would then take into consideration of possible capital growth and not far behind it, the ability to negative gear.

            Since cash flow is important for me, I would forgo higher rent if I could maintain longer periods of continuous income - so this might relate back to your exploration of rental prices; a renter might end up paying slightly less from me (or even the market rate for my property) if the benefit was going to have a longer period of continuous rent. I would not risk a rent increase if it meant my property was going to be vacant for two weeks for example. If I can maintain cashflow then I know I am going to meet my own ongoing costs and liabilities. The ability (or luxury) that a property's value can increase, whilst the ability to negative gear simultaneously is just the icing for my (and many other investors) situation.

            • Other on 18/01/2021 - 16:44

              @TheMindsetTraveller: Your not the average though.

              So for the majority, it is cap growth & negative gearing.

        • steeevo on 18/01/2021 - 17:59
          +2

          I personally dislike negative gearing, but am struggling to follow your numbers.

          It seems off to compare taxable income to gross rather than net cash flows? In your example, there is $52k of outgoing in relation to those two investment properties that are missing from cash flows which closes the gap quite a bit.

          The salary side also seems funny because you are factoring in the tax refund but using gross income before tax of 100k, so that would be another 24k swing against your number cashflow number of 146k.

          Perhaps I have just misunderstood, but your actual cashflow looks like it would be $70k, or less than half of the number you show…

          Compared to no investment property so a 100k salary paying 24k tax, you are about 6k worse off cashflow wise by owning the property.

          • TheMindsetTraveller on 18/01/2021 - 21:59
            +2

            @steeevo: Yeah you are right, sorry to add gross / net etc to the mix.

            I'll try to be brief, let's say person on $100k p.a salary plus 2 investment properties - using the above figures for the property x 2.

            Without investment property, $100k gross less $24.5k tax = $75.5k in hand after tax.

            With two properties, using above figures, where annual income is $18.2k, cost is $26k. I'd also add capital depreciation of $10k … so the end result is income $18.2k minus actual $26k and depreciation $10k = negative $17.8k per property,. Times this by 2 which equals a $35.6k loss, which is then allowed to be offset against your regular taxable income.

            So now it is $100k minus $35.6k loss and therefore your actual total taxable income now drops from $100k to $64.4k. Since you are now taxed at $64.4k you should pay $12.4k tax only, but since you already PAYG $24.5k from your day job, you should get a refund of $24.5k - $12.4k = $12.1k.

            So since you received $75.5k from your $100k work after tax is paid PLUS now the $12.1k tax refund, you would now have $87.6k in hand overall.

        • goms on 18/01/2021 - 23:49
          +4

          Now, $100k salary + $18.2k rent property 1 + $18.2k rent property 2 + $12k tax refund = $146.4k gross cashflow

          This is simply not true. You need to take expenses into account to calculate cashflow, otherwise it's income, not cashflow.

          Negative gearing gives you a tax break, not a tax refund. If you are on 37% tax bracket, you get 37c on every $1 you spent, netting 63c out of pocket.

          It's true that you pay less tax due to less income, however your cashflow would be less. You won't increase your cashflow by having a negative geared property, unless the negative part is caused by depreciation.

          Eg: $20k rent income - $18k expenses (mgmt fee, repair, interest, etc..) - $5k depreciation = $3k negative income, but $2k positive cash flow.

          I saw your calculation revision above

          So now it is $100k minus $35.6k loss and therefore your actual total taxable income now drops from $100k to $64.4k. Since you are now taxed at $64.4k you should pay $12.4k tax only, but since you already PAYG $24.5k from your day job, you should get a refund of $24.5k - $12.4k = $12.1k.
          So since you received $75.5k from your $100k work after tax is paid PLUS now the $12.1k tax refund, you would now have $87.6k in hand overall.

          Again, you did not take into account the expenses. You won't be pocketing $75.5k anymore since you need to pay the IP's expenses (bank interest, management fee, repairs, etc..)

          Here is my calculations. Let me know what you think.

          No investment property
          Gross Income $100k. Tax $24k. Net income: 76k.

