The future of Australian property prices

beachlife · 13 February 2014

Trembling Hand said:
Not against PAYG earnings they don't. Any Tax breaks should be isolated to the assets or group of assets. That would be more likely to ensure investment decisions made on the asset rather than a government backed winner.

In some cases sole traders and partnerships can claim a loss against other income. From the ATO

If you're a sole trader or a partner in a partnership, you may be able to claim business losses by offsetting them against other income - for example, income you earn from salary or wages

Also once the property becomes positive the investor has to add the profit to the payg income and effectively pay tax in the highest bracket the wages put them in, unlike companies that get the very favourable reduced tax rate.

Again if the tax breaks were so good the super rich would own entire suburbs. They dont.

sydboy007 · 13 February 2014

beachlife said:
Also once the property becomes positive the investor has to add the profit to the payg income and effectively pay tax in the highest bracket the wages put them in, unlike companies that get the very favourable reduced tax rate.

Since 2000 residential rental properties have in aggregate lost money EVERY YEAR. Strange how halving the CGT on assets held over 12 months correspond with this.

beachlife said:
Again if the tax breaks were so good the super rich would own entire suburbs. They dont.

Notice how the level of investment property ownership really takes off for those on 90K or more a year ie the top 10% by income, so while the rich may not own entire suburbs, they are the ones most likely to own multiple properties

The rich do have a higher level of properties that are positively geared, but they are also likely to have held an investment property for a longer period.

With todays jumbo mortgages I'd say it takes at least 15 years till you would break even and start to pay any taxes on the rental income. Considering roughly 40% of IP loans are I/O it's conceivable that the property will never break even, or not until any non deductible debt has been repaid.

For the roughly $60B in 2013 $$ for NG losses, I'd argue the Govt would have been able to build a LOT of public housing at much cheaper prices. Might have kept the speculators at bay, and FHBs would be able to buy a reasonably priced property.

Value Collector · 13 February 2014

sydboy007 said:
1, Strange how halving the CGT on assets held over 12 months correspond with this.

2, Notice how the level of investment property ownership really takes off for those on 90K or more a year ie the top 10% by income, so while the rich may not own entire suburbs, they are the ones most likely to own multiple properties

The rich do have a higher level of properties that are positively geared, but they are also likely to have held an investment property for a longer period.

3, With todays jumbo mortgages I'd say it takes at least 15 years till you would break even and start to pay any taxes on the rental income. Considering roughly 40% of IP loans are I/O it's conceivable that the property will never break even, or not until any non deductible debt has been repaid.

For the roughly $60B in 2013 $$ for NG losses, I'd argue the Govt would have been able to build a LOT of public housing at much cheaper prices. Might have kept the speculators at bay, and FHBs would be able to buy a reasonably priced property.

1, the negative gearing and 50% CGT discount is no different whether you were investing in shares or property, so I can't see your point. Don't you think shareholders claim any interest they pay or losses they make against other income?

2, the ownership of all investments goes up for those with high incomes,

3, One mans loss in another mans profit, the government gets its tax no matter what, If a property investor pays less tax because he paid interest that year, then the guy he paid the interest to will make a larger profit and pay extra tax.

trainspotter · 13 February 2014

sydboy007 said:
For the roughly $60B in 2013 $$ for NG losses, I'd argue the Govt would have been able to build a LOT of public housing at much cheaper prices. Might have kept the speculators at bay, and FHBs would be able to buy a reasonably priced property.

Why does the government have to build houses for every body? Why would it be cheaper for the government to build houses when they subcontract them out to private construction companies to build them anyways? Why would FHB's suddenly rush in to buy these homes? The prices would sure drop cause the place would resemble a ghetto.

Everyone is whinging that the prices are too dear ..... boo hoo ..... Tell me what is wrong with this place?

http://www.realestate.com.au/property-house-qld-slacks+creek-109012126

Naaahhhh ...... why bother ...... I am getting a good stockpile of cardboard boxes together and am going to start building a block of flats.

Value Collector · 13 February 2014

trainspotter said:
Why does the government have to build houses for every body? Why would it be cheaper for the government to build houses when they subcontract them out to private construction companies to build them anyways? Why would FHB's suddenly rush in to buy these homes? The prices would sure drop cause the place would resemble a ghetto.

Everyone is whinging that the prices are too dear ..... boo hoo ..... Tell me what is wrong with this place?

http://www.realestate.com.au/property-house-qld-slacks+creek-109012126

Naaahhhh ...... why bother ...... I am getting a good stockpile of cardboard boxes together and am going to start building a block of flats.

yeah, look at what happened when the government got involved in the insulation business.

