Bushy Martin separates facts and fiction on the topic of negative gearing, not just for property investors but for all Australians.
The threat of the removal of negative gearing could see drastic impacts on the future of housing affordability, rental supply, and the financial wellbeing of Australians nation-wide.
In light of the upcoming Federal election, KnowHow’s Bushy Martin revealed the truth about effects of negative gearing while debunking negative perceptions around Australian property investors.
He talked about the issues on The Real Estate Show in Canberra, and his show notes are also below.
Negative gearing: What is it?
Negative gearing is where expenses associated with an asset are greater than the income earned from the asset, allowing the individual to reduce the amount of income tax paid each year. Negative gearing can also be applied to businesses, shares, property and any type of investment.
Would you be happy to buy and invest in a business for $740k that actually costs you $815k when you include all the costs, where you put in $200k of your hard earned savings and borrow the rest.
And then the business keeps costing you money every week and every year to the tune of around $15k a year, or over $300 a week out of your pocket, in the risky uncertain hope and prayer that you’ll be able to sell the business in ten or more years time for double what you paid for it, leaving you with a potential profit of just over $410k left in your hand after paying the tax office an extra $150k in Capital Gains Tax for the privilege when you sell?
And the only assistance you receive to reduce the pain of owning this year-in year-out loss making business, is that you get to use negative gearing, where you can claim the annual loss on the business against your other work income to soften the blow, and reduce your overall tax payable against your total income by around $15k a year (from $70k in tax down to $55k a year in tax), if you’re earning the average household income.
Does this sound good to you? Does this sound like a greedy investor using negative gearing to get rich at the expense of renters and first home buyers? I don’t think so.
Yet this is exactly what the average hard-working Aussie Mum and Dad investor is doing when they buy a rental property to help improve their retirement income long term and reduce their reliance on a government funded pension. And this is the negative gearing profile of 60% of the country’s 2.2 million property investors whose properties are costing them an average of $5.6k a year according to the ATO, where nine out of 10 of them only own one to two properties, and most of them only earn between $45k to $120k a year.
So negative gearing on an asset you buy using borrowed monies, which has been around in our income tax system since the 1920s, as well as in Canada, Germany, Japan and Norway, simply means that your annual costs exceed your annual income on the asset, and this yearly loss is taken off or deducted from your other overall income that then reduces how much income tax you need to pay.
Negative gearing: What are the misconceptions?
There is a common misconception that negatively geared property investors are the cause of hosing affordability issues, when in fact there is almost no impact on property conditions.
If you listen to the mainstream media, economists and a lot of commentators who are not property experts and don’t really understand the nuances of the complex dynamics that drive property, you’re likely to mistakenly believe that the use of negative gearing by the so-called greedy property investors, who are really the hard-working everyday Aussies like you and me that I’ve just otherwise described, are the sole cause of all of our housing woes, including housing affordability, the rental crisis and anything else that you can think of, but this couldn’t be further from the truth.
Rental home suppliers, which is what I think private property investors should really be called, only make up about a quarter of property owners according to RBA figures, while about 70% are owner occupiers. This means that the one in four property investment buyers, who buy rationally with their heads based on the numbers, are drowned out by the seven out of ten home owners who buy on FOMO emotion using their heart.
Negative gearing: What are the actual impacts?
The true cause of housing affordability and rental woes is a long term undersupply of housing.
The rental crisis that has been experiencing increasing rents and record vacancy rates has nothing to do with property investors, because increasing numbers of private landlords and rental suppliers are being driven out and selling their properties due to continuously increasing costs, taxes and restrictions that are no longer affordable to hold, with 65% of these rental properties being bought by owner occupiers, which is further reducing the number of properties for rent and making the rental crisis worse.
So negatively gearing and property investors have virtually no impact on property conditions, but the continued villainisation and inappropriate scapegoating of rental providers and the ongoing threat of removing the small financial pain relief of negative gearing and/or reducing capital gains concessions, will make housing affordability and the rental crisis substantially worse, as history has demonstrated.
Private landlord investors provide 80-90% of our rental stock, so instead of treating mum and dad investors as the problem and penalising them more, if we’re serious about improving housing conditions, we need to be doing the opposite and embracing them as the solution to housing supply and further incentivising them, not the other way round.”
Negative gearing: What are the consequences of removing it?
Removing negative gearing and the Capital Gains Tax discount would see a significant increase in rental costs.
We don’t need to look back very far to get a taste of what will happen if we remove negative gearing and drive investors out of property. The Hawke/Keating government turned off negative gearing back in June 1985 and that caused rents to rise rapidly across the country, with rents going up 58% in Sydney, 38% in Perth, and 10% in ACT, as investors exited the rental market and rental supply suffered, before they reinstated negative gearing after 2 years, before things got out of control.
But what we learn from history is that we don’t learn from history, so if we are short sighted and stupid enough to do this again, as well as reduce capital gains tax discounts, then mark my words, we’ve only seen the tip of the iceberg in terms of how bad and how much worse housing affordability and the rental crisis will get, as housing supply dries up, property values drop, our wealth falls and retirement lifestyle incomes plummet, with increased reliance on government funded pensions adding to spiralling government deficits. And this will have a negative effect on every single one of us, whether you’re a homeowner, renter, buyer, or seller.
So, we need to be very careful about what we wish for, as the ill-considered, unforeseen and far-reaching consequences of this type of half-baked knee-jerk yet convenient scapegoating punishment of the voiceless silent majority of hard-working rental providers will bite us all badly in the rear end for generations to come, and is likely to further widen the wealth gap and condemn the future downward slides of the already struggling middle class.
Listen to the interview here.
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