Will the Government have the guts to Change Negative Gearing Rules?

We’ve been writing on the topic of family wealth this week. It’s going to be an area of growing interest as society ages and thoughts turn from wealth creation to wealth preservation through the generations. But we’re not going to write about that today; there’s plenty of other stuff going on. Besides, you’ll be hearing more on the topic later today from Vern Gowdie, our family wealth expert. So keep an eye out for that.

The ageing of society is already starting to worry the government. The front page of today’s Financial Review says that Treasurer Joe Hockey is softening retirees up for pension cuts in the upcoming budget. Citing IMF research released earlier this week, Hockey says that spending on the pension is set to rise 70% in the coming decade if entitlements remain the same.

The message? Entitlements won’t remain the same. There’s a good chance that means testing will change, and it’s likely the assets test will be the focus. According to Grattan Institute director John Daley, 80% of people over 65 with $1 million in assets, collect the pension.

That’s because the family home is exempt from the assets test. After the budget, it probably won’t be. Changes could include only exempting the value of the family home up to the median house price threshold.

Such a change is likely to increase the trend towards downsizing, as retirees look to unlock the equity in their homes for living expenses. You’ll read more about this demographic trend from Nick Hubble in coming weeks.

The government could also make a serious dent in the budget deficit by changing negative gearing rules on property, a policy that costs billions for no discernable benefit. It’s a discussion that’s on the table apparently, and SBS reported on it earlier this week:

In 1985, when the Hawke government made changes to the scheme, the then-treasurer Paul Keating described negative gearing as a way for high-income earners to “swap flats on Bondi Beach which were built 40 years ago”.

And it remains true. In 2013, only about eight per cent of the money funding the scheme went towards new dwellings, with the remainder for established homes and apartments.

And today, the AFR picks up the story, saying departmental sources have confirmed the Treasury has done work for the budget on limiting negative gearing to new housing construction only. It remains to be seen whether the government has the guts to make the changes, but having the conversation is a start.

The benefits to the economy and society as a whole would be many. Apply negative gearing to the construction of new dwellings only and you’ll get an ongoing boost to the construction sector, which means more future housing supply. Along with removing the speculative element from the market, this will take the heat out of house prices and ease the pressure currently on the RBA to raise rates. The dollar would fall and take the pressure off our tradable industries.

More supply and lower prices give renters the chance to buy at reasonable prices. This dynamic destroys the scare campaign by the negative gearing advocates that rents will explode and leave people on the streets.

But not according to Housing Industry Australia boss Harley Dale. In the AFR he warned that:

…tinkering with the system would have a “massive negative impact on investor sentiment”. He said rental supply wouldn’t increase if investors were not confident.’

Bollocks. Is rental supply increasing because of negative gearing? No, of course it isn’t. And yes changes to negative gearing would damage investor sentiment, but so what? All this bullish investor sentiment is doing right now is pushing house prices up across the board and creating little new supply.

According to economist Saul Eslake, over 90% of negatively geared funds goes towards existing property. ‘Nuff said.

The fact that the government is seriously sniffing around negative gearing, and changing asset testing rules for pensioners, suggests property is nearing a top. At the height of China’s credit boom, when miners were rolling in it, the government slapped a super profits tax on the industry. They picked the top nearly precisely.

This has a similar vibe. Property is the magic goose in Australia and the government wants to start taking some golden eggs. Let’s just hope they don’t break its neck instead.

 

Regards,

Greg Canavan+
for Markets and Money

 

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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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