Australian Property – The ‘Good’ Investment Making a Loss for the Nation

In Australia, the debate rages on about this stupid and inefficient deficit levy. As it should. In what looks like bad timing for property speculators, the ATO just released 2001/12 taxation data showing negative gearing on properties continues to drain the governments’ tax coffers.

From today’s Financial Review:

‘The country’s 1.3 million landlords claimed almost $14 billion in tax losses that offset the tax owed on their other income, the latest Tax Office data shows.’

‘The average loss made per property in 2011-12 was $10,894, but this loss more than doubled for people earning over $180,000 to $22,772.’

We’re not sure how much these losses actually impact budget revenues. But it must be a fair whack. Reforming the negative gearing arrangements to apply to only newly built properties (the whole point of it in the first place) would surely go close to covering the $2.5 billion the government hopes to raise from the deficit levy.

And as the Henry tax review stated, applying a broad based land tax to replace a bunch of inefficient property taxes like stamp duty (which only slugs those moving house) would ensure governments maintain (and grow) their revenue base, only in a more equitable and efficient manner for the whole community.

This is simply sensible economics. But there are too many vested interests lobbying to keep negative gearing in place because they know it encourages speculation and turnover, which keeps the property gravy train tooting along for many.

Anyway, if property is such a good investment, why are Australia’s ‘property investors’ making a loss on it? And why are other Australians subsidising this loss? In short, it’s because we’re now rocking a finance-based economy…one that relies on a constantly falling cost of credit to inflate asset prices and produce the illusion of wealth. Who needs income when you have rising property prices?

We got another round of evidence of this today. The monthly gauge of manufacturing activity in Australia fell to 44.8, signalling an industry in deep recession (anything below 50 signals contraction). But not to worry, who needs a viable manufacturing sector when you have banks churning out record profits, year after year?

ANZ just announced another record profit, up 11% on last year’s effort. A drop in bad debt charges (again) drove the result. And the fact that year on year income grew faster than expenses is always good news for a highly leveraged institution.

But — and there is a ‘but’ — ANZ’s underlying profit (before tax and impairment charges) fell 1% from the six months to September 2013. This lends further weight to our view that the interest rate juice is beginning to run out. We’ll have to see what the other banks come up with in the next week or so, but we suspect the banking sectors’ good fortunes are coming to an end.

You can take that with a grain of salt. We’ve said the same thing before and been completely wrong. For example, a few years ago we thought a falling terms of trade would negate the effect of low interest rates and NOT cause a renewed asset price boom (which the banks have clearly benefitted from).

But China had one last roll of the stimulus dice and kept the party going. Meanwhile the RBA cut rates anyway…too far and too fast in our opinion, as they now how little left in the tank for when China’s economy really starts to slow (which is underway now) and the mining cap ex drops off in a big way next financial year.

So we’re sticking with our bearish view on the banks…even more so now, given the cycle high earnings and stretched valuations. Let’s see how that call looks in a year?


Greg Canavan+
for The Markets and Money Australia

Join Markets and Money on Google+

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money