The Negative Gearing Poll

[KnightersRevenge]

I think much of the negatives towards it come from ignorance of how it works.

The loss a property makes comes off of a persons total taxable income. I.e. a proerty loses $5000 per year and your in the 30% tax bracket you get $1500 off of your total tax. You don't pay $5000 less tax. It still costs you $3500 of your own money to finance the property.

This is an important point. YOU ONLY PAY LESS TAX IF YOUR LOSING MUCH MORE OF YOU OWN MONEY FIRST!

Now, anybody who wants to pay $1500 less tax by spending $5000 of their own money is investing for all the wrong reasons and is an idiot.

That may be true, are you asserting that none of the people currently benefiting from NG are in fact idiots?

 

[martyshire]

The $5000 loss is not necessarily a cash loss though TR. Depeciation/Building Allowances etc come into play and some may be paying P&I off any loan. The annual cash cost may in fact be significantly less in your example above.

Many people conveniently choose to ignore the risk investors are taking when complaining about the advantages of negative gearing.

I guess the question/complaint is why should these risks be encouraged? The NG safety net tips the natural risk vs reward equation off balance and attracts more investors than it should. This pushes prices up, increases mortgage sizes and subsequently puts young families etc under financial stress and hurts the economy.

In turn, I suppose the response to the question is 'because we need landlords', as has been covered in the thread already. I'm not sold on the logic of this though. There seem to be plenty of landlords elsewhere without the need for NG.

 

[martyshire]

Seems to me if you are worried about how much tax you pay you already have too much money.

BTW, Knigha, while I agree in part with your sentiment, I think this comment is on steroids.

 

[Big Cat Lover]

I guess the question/complaint is why should these risks be encouraged? The NG safety net tips the natural risk vs reward equation off balance and attracts more investors than it should. This pushes prices up, increases mortgage sizes and subsequently puts young families etc under financial stress and hurts the economy.

In turn, I suppose the response to the question is 'because we need landlords', as has been covered in the thread already. I'm not sold on the logic of this though. There seem to be plenty of landlords elsewhere without the need for NG.

What is the natural risk/reward equation?

I'm pretty sure people who invested over the last couple of years are not sitting on any sort of capital gain. If forced to sell after taking into account initial stamp duty and transfer costs most would have lost money. I note people aren't raging against investors who have negatively geared shares.

Young families who put themselves under financial stress with large mortgages etc should be doing plenty of sums before jumping into the market or buying an investment property. I understand there are all sorts of developers offering deals such as no deposit homes and banks have lent money to those they perhaps shouldn't but people need to take some responsibility and do their homework to understand what they are committing themselves to.

 

[martyshire]

What is the natural risk/reward equation?

What I mean is basically whether an investment is worthwhile. When someone makes any investment they weigh up their level of risk, chance of success, size of gain if successful, magnitude of loss if unsuccessful, and so on. Just like they do when placing a bet. By 'natural' I am referring to what this equation would be if there was no NG nor any other government interference.

Say Jo Bloggs goes to an auction, does his sums and works out that the rewards don't quite justify the risks. If you add NG, suddenly he decides it is a worthwhile investment because the magnitude of potential losses is reduced. He jumps in, sticks his hand up at auction and forces a family to bid an extra 20k

I'm pretty sure people who invested over the last couple of years are not sitting on any sort of capital gain. If forced to sell after taking into account initial stamp duty and transfer costs most would have lost money.

I agree, but I think most of them would have expected to see some capital gains when they bought or still expect some in the future (in real terms).

Young families who put themselves under financial stress with large mortgages etc should be doing plenty of sums before jumping into the market or buying an investment property.

Absolutely! I was referring to young families and their home loans (not ones that can afford an investment property) but your point remains valid, they should do plenty of sums, etc. Unfortunately emotion plays a big part though too when buying a first home. So when property prices rise consistently and quickly for a decade, and newly-married couples are force-fed lines like 'buy now or miss out forever' by the industry and media and all their relatives are telling you that they can never go wrong investing in property, due to the fact that the all bought during a policy-affected boom, and banks lending them much more money than they used to, you can imagine that many young people would either panic or be mislead into taking on more debt than they realistically should. I know several young families in this boat. Intelligent people that made emotion-affected or advice-reliant decisions and are now kicking themselves.

I think the main problem with NG is it encourages investors to look for capital growth instead of rental returns. This is different from most places I know of OS and it seems very dangerous to me. In Australia capital gains are seen as justification for or evidence of further capital gains. Capital losses (or lack of capital gains) lead to capital losses. This system should lead to higher peaks (2010?) and lower troughs. Along the way there will be bigger winners and worse losers. As much as I don't have anything against people who have used NG and I would probably do the same, I don't think this is good system for society overall.

 

[KnightersRevenge]

BTW, Knigha, while I agree in part with your sentiment, I think this comment is on steroids.

Yeah look given the vehemence of some people's reaction to it perhaps I over-shot.

