NEGATIVE GEARING AND THE ALP
Agencies And Orgs Criticise ALP Over Negative Gearing
Posted by Lonny propertynerd.com.au
Recent articles in Real Estate Business (REB) and The Real Estate Conversation (REC) are very critical of ALP, and others are as well.
It is impossible to please everybody, of course. We've had feedback from some readers who disagreed with what we wrote in the past regarding the Australian Labor Party (ALP) and their stance (or non-stance, depending on your point of view) about Australia's negative gearing policy.
But it may help to remember that we're primarily a news aggregating service, and as such we generally do not publish our own opinions, but rather report about what others in the industry are saying. And that is the situation in this case.
The Real Estate Institute of Australia (REIA) in January called for the ALP to "come clean before everyone loses". Its position was — and apparently is — that Australians deserve to know what the Party's position is before the election. ALP has rather famously walked back its earlier position that it wants to restrict negative gearing except for new construction and a few other smaller categories, and instead said they will talk about it after the election.
While it might be wrong, obviously many think that is a rather transparent ploy to simply withhold unpleasant news until after they are elected. But of course that cat left the bag a while ago.
The REIA statement about why they wanted a solid position on negative gearing included the following points. Agree or disagree, this is what they said:
• Mum and dad investors will no longer be able to claim a "modest" tax deduction. Yet ALP wants to allow a 20% instant asset write-off of capital expenditure for big businesses.
• Home owners will see additional downward pressure in a market that is already falling.
• Renters will see rents rise, as evidenced by the Hawke/Keating "experiment" of the 1980s.
• Independent research has shown that builders and their "trades" will build fewer homes.
• State governments and their constituents will receive less stamp duty.
All of these reinforce REIA's main point, which is that Australians deserve to know the Party's position, whatever it happens to be, well in advance of the election. Failure to take a stand causes uncertainty in the market, which has a tendency to slow business down.
The Sydney Morning Herald wrote an article back in early December which presented the opposite view, saying that people need to re-think the whole concept of negative gearing:
"... mostly, it is the ability to offset the cost of owning the property - including the interest paid on a loan - against assessable income that makes it particularly attractive...
"This strategy, known as negative gearing, is often considered more a tax strategy than an investment one.
"Since the aim of most investment strategies is to make a profit, investors with negatively geared property either hope that one day the rent covers the loan costs or the capital growth in the property is such that they make a profit when it comes time to sell."
Advisor for Smart Property, Kevin Lee, says negative gearing is great when property prices continue to go up.
"However, at a time of global economic uncertainty, betting on capital gains from property is a risky and outdated strategy for most people."
The rest of the article reinforces this viewpoint.
But it seems lately more people are on the other side of the fence, as REIA made clear. They believe maintaining negative gearing may be very important to sustain a market that has seen downturns.
According to REB, the CEO of Starr Partners, Douglas Driscoll, said Labor's apparent plan to limit negative gearing comes at the wrong time, and is likely to "backfire".
"Labor’s proposal to limit negative gearing to new developments and halve the capital gains tax coincides with other recent changes in the property market: a wave of new apartments and stringent macro-prudential measures.
"This will create an extended period of property price stagnation. If our own investors are impeded further, this is likely to lead to more competition from foreign buyers."
He points to foreign property companies like Juwai.com, which encouraged more investment in a "soft" Australian property market.
"Despite Australia’s tight regulations on foreign investment, other overseas property markets are tighter, including China, Canada and New Zealand.
"Unlike in Australia, the Chinese lack many appealing alternative investments at home and, due to government crackdowns on peer-to-peer lending, private equity funds and with the majority of their property being leasehold, many investors are forced to look elsewhere.
"Labor’s proposal to level the playing field for first home buyers will create unique opportunities for foreign buyers looking to capitalise on a ‘softer’ market, and I’m expecting to see this kind of investment gain further momentum this year."
He said partly due to this situation, Australians might start to look elsewhere for investment opportunities.
"Although New Zealand’s parliament clamped down on non-resident foreigners from buying existing homes last year, Australians — among the largest purchasers of homes in New Zealand — were exempt from this ban.
"Whether you’re looking for a home to live in or an apartment as an investment property, it’s relatively easy for Australian citizens to invest in New Zealand, and it can take as little as three to four weeks to complete a house purchase.
"If we’re not careful, we could find ourselves in an unusual situation wherein we see an influx of overseas investors buying property here, while our own investors start to purchase overseas."
Adding to this argument is a recent article in REC, saying that Labor's adoption of a policy to reduce negative gearing was formed during a strong market, and may make less sense today.
"In fact, according to CoreLogic, by the end of 2018, Sydney dwellings values were back to where they were in August 2016 and Melbourne values were back to February 2017 levels.
"The news is even worse for Perth and Darwin, where dwelling values are back to levels not seen since March 2009 and October 2007 respectively.
"Not only did Sydney and Melbourne post significant property price falls last year, restrictions on lending have resulted in the Australian economy starting to look a little shaky.
"While there is some conjecture on whether the temporary abolishment of negative gearing caused rents to soar in the mid-1980s, one thing that’s not in question is that tinkering with the property market in any way usually doesn’t end well."
(Of course, negative gearing itself is a form of "tinkering" with the economy, but let's ignore that for now... apparently we're talking about a change in the kind of tinkering.)
"Just consider how the economy is going at present, four years after the government regulator decided to tighten the lending screws nationwide.
"An interesting anecdote from the last time a government fiddled with negative gearing is that when it was reinstated a few years later, three years-worth of claims from investors nearly sent the ATO broke ... Given the change in market conditions in many capital cities, a wise person might suggest that they should hold-fire.
"Then again, when has wisdom had anything to do with government policy?"