Cameron Kusher extends the following argument in favor of negative gearing:
Many in favour of removing negative gearing from property say that it should occur due to the fact that housing is an unproductive asset class. My argument is that given that housing provides shelter, if investors don’t purchase these assets, it would then be the responsibility of the Government to provide this shelter. Ultimately, that would mean that anyone that pays taxes would be funding housing for those who can’t afford it themselves.
What happened to individuals being responsible for their own housing? A large part of rental demand is due to poor housing affordability. If we made housing more affordable, the rental market would shrink.
Kusher highlights that in September 1985 the government quarantined negative gearing interest expenses on new transactions.
The reason why negative gearing was reinstated in September 1987 was that it was proclaimed that rents rose sharply on the back of a fall in housing market investment.
The following chart shows that rental growth accelerated between September 1985 and September 1987:
But no explanation is given for the earlier peak in rental growth rates — 13% in 1982 — prior to restrictions on negative gearing.
And what is not mentioned is that interest rates were rising. Standard variable bank mortgage rates peaked at 15.5% in 1986/1987. That would account for any decline in new housing investment, even though this is not evident from investor finance commitments.
via Negative gearing and its impact on the housing market | RP Data Research Blog.
The author must have ignored the figures for residential property investment which have been available since at least October 2012.
92% of residential property investment is for the purchase of existing dwellings rather than those newly constructed. This means there has been little to no net increase in the supply of rental dwellings.
The over 1.1 million people who use negative gearing have been drawn into the property market in competion with owner-occupiers. Along with the credit boom, population growth, and land banking by mega developers of huge tracts around all capital cities this will have been a contributor to the housing and rental affordability crisis.
The urban myths have been debunked previously. eg Saul Eslake at
http://www.theage.com.au/business/time-to-change-the-unfair-rules-for-negative-gearing-20110424-1dsu6.html .
or Phillip Soos at
http://www.businessspectator.com.au/bs.nsf/Article/tax-reform-negative-gearing-housing-property-renti-pd20121001-YNBR2?OpenDocument&src=sph
And isn’t it funny how the defenders of negative gearing never want it to be conditional on actually building a house or finding a tenant? That might make it work as advertised, which is obviously out of the question.
Thanks Alex, Good post.
Hi Colin, making negative gearing (as opposed to just gearing) conditional on new construction seems like a great idea to me mate. I reckon that would definitely help with the housing supply problem.
However regarding your other point about claiming rental property deductions should be conditional on finding a tenant, as a former ATO personal tax auditor I can say that this is pretty much the case now under Australian Tax Law. That’s because to gain a tax deduction for your rental property expenses, the property has to be being used for the purpose of earning assessable income (ie rent) or at least available for rent for that purpose.
To prove that a property was available for rent where untenanted, I used to require evidence of the efforts being made to procure a tenant. Plenty of holiday homes had their deductions taken away from them if they couldn’t demonstrate evidence of the efforts being made to find a tenant. Furthermore, if less than market rates of rent were being charged for the use of the property, then the claimed deductions were apportioned to the extent to which that the property was being used for other purposes.
The other thing I want to say that I love your weekly chart summaries. I have learned a lot from them in a practical way that I nevery did from being a student in a couple of those trading schools. I guess its the next step in that respect, which they don’t normally provide. Hopefully one day I’ll put it all together myself and make lots of money from the markets.
Cheers mate.
Gordo
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