 

[poppa x]

Despite owning an Investment Portfolio consisting of 7 B&B's in Daylesford, I RENT where I live in Melbourne.
Why?
Because it's a purely economic decision and it's way cheaper to rent than buy the house I live in.
Over a lifetime, most people would be hundreds of thousands of dollars in front if they rented instead of borrowing and purchasing.
So why do most people aspire to "own their own home?".
It's all about emotion. Dollars and cents (and sense) are absent from the rent versus buy decision.

My decision to rent where I live and only buy property for my businesses, means I rely on Private Investors who Negatively Gear their residential investment properties, and I'm comfortable with them doing that. IMO it's (in most cases) a poor Investment decision, but one that I'm happy to take advantage of.


BTW, I totally ignore taxation issues when making any business decision.
A business decision has to make sense BEFORE any tax implications.
If it doesn't, then I stay away.
If it does make sense, then - and only then - do I try and work out the Tax consequences.

 

[Rosy]

So why do most people aspire to "own their own home?".
It's all about emotion. Dollars and cents (and sense) are absent from the rent versus buy decision.

Horses for courses really. I love the security and freedom of owning our house. No landlord who can force us to leave. We can make any changes we want to suit our needs and desires. We can go away for extended periods without the need to fork out rent for something that's not being lived in. We can build a studio, erect a hothouse, add a new shed etc. We did a lot of the building ourselves and subcontracted tradies. We saved before we started, living in a caravan while we built, and did things as we could afford them so we didn't have to borrow money. We'd be miles in front compared to having paid rent for 30 years. There can be dollars and sense in home ownership too. We could sell our house now for a massive profit but if we'd rented it would have been like money down the drain.

 

[poppa x]

Horses for courses really. I love the security and freedom of owning our house. No landlord who can force us to leave. We can make any changes we want to suit our needs and desires. We can go away for extended periods without the need to fork out rent for something that's not being lived in. We can build a studio, erect a hothouse, add a new shed etc. We did a lot of the building ourselves and subcontracted tradies. We saved before we started, living in a caravan while we built, and did things as we could afford them so we didn't have to borrow money. We'd be miles in front compared to having paid rent for 30 years. There can be dollars and sense in home ownership too. We could sell our house now for a massive profit but if we'd rented it would have been like money down the drain.

I've no argument with most of what you say Rosy. But most of it is a lifestyle choice, not an economic choice.
You say you could sell your house for a massive profit (true), but this overlooks the profit I've earned by applying my rental savings (compared to mortgage/principal payments) to the acquisition of my businesses.

I'm not saying there's a right way or a wrong way, because we all place different values on our lifestyle decisions.

 

[Rosy]

I'm not saying there's a right way or a wrong way, because we all place different values on our lifestyle decisions.

Indeed. I was more posting a response about why people aspire to own homes rather than the negative gearing aspect. Owning our house isn't really a financial decision even though we are far better off than if we'd rented. I enjoy the lifestyle, serenity and sense of freedom we enjoy by owning our property and have no interest in investments (so why am I commenting on this thread? :hihi ). I understand many wouldn't share those values and lifestyle choices though.

 

[MB78]

I've no argument with most of what you say Rosy. But most of it is a lifestyle choice, not an economic choice.
You say you could sell your house for a massive profit (true), but this overlooks the profit I've earned by applying my rental savings (compared to mortgage/principal payments) to the acquisition of my businesses.

I'm not saying there's a right way or a wrong way, because we all place different values on our lifestyle decisions.

From a pure $ point of view you are miles in front. But the average person does not have control over their finances to ensure they are putting the funds to best use. So the old forced savings rings the most true for mine.

 

[tigersnake]

Despite owning an Investment Portfolio consisting of 7 B&B's in Daylesford, I RENT where I live in Melbourne.
Why?
Because it's a purely economic decision and it's way cheaper to rent than buy the house I live in.
Over a lifetime, most people would be hundreds of thousands of dollars in front if they rented instead of borrowing and purchasing.
So why do most people aspire to "own their own home?".
It's all about emotion. Dollars and cents (and sense) are absent from the rent versus buy decision.

My decision to rent where I live and only buy property for my businesses, means I rely on Private Investors who Negatively Gear their residential investment properties, and I'm comfortable with them doing that. IMO it's (in most cases) a poor Investment decision, but one that I'm happy to take advantage of.


BTW, I totally ignore taxation issues when making any business decision.
A business decision has to make sense BEFORE any tax implications.
If it doesn't, then I stay away.
If it does make sense, then - and only then - do I try and work out the Tax consequences.

Very interesting pop. The forced savings factor does ring true, I was financially *smile* until I bought a house half by accident. 4 properties later, (not all at the same time), I'm now reasonably savvy. I tell people to put emotion aside when buying property, (I've made money on run-down, unfashionable properties on good land) but you take it a step further. Food for thought.

 

[Rosy]

From a pure $ point of view you are miles in front.

If you're paying a few hundred dollars a week in rent wouldn't it be lost money compared to paying it off a housing loan? Guess that's the negative gearing part I don't understand.

