negative gearing

"The Affordable Housing Party: the single issue party dedicated to solving Australia's housing affordability crisis. Australians are now living with some of the most unaffordable housing in the world, but it doesn't have to be this way! Obscene tax incentives to invest in property. Our lawmakers profit from the status quo. We opened up our housing market to investors all over the world. Australia's rapid population growth. Home buyers are paying too much to try to compete with investors. This can't go on forever!" Former journalist, Andrew Potts, Sydney, registered the Affordable Housing Party (AHP) with the Australian Electoral Commission earlier this month. Policies include: Phasing out negative gearing and capital gains discount on investment property sales; Stopping overseas buyers from buying Australian properties; Taxing properties left empty by investors; Cutting down immigration to 70,000 annually; Banning full time Airbnb properties; Ending “no fault” evictions for rental properties. Facebook page is https://www.facebook.com/AffordableHousingParty/

The text below is taken from the Affordable Housing Party site at https://www.affordable-housing-party.org/. The new party was also reported in the Murdoch Press at this URL: http://www.news.com.au/finance/money/investing/affordable-housing-party-launches-claiming-renters-and-first-home-buyers-are-being-ignored-by-canberra/news-story/2113945ffb746837789d0af8e12d7818. On the Sustainable Australia Party site at http://www.sustainableaustralia.org.au/120 it describes Andrew as " a former Australian Greens supporter and a former editor of the Sydney Star Observer weekly newspaper."

Australians are now living with some of the most unaffordable housing in the world, but it doesn't have to be this way!

​
In 1986 in the Inner West Sydney suburb of Dulwich Hill you could buy a newly renovated three bedroom home with a big backyard for $150,000 and pay off the mortgage in under a decade

In 2017 to buy the same home would cost you $1.5 million and you will probably be paying off that mortgage for the rest of your life.

Wages in Australia didn't increase by 1000% in the three decades since 1986. So what happened to make Australia have some of the least affordable housing on the planet?
​
​

Obscene tax incentives to invest in property

​
Negative gearing and the capital gains tax discount on real estate have turned housing from a fundamental human need in Australia into a giant tax minimisation scheme for wealthy Australians.

Negative gearing by property investors reduced personal income tax revenue collection in Australia by $13.2 billion in the year 2010/2011 and that number has only risen each year since then.

Our lawmakers profit from the status quo

​
Most of Australia's politicians are property investors. In 2016 the 226 members of the Australian Parliament owned 563 properties – a combined property portfolio worth over $300 million.

Put simply, a majority of our politicians have a vested interest in keeping this tax minimisation scheme in place and not intervening in other policy areas that are driving up property prices in Australia because they stand to benefit personally from the current arrangements.
​
​

We opened up our housing market to investors all over the world

​
Another factor driving up house prices is Australia's weak enforcement of its laws governing overseas investors buying property in Australia.

Even just temporary residents are allowed to buy property in Australia and there is no checking that they sell those properties when they leave.
​
There is also no requirement for real estate agents to check that purchasers are legally entitled to buy in Australia and only a fraction of these illegal sales are later discovered by the Foreign Investment Review Board.

At the same time domestic issues are driving capital flight out of mainland China which has seen many ordinary Chinese people choose Australia as a safe place to park their money in real estate in case the Chinese Government clamps down on their banks.

Many of these buyers do not want the trouble of managing a rental property remotely and do not get tenants in so the property will be in pristine condition when it is sold again. This is not unique to Australia. The same phenomenon has been observed in Vancouver, Hong Kong and other major cities where mainland Chinese investors have bought in large numbers.

A 2015 study of water usage in Victoria by the group Prosper Australia found that there were 82,724 homes in Melbourne that are being left deliberately empty by investors. That's nearly 20 percent of the investor owned homes in Melbourne and it is likely that there are similar numbers of deliberately empty properties in our other capital cities as well.
​
The 2016 Census suggest that there may be as many as 300,000 of these deliberately vacant investor owned properties across Australia- enough to house every homeless person in this country many times over.
​
If these properties were made available to renters there would be a significant drop in rents and house prices in Australia.

But as things stand, these unavailable properties create an artificial scarcity of housing for renters and buyers which pushes prices up even higher.
​
​

Australia's rapid population growth

​
Adding to the pressure on housing and infrastructure is record high immigration under the Liberals while they simultaneously demonise refugees - adding up to a quarter of a million new people each year to the country who need to find housing in Australia.
​
The Affordable Housing Party supports a multicultural Australia and we should never single people out by their race, nationality, culture or religion when it comes to migration into Australia. However the immigration targets that the Australian Government sets need to be at levels that are sustainable in the long term when it comes to the demand for housing, schooling, public transport and other forms of infrastructure.
​
We fear that Australia's rapid population growth is eroding the laid back quality of lifestyle that attracts migrants to this country in the first place, and we don't want them to be disappointed when they arrive here and discover they will spend most of their lives sitting in traffic jams, struggling to pay off huge mortgages, and probably working until they are 70 before they can retire.
​
​

Home buyers are paying too much to try to compete with investors

​
Fear of missing out and easy lending by the banks has driven more and more desperate people into the housing market, paying more and more ridiculous prices in the belief that property prices will always go up – but they don't and all these things combined are fuelling a dangerous property investment bubble that could send thousands of Australians broke if it finally bursts.
​
​

Australian housing is a haven for money laundering by international organised crime groups

​
For over a decade our federal politicians have failed to subject real estate agents, lawyers, accountants and other associated professionals with roles in the property sector to the Anti-Money Laundering and Counter Terrorism Financing Act 2006 because of push back from industry leaders despite our international partners urging us to close the loopholes.
​
As a result, Australia remains an attractive place for international crime groups to "wash" their dirty money in our real estate market. This sort of shady economic activity also contributes to the price of housing.
​
​

This can't go on forever

​
All of these factors have combined to form a perfect storm for housing affordability in Australia, but this is not sustainable in the long term.

