Renewed Debate on Negative Gearing

On the weekend, auction clearance rates hit record highs of 91.7% in Sydney and 87.4% in Melbourne. Total auction numbers were down for ANZAC Day as at least some people stopped to reflect on the freedoms (including the freedom to speculate at will) that past generations have afforded us.

Still, the RBA will be acutely aware that they have set this bubble off with their low interest rate policy, combined as it is with highly favourable tax treatment that encourages Australian housing speculation.

If there’s one decent thing to come out of this most recent housing frenzy, it’s a renewed debate on negative gearing. While Joe Hockey thinks it’s ok for Australian taxpayers to subsidise property punters, others aren’t so sure.

Finally, it’s becoming acceptable to criticise negative gearing in this country. Shadow Treasurer Chris Bowen put it on the table last week, saying he would take changes to the contentious policy to the next election.

While hardly revolutionary, he will propose restricting negative gearing to new builds only, and grandfathering existing rules so punters aren’t disadvantaged.

It’s about time Labor started putting some policy ideas on the table. But the way Bill Shorten is travelling as Labor leader, he might be lucky to get to the next election in that position. His Treasurer, currently the ‘ideas man’ in the party, might be the better leadership option.

It’s now becoming respectable for the mainstream media to question negative gearing too. It’s not just fringe blogs like Markets and Money or the guys at MacroBusiness shouting about the stupidity of this policy.

Today’s Financial Review takes aim, albeit behind the cover of a ‘professor’:

Negative gearing could be scaled back to finance income tax rate cuts in a similar vein to Ronald Reagan’s 1986 tax reforms in the US, a leading tax professor says.

Miranda Stewart, who will host a two-day forum on the future of the tax system at the Australian National University this week, said taxpayers subsidised rental losses for property investors by more than $7 billion in 2011-12, the latest figures available. That money might be better spent on arresting bracket creep, particularly for moderate income earners, she said.

“We’re putting more than $7 billion into some people’s speculative investments at the expense of other taxpayers who are paying higher tax over time,” Professor Stewart said. 
“That’s a lot of money. If we were to quarantine those losses even partly, over time we could finance a tax cut to recapture bracket creep.”

Tax cuts for the many at the expense of a few? That sounds way too egalitarian to form a part of Australia’s tax policy. The political imperative these days is to pander to the special interest groups and hope they get you home…for another three years at least.

The Age had a great article on the weekend that inadvertently pointed out the destruction caused by the current policy of negative gearing. That is, running your investment property at a loss (and claiming a tax deduction on that loss) in the hope and expectation that capital gains will more than make up for the difference.

The article discussed the demise of Fitzroy Street in St Kilda. Fitzroy Street was the site of the old Markets and Money headquarters, so I’m quite fond of the scruffy old strip.

The street is a bit run down, and has quite a few empty shopfronts. Many of the shop owners complained of the onerous rents on the strip and blamed these high costs for the constant turnover and vacant lots.

I could be wrong, but what’s the incentive for a wealthy property owner to lower their rent and let out a space. Isn’t it just as lucrative to leave it empty, run it as a loss (to offset tax on other income) and just watch the land boom push up the asset value?

This is the hidden cost of land speculation and the brainless tax policy that encourages it. It chips away at the structure of society…not only creating haves and have nots…but changing the shape of our local streets and the way we interact.

Phil Anderson at Cycles, Trends and Forecasts would no doubt agree with me. But he would also say I’m screaming at the wind and the cycle is simply playing out the way it always does. So why not just accept it and take advantage of it.

That sounds good in theory, but I’d rather stay angry instead. When the fire in the belly goes out, what’s left? Markets and Money speaks out for the underdogs, and if there is an underdog in Australia’s society right now, it’s the non-land owning peasant class.


Greg Canavan+,
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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:

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