 

[tigersnake]

If you're paying a few hundred dollars a week in rent wouldn't it be lost money compared to paying it off a housing loan? Guess that's the negative gearing part I don't understand.

the negative gearing is irrelevant to your question rosy. Say for example the suburb I live in in Brisbane. You can buy a house for $500K (if you're lucky). The repayments on the mortage over 25 years at 7% interest is say $900 a week (being generous). You can rent the same house for $450-500 a week.

Keeping in mind the returns on residential real estate are not good (projected, they have been good in the past), being generous you might make 5% a year on your investement, not including rates, maintenance.

Poppa is saying you rent the house, put the $4-500 you save each week into investments with better returns, plus more flexibility to shift the money, no maintenance, rates etc, you end up way ahead over time.

 

[martyshire]

the negative gearing is irrelevant to your question rosy. Say for example the suburb I live in in Brisbane. You can buy a house for $500K (if you're lucky). The repayments on the mortage over 25 years at 7% interest is say $900 a week (being generous). You can rent the same house for $450-500 a week.

Keeping in mind the returns on residential real estate are not good (projected, they have been good in the past), being generous you might make 5% a year on your investement, not including rates, maintenance.

Poppa is saying you rent the house, put the $4-500 you save each week into investments with better returns, plus more flexibility to shift the money, no maintenance, rates etc, you end up way ahead over time.

Just to add to your comment, snake, it depends on the price/rent ratio at the time Rosy bought.

I would have thought most people who bought their home in Victoria 20-30 years would have been economically better off buying than renting because prices were so much lower compared to rents. Different story these days though, I agree.

 

[KnightersRevenge]

Just to add to your comment, snake, it depends on the price/rent ratio at the time Rosy bought.

I would have thought most people who bought their home in Victoria 20-30 years would have been economically better off buying than renting because prices were so much lower compared to rents. Different story these days though, I agree.

Most of these hypotheticals are predicated on the property market boom. This wasn't a fait accompli. That is the essence of my objection to tax breaks for people who haven't done anything except sit on an asset and rode a property boom, without producing anything or increasing employment.

 

[Rosy]

Different story these days though, I agree.

You can still buy houses in and around Melbourne for $300,000 or less and far lower in the country. From my experience, through my kids, rent is still pretty hefty for run down houses. That would make rent payments not that big a difference to paying off a loan. The hardest part for kids starting out is to save a deposit though.

Having never borrowed money, therefore admittedly being somewhat ignorant about it, I find this discussion quite interesting. I struggle a bit with the concept of paying a few hundred dollars a week in rent when you could pay similar and own the house. Of course it comes back to lifestyle choices as well as financial.

 

[poppa x]

Most of these hypotheticals are predicated on the property market boom. This wasn't a fait accompli. That is the essence of my objection to tax breaks for people who haven't done anything except sit on an asset and rode a property boom, without producing anything or increasing employment.

So in the absence of Negative Gearing, and the resultant drop in private rentals caused by the absence, are you telling me Knighter that I should be (in effect) be forced to buy rather than rent? Or that I should pay higher rent because Landlords will inevitably charge more?

I don't think you can have it both ways.

Also, people assume that paying off a house is using "good" money whereas rent is "wasted" money.
Not True!
Because the house payment is mainly Bank interest - not payment off the principal.

 

[Rosy]

Also, people assume that paying off a house is using "good" money whereas rent is "wasted" money.
Not True!
Because the house payment is mainly Bank interest - not payment off the principal.

Bearing in mind not everyone is out to make money from investment properties (so this could well be a discussion for a different thread) do you think, as a generalisation, someone would be better off to buy a house and have repayments of approx $500 a week or to pay rent of approx $500 a week?

 

[TOT70]

Bearing in mind not everyone is out to make money from investment properties (so this could well be a discussion for a different thread) do you think, as a generalisation, someone would be better off to buy a house and have repayments of approx $500 a week or to pay rent of approx $500 a week?

I might wade in here.

The interest component of the repayment is a cost. Rent is a cost. They are identical. Any capital repayment is an investment in the asset. It is different.

If the $500 repayment is ALL interest, it is the same as paying rent. If $400 of it is interest and $100 is a capital repayment and reduces the loan by that amount it means that you have saved $100. This saving is permanent, or at least until you re-borrow it to buy a car/take a holiday/renovate the kitchen.

Poppa’s argument is essentially a tax argument. If someone borrows to purchase lifestyle assets such as houses, cars, holidays etc, the costs (read interest to keep it simple) are not tax deductible but if they borrow for investment, the costs are deductible.

Here’s a case study to help understand it.

TOT borrows money to buy a house and has an annual interest bill of $10,000. To pay this bill, he has to earn approximately $15,000, on which he will pay approximately $5,000 Tax, which leaves him the $10,000 to meet the interest bill.

Poppa borrows the same amount of money to buy another B&B and has the same interest bill. Providing he uses his B&B to produce income and doesn’t stay there every other weekend, the $10,000 is tax deductible against that income and costs him about $7,200 after tax, the difference being the tax saving.

So TOT has to earn $15K to fund his purchase and Poppa has to earn about half of that.

The nexus between the interest and the income is at the heart of why negative gearing is fair and equitable. The Government will tax the income that it produces, therefore, it has to allow a deduction for the costs.