Klogg · 13 February 2014

sydboy007 said:
For the roughly $60B in 2013 $$ for NG losses, I'd argue the Govt would have been able to build a LOT of public housing at much cheaper prices. Might have kept the speculators at bay, and FHBs would be able to buy a reasonably priced property.

Forget spending any money at all... Just stop restricting the supply of land! ACT is a perfect example of this.
http://www.act.org.nz/?q=posts/artificial-restrictions-on-land-supply-behind-high-house-prices

Add to that the ridiculous amounts of red tape for planning and construction, the high cost of stamp duty, AND the incentive given to make an operating loss on investment properties (the $60B figure you mentioned) and you can easily find the cause.

The sad truth is the government, banks and majority of our economy are now dependent on high land prices... It either blows up (through too much leverage and high rates) or the status quo remains.

Value Collector · 13 February 2014

Klogg said:
, AND the incentive given to make an operating loss on investment properties (the $60B figure you mentioned) and you can easily find the cause.

How is there an "Incentive" to lose money. People make it sound like the government are funding peoples losses, this is just untrue.

sydboy007 · 13 February 2014

Value Collector said:
1, the negative gearing and 50% CGT discount is no different whether you were investing in shares or property, so I can't see your point. Don't you think shareholders claim any interest they pay or losses they make against other income?

Yet prior to 2000 IPs made in aggregate only small surplus or negative income. Don't you find it concerning that post 2000 the losses have at times been massive. A rational market would not sustain losses of that magnitude.

Value Collector said:
2, the ownership of all investments goes up for those with high incomes,

The implication was that NG is not that big a thing for wealthy investors, yet the stats show they are the biggest beneficiaries of it.

Value Collector said:
3, One mans loss in another mans profit, the government gets its tax no matter what, If a property investor pays less tax because he paid interest that year, then the guy he paid the interest to will make a larger profit and pay extra tax.

Except that it causes house prices to be much higher than a rational market would be. There is also considerable tax deferment, and because too many investors get blinded by the NG tax benefits, they fail to adequately look at the REAL total after tax return upon selling. The newspapers are a calssic example of saying Mrs and Mrs Citizen bought their house in 1976 for just $15,000 and sold it for $450K in 2013. Too many people see it as a $435K profit, never considering all the costs associated with the house, or the fact that inflation has eroded much of the gains.

sydboy007 · 13 February 2014

Value Collector said:
How is there an "Incentive" to lose money. People make it sound like the government are funding peoples losses, this is just untrue.

Because that's how IPs are marketed by the industry.

Buy an IP and use negative gearing to lower the tax you pay.

Negative gearing by property investors reduced personal income tax revenue in Australia by $600 million in the 2001-02 tax year, $3.9 billion in 2004-05 and $13.2 billion in 2010-11.

So if you loose $8000 on your IP and that allows you to reduce your income tax by $3000 then isn't the Government subsidising your loses? You are not bearing the full financial cost of the loss.

Plenty of property web sites have NG calculators to show you how much tax you'll save.

beachlife · 13 February 2014

Value Collector said:
How is there an "Incentive" to lose money. People make it sound like the government are funding peoples losses, this is just untrue.

I hear the 'incentive' on the radio every day. Just about all of the sprukers market based on tax savings. Which is probably why so many people get upset by it. Save tax they spruke, what they dont add is but go home with less money in your pocket each week while you subsidise someone elses accomodation.

sydboy007 said:
The implication was that NG is not that big a thing for wealthy investors, yet the stats show they are the biggest beneficiaries of it.

It depends on what you call wealthy. I dont call a wage earner on $90k wealthy. I dont see any people that hold 3 inv props motoring down the river in super yachts. Most are working hard in their job trying to keep on top of the negative cash flow hoping that they dont lose their job next week.

Unemployment now at 10 year highs, that will trickle into the market.

sydboy007 · 13 February 2014

trainspotter said:
Why does the government have to build houses for every body? Why would it be cheaper for the government to build houses when they subcontract them out to private construction companies to build them anyways? Why would FHB's suddenly rush in to buy these homes? The prices would sure drop cause the place would resemble a ghetto.

Everyone is whinging that the prices are too dear ..... boo hoo ..... Tell me what is wrong with this place?

http://www.realestate.com.au/property-house-qld-slacks+creek-109012126

Naaahhhh ...... why bother ...... I am getting a good stockpile of cardboard boxes together and am going to start building a block of flats.

My point is that the argument for NG is that it encourages the building of rental properties. It's not a free / costless option to the Government or society.

I'd argue that the Govt spending some $60B on public housing over the same period would have resulted in more NEW construction, since investors generally buy an EXISITING property 9 times out of 10.

Now if NG for only available on newly formed assets I could see it being usfule, but I don't see it has any benefit being available on exisiting assets. Doesn't matter if housing / shares or any asset.

