The negative gearing debate is back in the media.
On Monday, the ABC’s Michael Janda warned everyone will lose in the long run when our investor lead property bubble bursts. (‘Few positives to be found in negative gearing‘)
Today, The Business Spectator’s Callam Pickering is singing the same tunes (‘Why negative gearing is Australia’s biggest policy failure‘) saying “Unfortunately the government, through inaction, is supporting speculation and rising indebtedness, and in the process has left households increasingly vulnerable to economic shocks.
A recent International Monetary Fund (IMF) report shows the three countries with such favourable negative gearing schemes, Australia, Canada and New Zealand were ranked in the four top most overvalued property markets it surveyed, leaving these countries extremely vulnerable to significant financial crises when their property bubbles burst. So concerned of a bigger property lead crash than the GFC, the IMF has set up a website to monitor housing bubble activity – Global Housing Watch.
Losing money hand over fist with negative gearing in the pursuit of speculative capital gains is regularly spruiked to naive property investors through free property seminars. According to the ABC, the consumer affairs departments of the Western Australia, New South Wales and Victoria state governments have launched a crackdown property spruikers writing to them and “warning them they must abide by Australian Consumer Law or could be hit with penalties of up to $1.1 million.” The fear is vulnerable investors, many of whom lost a small fortune in the GFC are being lured into the “risk free” but unprecedented property bubble.
» Property spruikers put on notice by states The ABC, – 8th July 2014.
» Few positives to be found in negative gearing – The Drum, ABC, 7th July 2014.
» Why negative gearing is Australia’s biggest policy failure – The Business Spectator, 9th July 2014.
Like so many government policies, NG is not based on any peer-reviewed studies, and there is no mechanism for measuring it’s desired goals. It’s a flaw of our governance that policy can be put into place in this way. Invariably whenever governments get involved in free markets it will end in disaster sooner rather than later, and indeed they will ultimately resort to kicking the can further down the road because there’s no politically palatable solution for dealing with flawed policy.
Maybe this is the shock we need to reform out political institutions, though god knows it didn’t happen in the USA.
Negative gearing is a strange idea, which distorts the fundamentals of investment. If any investment is made purposely for a loss, the practice subsidies something else. It is this something else that the government and the banks, the real estate industry people avoid to talk about.
When 95% of loans flow into speculative housing market, 97% of deals are purchases of the multi-handed old shabby houses, the borrowers have unlimited liability before bankruptcy, on top of the negative gearing, who are the beneficiaries of the historical bubble?
Australia has the lowest population density in the world but the highest housing prices. Behind these strange phenomena, there are a group of fat parasites, which suck the blood of the economy to nourish their black hearts. Unfortunately the government is kidnapped or sidelined with the parasites.
It is a profound policy failure that will have dire consequences going forward. Our spineless politicians have pandered to a set of narrow interests over the years at the expense of the community as a whole:
1.There is no coherent national housing strategy that recognises a multitude of housing needs (not everyone wants to buy or speculate in property)
2.A ‘rentier’ economy build on a financial house of cards – GDP growth is an illusion
3.Inhibitor of labour mobility
4.Failure to accommodate the needs of lower income earners – police, health workers, teachers, etc
5.Massive misallocation of investment in what are non productive assets (60% of national assets are property – UK is less than 20%)
6.Declining ‘productive’ asset base supporting non productive assets (we have forgotten how to be competitive and produce products)
7.Demonisation of public spending when in reality private sector debt is the real problem
8.Economy distorted as nearly 50% of the economy is financial services
9.The banks have too much influence
10.Property costs – flows through to increased costs everywhere – demand for higher wages, high commercial rents raises the costs of products and services, etc
11.Lack of imagination over successive governments….the government could issue bonds to raise funds to build housing for instance
12.Guarantees given to the banks to bail them out if they get into difficulties
13.Etc…
I would NEVER bail out the banks. If they got into difficulties I would nationalise the lot of them and create a public bank.
NG is the best proof politicians are holding onto a system that is losing billions in taxes, funnels this lost wealth into the pockets of the bank/real-estate industry while at a time politicians claim we cannot afford many more important social, medical, welfare and health programs that spreads Australia’s wealth to all of us. This is the least of all the favours politicians can do for the bank/real-estate industry considering they did provide millions into their favourite charities, political campaign funds and offshore banking accounts held under investment portfolios under a company name. Spread the word-DONT BUY NOW!! and DONT VOTE FOR THEM NOW!! BE CRITICAL OF POLITICIANS ACTIONS AND TELL THEM SO
You have to feel sorry for all the naïve small investors who purchased negatively geared properties. In most cases these poor unfortunates did not calculate that the market has to keep rising for them to come out ahead. The rule is “The potential capital gain must be consistently more than the certain income loss”. As the housing market collapses who is going to explain to them why they lost so much of their wages subsidising rental properties?
Yep, both Lab/LNP would rather shut hospitals than have a Negatively Geared Property Investors lose any of their deductions.
But seeing as there is no one to vote for on this issue, the can will be kicked down road.
@56andoverit:
You forgot global warming…
The real cost of this policy is seen everyday in Australian cities in the level of homelessness. It is disgusting for a society that is supposed to be egalitarian. However as you push up costs of rent etc somebody is going to drop off the bottom. All you can do is hope it isn’t yourself.
People call them bums, get a job etc, but the real bums are negatively geared ‘investors’ deliberately losing 30billion+ per year. (Equivalent to 120,000 $250,000 homes PER YEAR)
For only a fraction of that sum and you could comfortably house all of the homeless and do so much more.
@Mr V
Great points.