The future of Australian property prices

[beachlife]

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

Not all of it, the depreciation schedule is just smoke and mirrors. A house remains livable well beyond the time frames used in the schedule.



Look at this chart http://reiwa.com.au/Research/Pages/Perth-house-price-chart.aspx prices didnt crash when Keating got rid of NG and didnt take off when it came back. So clearly NG tax deductions have very little impact.

But to me they have now formed what looks like a big bubble that followed the demographics and easy credit, and the rush of investors now just might be the last big push. Where will the buyers come from once the mum and dad investors are hocked up to the eyeballs with 90% LVR's?

 

[Value Collector]

Not all of it, the depreciation schedule is just smoke and mirrors. A house remains livable well beyond the time frames used in the schedule.

depreciation schedules normally go over 40years that's a pretty long period, and anything thing claimed as depreciation reduces the cost base used to calculate CGT, so it will increase the capital gains tax paid.

But depreciation is not limited to property, every business offsets a portion of their income through depreciation of their plant and equipment, depreciation is a real thing.

 

[Value Collector]

But to me they have now formed what looks like a big bubble that followed the demographics and easy credit, and the rush of investors now just might be the last big push. Where will the buyers come from once the mum and dad investors are hocked up to the eyeballs with 90% LVR's?

Well if your right all the better for us, we will have some cheap property to add to our portfolios in the future.

But it's also a misconception that property investors are all up to their eyeballs in debt, there certainly are some that are, but everyone of them there is another one that has finished paying off there own home and have bought an investment, another that invests debt free, another that has debt but smashes it with his high income, another that has owned the property so long the debt is pretty small.

People here seem to think that 100% of the property investing community are undercapitalised speculators, this is not the case.

 

[sydboy007]

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.

What is the use of NG on exisiting assets? It doesn't actually help to improve things. If it encourages new shares to be issued, new companies to be formed, new housing stock to be built, I can see the use, otherwise why have it on exisiting assets and why aren't the losses amortised to the cost base instead of being able to reduce income tax.

The $60B in losses will work out to be less in forgone tax, but it's still a massive level of losses. The most persistent argument by the Real estate industry for retaining NG is in helps to increase the amount of rental proeprties. It clearly doesn't.

The fact is we over invest in property.

 

[satanoperca]

What is the use of NG on exisiting assets? It doesn't actually help to improve things. If it encourages new shares to be issued, new companies to be formed, new housing stock to be built, I can see the use, otherwise why have it on exisiting assets and why aren't the losses amortised to the cost base instead of being able to reduce income tax.

The $60B in losses will work out to be less in forgone tax, but it's still a massive level of losses. The most persistent argument by the Real estate industry for retaining NG is in helps to increase the amount of rental proeprties. It clearly doesn't.

The fact is we over invest in property.

Agree.

Stop all this bulls--t about NG being removed will see a shortage in rental properties and/or an increase in prices.

The majority of investors by existing stock, in established areas. Why? Land increases in value, buildings do not. So why invest in the outer suburbs in a new build, when the returns are on land in established areas.

NG should only be applicable to new builds, thus giving investors a reason to add to rental supply.

So simple.

And fully agree we over invest in property. Try running a small business and getting capital injections from investors, they would rather buy property and I cannot blame them under the current system. However, you need a business/employment before a home. You can live in a cardboard box and still go to work, but try buying a house without a job.

We must start investing in innovation.

Cheers

 

[Value Collector]

1, What is the use of NG on exisiting assets?

2, It doesn't actually help to improve things. If it encourages new shares to be issued, new companies to be formed, new housing stock to be built, I can see the use, otherwise why have it on exisiting assets and why aren't the losses amortised to the cost base instead of being able to reduce income tax.

3, The $60B in losses will work out to be less in forgone tax, but it's still a massive level of losses.

4, The most persistent argument by the Real estate industry for retaining NG is in helps to increase the amount of rental proeprties. It clearly doesn't.

The fact is we over invest in property.

1, It produces a fairer tax system that taxes people based on their net profits each year, Its an understanding that people may have several business ventures so it allows for annual tax to be charged based on the total net profit of all the business ventures combined.

2, because it makes sense to offset negative cash flows against other positive to get to a net bases each year. It's how every single business in Australia works.

3, yes, a lot less at the absolute most it would be $27Billion, and as I said that $27Billion is further offset by taxes paid by the banks etc how are recording that $60Billion as profit on their books.