Imagine what $14B of public housing funding could have achieved in the 2010-11 year.

Value Collector · 13 February 2014

sydboy007 said:
1 ,Yet prior to 2000 IPs made in aggregate only small surplus or negative income. Don't you find it concerning that post 2000 the losses have at times been massive. A rational market would not sustain losses of that magnitude.

2, The implication was that NG is not that big a thing for wealthy investors, yet the stats show they are the biggest beneficiaries of it.

3, Except that it causes house prices to be much higher than a rational market would be. There is also considerable tax deferment, and because too many investors get blinded by the NG tax benefits, they fail to adequately look at the REAL total after tax return upon selling. The newspapers are a calssic example of saying Mrs and Mrs Citizen bought their house in 1976 for just $15,000 and sold it for $450K in 2013. Too many people see it as a $435K profit, never considering all the costs associated with the house, or the fact that inflation has eroded much of the gains.

1, the losses that other investors allow in their portfolio does not concern me, But don't you think there are many people with debt against companies paying 1% - 3% dividends while they pay 8% margin loan interest, don't you think they are negatively geared

2, they will be the biggest of everything, they will be the biggest holder of positively geared property also.

3, If anything, from my experience here, the real after tax return is ignored by people such as yourself. look at your example, your only counting the $435K capital gain, your ignoring the rental return, from 1984 onwards there property would have had a growing positive cash flow that dwarfed the $435K capital gain.

you see this kind of thinking on this site all the time, look at the gold thread, they compare the price of gold from 2000 till now to the price of a stock index over that period and say that gold beat the index, they for get to factor in the dividends the index compounded on the way.

sydboy007 · 13 February 2014

beachlife said:
I hear the 'incentive' on the radio every day. Just about all of the sprukers market based on tax savings. Which is probably why so many people get upset by it. Save tax they spruke, what they dont add is but go home with less money in your pocket each week while you subsidise someone elses accomodation.

Very true, but NG is still costing the budget many billions. If we're loking at efficiency for generating NEW CONSTRUCTION then I'd argue NG is a VERY EXPENSIVE way of achieving it.

beachlife said:
It depends on what you call wealthy. I dont call a wage earner on $90k wealthy. I dont see any people that hold 3 inv props motoring down the river in super yachts. Most are working hard in their job trying to keep on top of the negative cash flow hoping that they dont lose their job next week.

According to recent ABS figures a single income earner on 90K was better off than some 85% of income earners in 2010-11. To me that makes you a wealthy income earner. Last year a weekly pre tax income of 1343 put you in the 8th decile or higher income group. Unless your definition of wealthy is the 1%, beating 15-20% of the population would appear to make you wealthy.

beachlife said:
Unemployment now at 10 year highs, that will trickle into the market.

Yup, and yet investors are still out bidding up IPs, especially in SYD and MEL. It's nearly a market of investors just flipping existing properties to each other at higher and higher prices.

Value Collector · 13 February 2014

sydboy007 said:
So if you loose $8000 on your IP and that allows you to reduce your income tax by $3000 then isn't the Government subsidising your loses? You are not bearing the full financial cost of the loss.

.

HAHAHA, what school of finance did you study at.

At best, you have to lose $1 to get a tax credit 45cents, If you think that's an incentive, you can send me $1000 every day of the week and all give you $450 back.

You are bearing the full financial cost of the loss.

for example,

You earn $200K for you day job as a lawyer, you own an IP which booked a $20,000 loss. You net reported earnings that year are $180,000 which you will pay tax on at your marginal rate.

That $20,000 loss is real, that money is gone, the government doesn't refund you any of that loss.

The government is in the business of taxing people based on their total profits, you can write off the loss from any genuine business venture against other income you earn, its the only fair way to do it.

sydboy007 · 13 February 2014

Value Collector said:
1, the losses that other investors allow in their portfolio does not concern me, But don't you think there are many people with debt against companies paying 1% - 3% dividends while they pay 8% margin loan interest, don't you think they are negatively geared

That's why I'd prefer to see NG available for only NEWLY created assets. Then it is at least actively encouraging new investment. How is it beneficial for NG to be available on existing assets? All it does is increase asset price inflation.

Value Collector said:
2, they will be the biggest of everything, they will be the biggest holder of positively geared property also.

yes they are, yet the IP market has continued to make massive losses since 2000.

Value Collector said:
3, If anything, from my experience here, the real after tax return is ignored by people such as yourself. look at your example, your only counting the $435K capital gain, your ignoring the rental return, from 1984 onwards there property would have had a growing positive cash flow that dwarfed the $435K capital gain.