          With investment property $35k loss (including 2x10k depreciation)
          Gross Income $65k. Tax 11.7k. Net income: $53.3k + $20k = $73.3k (Adding back the depreciation because there is no money spent on depreciation)

          You are basically getting $2.7k less in your pocket when you have IP, based on the numbers above.

          • TheMindsetTraveller on 19/01/2021 - 10:28

            @goms: Happy to be called out and be corrected because I am and never will be perfect but always willing to learn.

            You said 'it is true that you pass less tax … however cashflow would be less' I agree with this and i explain below in a sec;

            However I would disagree with your calcution "With investment property $35k loss (including 2x10k depreciation)
            Gross Income $65k. Tax 11.7k. Net income: $53.3k + $20k = $73.3k (Adding back the depreciation because there is no money spent on depreciation)"

            Have a look a this online calculator to work out the benefits of negative gearing

            https://www.yourmortgage.com.au/calculators/negative_gearing…

            I just used the above example, and entered the figures of 1 property, and it was I would be $23/w worse off from a cash flow point of view, but the tax benefit would be plus $6,590 per year. so if 2 properties, the tax benefit would be $13,180. I roughly calculated a $12.1k benefit.

            In any case, even after expending money to keep 2 properties, even if I going back $46/week for 2 properties, that is a good outcome. but going back to my prefernece of cashflow, I think my explaination was not clear - i wasn't look it from a true accounting point of view but rather as a way of saying cashflow, for me, is regular and stable weekly rent coming in (and minimising vacancy periods).

            • steeevo on 19/01/2021 - 21:08
              +1

              @TheMindsetTraveller: I just did the same calculator. Pretty sure that the $23/W (or $1.2k per year) is after the impact of the tax adjustment.

              I don't think anybody is saying that your tax benefit calculation is wrong, it is just that you keep ignoring some of the cash outflows when trying to show the benefit of negative gearing.

              • TheMindsetTraveller on 20/01/2021 - 09:04

                @steeevo: Thanks for your inputs and comments.

                I think my comment re; cashflow was miscommunicated by me. My reference to my 'cashflow' was more about rent income coming in as regularly as possible, with very little time when it stopped (ie a property being vacant).

                To bring some finality for my part on this topic , it was a good thread and better input by you all - and at the end of the day, everyone needs to consult professional advice and see what works for their personal situation.

        • TheBird on 19/01/2021 - 16:06

          capital growth is the icing on the cake - remember that not all call cakes need/want to have icing.

          Within the context of negative gearing, it doesn't work without assumed capital growth. All you'd end up doing is funding someone elses discounted rent while assuming all the risk.

          You can't negative gear unless you're making a loss, so all you're doing is offsetting SOME of the costs by reducing your tax paid, but unless you're in a 100% tax paid category (which no one is), it'll always be a losing proposition without capital gain.

          It's an important lesson to learn. Those who don't may doom themselves to struggle financially long term due to poor decision made on a false premise.

          So while you're correct, you don't need "icing on the cake". For this to happen, your property's income needs to be equal or greater than the expenses. If it's equal, you're then assuming all the risk again for no return.

          To be clear, I'm not saying your investment in property is a bad decision. With few exceptions, property tends to rise in value over time.

      • Scrooge McDuck on 18/01/2021 - 18:37

        The problem is that this increases the gap between the cost of renting and owning property which becomes harder and harder to cross.

        Of course the price difference increases if the lower price decreases. As you've explained in the rest of your comment, this could make the higher priced option more affordable by enriching the saving ability of consumers, but doesn't if they're financially irresponsible.

      • dsar on 18/01/2021 - 20:46
        +5

        nEgaTivE GeaRinG maKes ReNt m0rE aFfoRdDabLe

        https://theconversation.com/three-myths-on-negative-gearing-…

        Myth 3: Negative gearing keeps rent prices lower

        "The industry also claims that if negative gearing is restricted, landlords will try to pass on some fraction of their higher tax costs by pushing up rents. But will they succeed?