4, You can't argue that NG causes more houses to be bought without saying it also results in new houses being built. As I mentioned earlier, over 90% of off the plan developments are sold to investors, that's creating new stock. Flick through the pages of any property investing magazine and you will see property developments being marketed right around the country to investors, Also my dad sold his house to a property investor.

Infact the only part of NG that you could say is not always a true cash flow loss is depreciation, and that is biggest on new properties.

 

[sptrawler]

1, It produces a fairer tax system that taxes people based on their net profits each year, Its an understanding that people may have several business ventures so it allows for annual tax to be charged based on the total net profit of all the business ventures combined.

2, because it makes sense to offset negative cash flows against other positive to get to a net bases each year. It's how every single business in Australia works.

.

If that were the case, losses of a capital nature would be able to offset against income, at present they can only be carried forward against a capital gain.
This is because the investment is seen as speculative.
Can't the same be said of an interest only loan against a property, where the purchase was to get capital appreciation.
Why should the taxpayer have to pay the speculator the shortfall in their earnings, they took the loan on with the knowledge, it is unlikely to ever be rent possitive.
They should only be able to mitigate their losses upto the income they recieve from the investment.
To allow them to claim a tax refund for losses above that, just encourages speculation/gambling losses to be a tax deduction.

 

[beachlife]

But depreciation is not limited to property, every business offsets a portion of their income through depreciation of their plant and equipment, depreciation is a real thing.

Depreciation on plant and vehicles makes sense because they do devalue and wear out, and will be on sold at a lower price, or scrapped. Houses are onsold for a higher price, for now anyway. A block of land with a 40 year old house is worth more than a vacant block in the same area, but if you consider the theory of depreciation the land with the house should be cheaper by the cost of demolition, since in theory the house is worthless and it will cost thousands to push it over. It never is. So for houses, depreciation is a rort.

Well if your right all the better for us, we will have some cheap property to add to our portfolios in the future.

But it's also a misconception that property investors are all up to their eyeballs in debt, there certainly are some that are, but everyone of them there is another one that has finished paying off there own home and have bought an investment, another that invests debt free, another that has debt but smashes it with his high income, another that has owned the property so long the debt is pretty small.

People here seem to think that 100% of the property investing community are undercapitalised speculators, this is not the case.

The sprukers and the banks encourage investors to max out the borrowings to minimise the tax. That's the marketing pitch.

 

[Value Collector]

1, If that were the case, losses of a capital nature would be able to offset against income, at present they can only be carried forward against a capital gain.
This is because the investment is seen as speculative.

2, Can't the same be said of an interest only loan against a property, where the purchase was to get capital appreciation.

3,Why should the taxpayer have to pay the speculator the shortfall in their earnings, they took the loan on with the knowledge, it is unlikely to ever be rent possitive.

4, They should only be able to mitigate their losses upto the income they recieve from the investment.
To allow them to claim a tax refund for losses above that, just encourages speculation/gambling losses to be a tax deduction.

1, Neg gearing is about offsetting a cashflow loss against a positive cashflow from another sources, it's no different to what happens anywhere else, eg, woolworths would currently be offsetting the losses its making at masters against the profits its making at its other businesses.

2, you could do it that way I guess, but everyone would have to do it that way, but how would you decide who is investing for capital gain and how is investing for income, and you would have to make everyone do it that way including shares with margin loans, woolworths with masters etc. It makes more sense to me to claim the loss in the year its made.

3, As explained above in another post, the tax payer does not pay any shortfall. its simply a recognition that a person made a $200K profit from source A, and a $20K loss from source B, lets charge them tax based on the net amount of $180K. the tax payer doesn't hand over any dollars.

4, many worthwhile investments do not generate positive cash flow in the early years, A neg cashflow property will usually be positive by about year 7, from then it will generate tax dollars.

 

[Value Collector]

1,Depreciation on plant and vehicles makes sense because they do devalue and wear out, and will be on sold at a lower price, or scrapped. Houses are onsold for a higher price, for now anyway. A block of land with a 40 year old house is worth more than a vacant block in the same area, but if you consider the theory of depreciation the land with the house should be cheaper by the cost of demolition, since in theory the house is worthless and it will cost thousands to push it over. It never is. So for houses, depreciation is a rort.



2, The sprukers and the banks encourage investors to max out the borrowings to minimise the tax. That's the marketing pitch.