It is now estimated that property in Australia is probably overvalued by as much as 30 to 40 percent over its real worth. So if you're buying that $1.5 million house in Dulwich Hill it's probably only worth $1 million and you might as well have just burnt your deposit.

However a controlled demolition of house prices in Australia by making property a less attractive investment option compared to other forms of more productive investment over time can prevent an economic disaster from occurring and better policies by government can make sure another bubble does not occur.

At first glance The Australian Greens’ announcement that they would abolish the negative gearing ₁  tax break, in a bid to increase government revenue through increased taxation and improve homelessness and housing affordability looks like the right move. I have, however a few questions about this.

Firstly it must be pointed out that the Australian Greens advocate that the new tax regime be “grandfathered” so that current negatively geared investors could continue to be so, but that no new investors would be entitled to this. Two sets of tax rules would apply side by side.

I wonder if borrowing to buy a property would be as attractive to a potential investor if s/he could not negatively gear. Presumably, The Greens do not advocate NO tax deduction on an income-generating investment but just to the point where it goes into the red.

I see from the policy document that their ruling would apply to all asset classes. At least here is some consistency.

Negative Gearing applies to non-property investments too

Negative gearing is usually only discussed in the context of property, but of course it applies to other investments too. At present one can borrow to buy shares, which will generate an income since they pay dividends. These dividends are subject to income taxation, in many cases offset by company tax already paid, in the form of imputation credits to the investor. Any shortfall in the income from the shares compared with the interest on the loan is tax deductible. With The Greens’ policy presumably this would only work up to the point that the investor is not going into the red.
One needs to look at why people borrow to invest in any asset. The sensible reason to do this is that the investor believes that the investment will rise in value, such that equity in the asset increases and the loan starts to look small by comparison. The investor can profit in two main ways:

1. With housing, as the value rises, the rent will also increase. Eventually the investor who was negatively geared could become “positively geared” and hence will pay tax to the government.

2. The investor who sees that s/he has made a paper profit can realise this gain, pay back the bank and pocket the profit minus Capital Gains Tax.

I cannot see that abolishing negative gearing will free up housing for non-investor home buyers nor that the tax gains for the government will be as significant as the Australian Greens believe. The abolishing of negative gearing would affect Australian investors, but it would not affect foreign investors who have borrowed from elsewhere. How would that be addressed?

Greens proposal fails to address land-costs – the biggest part of housing unaffordability

The Australian Greens advocate the use of prefabricated houses as a part solution to the terrible problem of homelessness in Australia. I don’t see anything in the document about the land required to put the prefab house on. Land-costs are the major component of housing in cities and these costs are more marked in areas which would be considered to be in a “good position.” The actual house is a relatively minor thing. If people had their own land, probably most would manage to erect some sort of shelter for themselves!

The Australian Greens, in deciding that “negative gearing” is to blame for Australia’s housing woes (and the complete evaporation of “the Australian dream”) fail to address the demand factor which is fundamental to the issue of unaffordable housing.

Where do the demands for Australia’s housing come from?

1. Australians as they reach adulthood tend to need housing apart from their parents . Only about half as many people die in Australia as are born here in any one year so there are roughly only half the number of houses available from that source as there are young Australian people looking for them. Thus there is a built-in shortfall because of our demography.

2. In addition to this, with high immigration, there are likely to be more migrants invited to Australia as business migrants, as skilled workers, students or for family reunion, than there are young Australians looking for their first home.

Penalised Australians would retreat and foreign investors advance

These two groups compete in the same housing market. If Australian would-be investors retreat from the housing investment market because the advantage of negative gearing is not there, I think as long as the total demand for housing does not slump then non-Australian investors will fill the gap left by locals and compete with local home-seekers. With large numbers of people needing housing and a short-fall in supply leading to very high purchase and rental prices, home-seekers and would-be renters will “fall through the cracks.”

Scott Ludlam says that 7,000 houses “for the homeless” will be supplied by 2020. That’s great, but people need housing now. There are 105,000 homeless people on any one night in Australia, according to Salvation Army figures and according to “Kids under cover”. Family breakdown is blamed for a lot of this but if housing were abundant, as it should be, a family breakdown would not result necessarily in homelessness.

Something needs to be done much more urgently about this problem, one which used to be practically unknown in Australia. We all, including The Greens, think we have a silver bullet for this problem but it seems clear that the demand side of the equation still needs to be lightened. This can be addressed easily and quickly at little or no cost. We should not be bringing in large numbers of skilled immigrants to compete against local young people for both housing and jobs. In maintaining very high immigration we are doing our young people a terrible disservice. Surely they deserve better than this?

NOTES

1. ↑  "Negative gearing is a form of financial leverage where an investor borrows money to invest and the gross income generated by the investment is less than the cost of owning and managing the investment, including depreciation and interest charged on the loan (but excluding capital repayments)." Source: en.wikipedia.org/wiki/Negative_gearing