If the property has been negatively geared, then the rental income is not that relevant since they've still lost X $ while holding the property. They'd also need to adjust for inflation their older losses to fully understand how much money they've lost, then also look at how much they could have made on a positively geared asset, or by not borrowing at all and just using surplus income to buy income producing assets as they could afford.

We over invest in property. It doesn't generate export income, but does deplete a lot of our export income via the 10s of billions of dollars in interest payments it costs us.

Why do you believe above wage growth property inflation is good?

sydboy007 · 13 February 2014

Value Collector said:
HAHAHA, what school of finance did you study at.

At best, you have to lose $1 to get a tax credit 45cents, If you think that's an incentive, you can send me $1000 every day of the week and all give you $450 back.

You are bearing the full financial cost of the loss.

for example,

You earn $200K for you day job as a lawyer, you own an IP which booked a $20,000 loss. You net reported earnings that year are $180,000 which you will pay tax on at your marginal rate.

That $20,000 loss is real, that money is gone, the government doesn't refund you any of that loss.

The government is in the business of taxing people based on their total profits, you can write off the loss from any genuine business venture against other income you earn, its the only fair way to do it.

If NG wasn't available, or was quarantined against the asset cashflow, do you think investors would be so inclined to pay the current prices they are?

I don't know how you can argue that NG is not a subsidy for losses. The tax payer is helping out at up to 45c in the $ for the losses.

Value Collector · 13 February 2014

sydboy007 said:
My point is that the argument for NG is that it encourages the building of rental properties. It's not a free / costless option to the Government or society.

I'd argue that the Govt spending some $60B on public housing over the same period would have resulted in more NEW construction, since investors generally buy an EXISITING property 9 times out of 10.

Now if NG for only available on newly formed assets I could see it being usfule, but I don't see it has any benefit being available on exisiting assets. Doesn't matter if housing / shares or any asset.

Imagine what $14B of public housing funding could have achieved in the 2010-11 year.

I think your view of negative gearing is warped. Its not simply to encourage people to build more rental property ( even though it does achieve this aim) the point of it is that it only fair that the government only tax you on your net profit each year.

the government basically owns the rights to 30% of the earnings of every citizen, If one citizen earns $100K in business A, but losses $50K in Business B the government is entitled to 30% of the net profits, it can't be said that he is having his $50K loss subsidised.

As I said before, negative gearing laws apply to all investments.

But also your $60B figure is way off, the $60Billion loss your quoting is only offset a much smaller portion of tax, at the most probably $20B, But the loss of the $60Billion caused others the book profits such as the banks, which they paid tax on which would offset a chunk of the $20B.

Value Collector · 13 February 2014

sydboy007 said:
1, If NG wasn't available, or was quarantined against the asset cashflow, do you think investors would be so inclined to pay the current prices they are?

2, I don't know how you can argue that NG is not a subsidy for losses. The tax payer is helping out at up to 45c in the $ for the losses.

1, I don't think the negative gearing affects the price they are willing to pay, it probably affects their ability to buy a second one, But what does that matter, why should a property investment be treated to harsher taxes than any other investment.

2, How is the taxpayer helping out. At no stage is the taxpayer handing over money to subsidise the loss. You can only claim a deduction against earnings and tax that you yourself have paid in that year. If you earned $0 from others sources and but had a $20,000 neg cashflow, you get nothing.

The only time you can deduct your neg cash flow is when you had other earnings in that year to offset.

Picture that I am a hard (but fair) stand over man (the tax office), I tell you that I want 30% of your earning each year or I'll put you in jail, at the end of the year you tell me you earned $200K from your lawyer practise, but lost $20K in a property investment.

So I( the hard but fair stand over man) says "Ok bud, so you really earned $180,000 net, give me $54,000 and I'll leave you for another year", You can't say that I gave you anything, I took 30% of your net earnings.

craft · 13 February 2014

sydboy007 said:
If NG wasn't available, or was quarantined against the asset cashflow, do you think investors would be so inclined to pay the current prices they are?

Not if MIS is indicative. In just about every case non-economic long term decisions for the assets were made due to the immediate benefit of the tax cash flow. Take the tax break away and the assets turned out to be overpriced oversupplied and long-term returns were crap/non existent.

The tax code is warping the proper economical allocation of resources. Our productivity is being effected but its probably too late to change things without at least short term stability being effected. Tough situation but they can only kick the can so far down the road. The Sooner Negative Gearing goes the less damage the change will cause.

baby_swallow · 13 February 2014

House price increase comparison table - Australia is 5th on the list
Ours isn't as bad as the Kiwis...

'

Also:
Canada’s government has announced that it is scrapping its controversial investor visa scheme, which has allowed waves of rich Hongkongers and mainland Chinese....

http://www.zerohedge.com/news/2014-02-12/did-canada-just-pop-its-housing-bubble

The future of Australian property prices

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