1, Houses wear out too, just over a longer period than a car. A 40 year old house would only be worth something if it has been maintained over that 40 years. If you went 40 years without redoing or fixing the roof, repaint, kitchens, bathrooms etc, the house component of the price would be worth almost nothing, the house would probably be bulldozed and so yes vacant land would be worth more if it is in exactly the same spot.

Bottom line is the building component of a property investment does lose money, and it requires constant replenishing over the years to hold its value. some parts such as brick work and the slab will last many decades, others such as carpets, curtains, kitchen and bathroom fittings, paint etc etc wont last 40years, 40years is just an number used to keep it simple.

Offcourse some things take longer, than cars, for example gas pipelines and railway lines are depreciated over 80 - 100 years, but every eventually becomes worthless or at most worth its weight as scrap metal.

2, and if your silly enough to listen to spruikers you will lose your money

 

[sptrawler]

1, Neg gearing is about offsetting a cashflow loss against a positive cashflow from another sources, it's no different to what happens anywhere else, eg, woolworths would currently be offsetting the losses its making at masters against the profits its making at its other businesses.
.

Comparing Wollies tax offset with personal tax offset, is a bit out there.
It works out untill the tax dept rules the investment isn't a bonafide business.
That is why a lot of small businesses are not found to constitute a small business and have their tax claims overturned and penalties applied.
It is very easy for the ATO to decide personal investment property claims, can only be offset to certain amount, unless it is the prime income source of the individual.

 

[Value Collector]

Comparing Wollies tax offset with personal tax offset, is a bit out there.
It works out untill the tax dept rules the investment isn't a bonafide business.
That is why a lot of small businesses are not found to constitute a small business and have their tax claims overturned and penalties applied.
It is very easy for the ATO to decide personal investment property claims, can only be offset to certain amount, unless it is the prime income source of the individual.

A property investment is a bonafide business.

But look it makes complete sense to me to only tax people or companies on their net profit. Why would it not make sense to do it this way?

 

[beachlife]

1, Houses wear out too, just over a longer period than a car. A 40 year old house would only be worth something if it has been maintained over that 40 years. If you went 40 years without redoing or fixing the roof, repaint, kitchens, bathrooms etc, the house component of the price would be worth almost nothing, the house would probably be bulldozed and so yes vacant land would be worth more if it is in exactly the same spot.

Bottom line is the building component of a property investment does lose money, and it requires constant replenishing over the years to hold its value. some parts such as brick work and the slab will last many decades, others such as carpets, curtains, kitchen and bathroom fittings, paint etc etc wont last 40years, 40years is just an number used to keep it simple.

Offcourse some things take longer, than cars, for example gas pipelines and railway lines are depreciated over 80 - 100 years, but every eventually becomes worthless or at most worth its weight as scrap metal.

Now you are being silly and confusing maintenance (painting) with capital outlays. Here's an example. My dad bought his house in 1967 for $19,000. Its 72 years old. He has done no improvements, still has original kitchen etc, even the carpet. We just had it valued and the licensed valuer assigned a depreciated value to the improvements of $22,000. Thats more than what it cost to buy with the land and a heck of a lot more than what it cost to build. If an investor bought it they could start claiming against that. Cash loses are real, but people that object to tax benefits have a fair claim with respect to depreciation, especially when each successive investor gets a new schedule drawn up. Having said that I claimed it when I could, no reason not to take advantage of the system, even if its nonesense.

Anyway some real depreciation is on its way which will eclipse the paper claims.

 

[Smurf1976]

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.

I assume the original post was a reference to public housing, that is housing owned by government and made available to (mostly) low income people for them to live in.

Back in ye olde days, government did indeed build such houses and they did it using direct government employees. Then along came the idea that everything should be contracted out and the cost of doing literally any physical work went through the roof (or the quality dropped, one or the other depending on situation) when that happened.

Do it "in house" and you need to employ workers, buy materials (which for a government purchase in bulk will be relatively cheap) and build the houses, roads, dams or whatever.

Contract it out and you need an army of contract administrators and a legal team on both sides. Then you have a huge pile of paperwork. Then you need people to actually do the job and materials. Then you add a profit on top of all that - the work, materials, administration and so on.

What you end up with is a situation where labour productivity "on the tools" tends to go up, but where a lot of people spend a lot of time not actually using any tools. The end result is that some jobs cost a bit less, the occasional one costs an order of magnitude more, and on average you get either a modestly higher cost for the same quality, or the same cost for lower quality. Either way it's a worse deal so far as the taxpayer is concerned. Been there, seen this one first hand.