        Rents are ultimately determined by the balance between demand and supply for rental housing. In property markets – as in other markets – returns determine asset prices, not the other way around. Rents don’t increase just to ensure that buyers of assets get their money back."

      • Drakesy on 18/01/2021 - 21:16
        +7

        Ultimately at the end of the day the Australian tax payer is effectively giving those rich enough/speculative enough a safety net straight out of their own pockets for the privilege for the investor to own a house.

        I'm all for providing houses to renters, but when people literally shell out wayy to much for it purely on speculation and don't make money, negative gearing the crap out of it then that's too far. Where else do you get a rebate for losing money.

        It's ridiculous.

      • Genepi on 20/01/2021 - 13:56

        Exactly. An investment property is much better if it's positively geared.

        • rgr on 20/01/2021 - 18:32

          yeah but your average mum and dad investor dont get this. if you tell them you can take a constant loss at 37% or whatever and are thereby paying less tax, they'll think it's a smart idea because they could then "off set those losses against capital gains". i would theorise that this also gives them some clout that they can share with friends and family at the bbq, so they can make themselves appear smart and intelligent.

          what they fail to see is that for every % the negative gearing takes them down, they need twice as much to remain up or ahead so thereby if you're sitting in an investment that is leveraged and is in a sideways market then you're losing. NG works in a consistently rising market where the net outcome is you're up by some % pts by way of a climbing price figure

    • dasher86 on 18/01/2021 - 13:12
      +22

      It used to be every Australian's dream to own their own home.
      Now it's to own someone else's.

      • cheapaschips on 23/01/2021 - 09:11
        +1

        People invest in various areas including housing which all have pros and cons.

        Please open real-estate and domain apps, there are thousands of houses for sale at any given time.

        Nobody is stopping anyone from buying. There is enough for everyone so if you have your deposit and loan approved please feel free to go purchase a house.

    • borrisz0r on 18/01/2021 - 18:34
      +4

      Great idea, maybe see how that turned out in 1985?

      The problem with removing anything, is what replaces it, and will it be better for the overall society? Public housing has been replaced by the private rental market, i have been approached several times about 'signing' my property up for public housing where i lose control of who and when tenants use the property, and they pay me an additional fee for the privledge. So what would happen if they moved the incentives for property investors to keep providing rentals? Probably exactly what occured in 1985, the tenant will pay for it.

      Not to be judgemental, but there is definitely a demographic cohort who have little to no financial/budgetting knowledge and live week to week. Of this segment, there are people who will always struggle to purchase property as they cannot raise the deposit and maintain the financial disclipine to own a home.

      A perfect example:

      Regional Hubs - I can get a solid 3/4 bedroom home in Tamworth, Orange, Wagga etc for <250k. Is that unaffordable on minimum wage of over $750 per week? Of course not if you can budget and balance the books, you need to ask yourself, why is there over 30% rentals in these areas?

      The bigger problem to solve is financial literacy issues which are rife in our country, not blaming investors for capitalising on it. You solve that problem, and the balance shifts on its own.

      Just so we are clear:
      I own investment properties, but not negatively geared (its around neutral.)
      I am not from a rich family, i am from a blue collar family of modest means, i have just worked very hard to get where i am
      I learn't how to manage money so i wouldnt have the struggles my parents did

      Just my 2 cents team, neg away…

      • dsar on 18/01/2021 - 23:39
        +3

        So what would happen if they moved the incentives for property investors to keep providing rentals? Probably exactly what occured in 1985, the tenant will pay for it.

        Myth 3: Negative gearing keeps rent prices lower

        "But the most enduring myth around negative gearing concerns its role in controlling rents.

        To understand the origin of this myth, we need to explore some history as well as economics.

        The property industry claims that rents rose when the Hawke government restricted negative gearing in 1985. But this is a Sydney-centric version of the past. Rents did rise rapidly in Perth and rose somewhat in Sydney. Yet inflation-adjusted rents were stable in Melbourne and actually fell in Adelaide and Brisbane. In Sydney and Perth population growth and insufficient residential construction – due to high borrowing rates and competition from the stock market for funds – not the policy change, led to the rent rises."

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