The real problem with governments contracting things is that to be blunt, they're generally a pushover. As long as all the I's are dotted and the T's crossed, nobody really cares about too much else. For political reasons government will want the job done, and the incredible amount of work required to award a tender which complies with all the rules means that no sane public servant would want to go back through the tender process again should there be a contractor. Unless they actually stop doing the work, which generally doesn't happen, then it's far more practical to simply hand over the money and keep the project moving so that's what they do. There are good contractors and bad, trouble being that the bad ones generally still get paid due to the difficulty changing part way through a project.

Working in the public service, I remember quite well tying up myself and two others for an entire week spending what would be around $10K in today's money on a single item. In due course the matter was resolved, meanwhile the supplier decided to raise the price since they knew it would take too long to repeat the purchasing process. So it ended up as $12K for the purchase plus another 5K in wages so $17K overall in order to buy something that retailed for $10K "off the shelf". In short, that's why things go wrong when government deals with private enterprise - too many rules and regulations means that government is an outright pushover.

So I can certainly see that government can't build cheap public housing for low income earners like they used to given that they've changed the way they do business. But they could always go back to the old model if they really wanted to as it's only ideology that stops them. Taxes could be reduced pretty much immediately if they did.

Go forward a couple of decades and everyone will have worked this out. It's a big cycle if you look at history with things like utilities, transport etc going from private to public and now mostly back to private. Once the pain of rising utility bills and the cost of taxpayer subsidies to privately owned operators of various things becomes an issue, and at some point it will, then things will start going back the other way over the next few decades. Then it will go back to private again. That's the lesson of history and I expect we'll repeat it. Tas bought back the railways not that long ago and WA has stopped outsourcing some things in the power industry so there's a bit of it happening already.

As for house prices, well if you have government buying existing houses so as to make them available as public housing then that's a very different situation to if government simply cleared the land, built a few houses here and there and sold the rest of the land to private owners. It's simple supply and demand there, with government having moved from being a source of supply to being a source of demand.

 

[sptrawler]

A property investment is a bonafide business.

But look it makes complete sense to me to only tax people or companies on their net profit. Why would it not make sense to do it this way?

It isn't a business, as much as it is a speculative personal investment.

 

[Smurf1976]

People here seem to think that 100% of the property investing community are undercapitalised speculators, this is not the case.

I don't doubt that it's certainly not 100% of people in that situation. But some would be, and markets are made at the margin.

 

[sptrawler]

It isn't a business, as much as it is a speculative personal investment.

Further to my previous post.
A business, is a venture that is expected to return a positive income.
Not a purchase that is expected to return a capital gain.lol
That probably falls under the same umbrella as a painting that you rent out to the museum.
See if you can negative gear that?

They both earn an income, which doesn't cover the carrying costs, why can't I negative gear it.lol

 

[Value Collector]

Now you are being silly and confusing maintenance (painting) with capital outlays. Here's an example. My dad bought his house in 1967 for $19,000. Its 72 years old. He has done no improvements, still has original kitchen etc, even the carpet. We just had it valued and the licensed valuer assigned a depreciated value to the improvements of $22,000. Thats more than what it cost to buy with the land and a heck of a lot more than what it cost to build. If an investor bought it they could start claiming against that. Cash loses are real, but people that object to tax benefits have a fair claim with respect to depreciation, especially when each successive investor gets a new schedule drawn up. Having said that I claimed it when I could, no reason not to take advantage of the system, even if its nonesense.

Anyway some real depreciation is on its way which will eclipse the paper claims.

I am not talking about improvements, i am talking about maintaining the value of the building by maintaining it, if you are honestly saying that your father has not maintained his building for 47 years and it hasn't lost any value then that is a very rare case.

Saying that though, some of the residual value that remains would have increased with inflation, but adjusting everything for inflation the building would be worth less than when it was new.

 

[Value Collector]

It isn't a business, as much as it is a speculative personal investment.

Without you going and examining individuals portfolios and interviewing them on there entry and exit plans i cant see how you can come to that conclusion, I can tell you my property investments are very much a business and a key part to my business plan

 

[Value Collector]

Further to my previous post.
A business, is a venture that is expected to return a positive income.
Not a purchase that is expected to return a capital gain.lol
That probably falls under the same umbrella as a painting that you rent out to the museum.
See if you can negative gear that?

They both earn an income, which doesn't cover the carrying costs, why can't I negative gear it.lol

All of my properties return a positve cash flow, not all of the companies on the asx do.