Is Negative Gearing good or bad?
With so much debate right now about negative gearing it’s really important to try and provide some balance. Is it a good thing or is it a bad thing? So I’m going to come up with five reasons why I think it’s a positive thing for the economy and of course I’ve got to declare my self-interest here because I am a property investor myself. I have a business where I help other people get into property investment so it could be thought that this is all self-interested and I’m running my own agenda.
So hopefully we can provide a balanced view on why I think it’s actually a positive thing and my first reason is very simple. I don’t think negative gearing is just for the super rich. Now definitely someone on higher income paying higher amount of tax gets more taxation advantages from it but it doesn’t mean that middle Australian isn’t using this mechanism to try and self-fund their own retirement because I see lots of property investors. I see a full cross-section of people high income earners and medium to sorts of low medium income earners who are all interested in getting ahead. So that cross section there would suggest that it’s not just for the super rich. Average Australians want to get ahead too and this is a really good vehicle for them. They feel safe, doesn’t have the same volatility as other investment options and they feel like they really know it and the Great Australian Dream in Australia is so entrenched in a psyche, it just suggests that investment property something they really feel safe about and also the fact that they put most of their store wealth in their own principal place of residence just give them that familiarity and comfort.
For me, I don’t think it’s just for the super-rich I think it’s for ordinary Australians to get ahead and create self-funded retirement.
Now surging house prices is often blamed on negative gearing. Because of negative gearing, prices keep going up in value but in my view, house prices going up is complex. If we think about in the 70s, we had single income earners, usually dad. Mom stayed home to look after the kids and then she got a part-time job later on in the 70s to get a little bit more income to help pay off the mortgage and then in the 80s, typically or potentially they had two jobs. Two incomes in the house. Now, if you think about it the girls who grew up in the 80s, now in 2016 have an opportunity for a full-time job and also a full-time professional job. So what we’re seeing since the 70s to now is this organic growth in household cash flow and that is never going to be repeated again. At the same time from the 90s, we’ve had the recession we had to have with interest rates at 17% – 18% which have now been driven to historical lows. So we’ve not now got this maximum gap injection of cash into the house which is then been turned into borrowing capacity for people to go into the marketplace and buy the principal places of residence and that’s been one of the biggest contributors to prices continually going up in value. Add to the fact that we’ve had low interest rate environment for some time now, 25 years of economic prosperity. People just think that things are always going to be great. They’ve got this enormous optimism that comes from being in that position of economic prosperity for so long. So just to blame it on negative gearing to me, it just makes for a great headline but to me I think it really doesn’t look for the underlying cause of what’s causing houses to go up. Some of our bigger cities, we’re just not building enough so there’s not enough stock to the amount of people who want to buy so that’s also putting upward pressure on prices. So negative gearing being the reason prices are going up in value, to me is just a one big myth.
My third reason I think it’s positive is because someone’s got to provide the housing. So let’s imagine the private sector has moved out, no private investors and it was up to the government to provide this housing. Historically they haven’t been great at doing that but even if they did it, it’s an enormous cost to them. In excess to what they’re probably giving in tax deductions to the property investors to do it themselves. So there would be huge upward pressure on rents. So the debate on negative gearing is all about helping the poor person at the beginning, at the entry level whether it’s the renter or the first time buyer but the poor old renter will be paying higher rents because investors are going to pass the increased costs on to someone and it’s gonna be less investors in the market if we don’t have the negative gearing so there’s just this upward inflationary impact. Like we saw back in the 80s, back in 85 when they removed it previously and that had an upward pressure on rents also. So the point is that someone’s going to provide it and if its left to the government, it will cost them a lot of money and a lot of time and a lot of management where else the private sector, they can do it and also give them an opportunity to get ahead and self-fund their retirements.
My number four reason is, it has a multiplier effect. Now the argument is always that brand new has more of a multiplier effect than established because it’s employing builders, chippies and sparkies and you know, people are going to get new ovens and new fridges, all that sort of thing and I get that. That’s really positive. But there is a multiplier effect with established properties as well because you are going to employ a property manager, you got to employ a maintenance person, you got to get insurance in place, you are going to get building and pest inspection done, there’s a whole range of things that come from buying property in the established market. Those people have to earn an income and I have to pay tax also. So yes, you are getting a tax deduction to buy the property but that’s employing a whole range of people who are also paying tax to the government as well. So there is that multiplier effect that comes from negative gearing in my view.
The last one is in my view the most forgotten one is negative gearing eventually becomes positive. Negative gearing eventually becomes positive. You need that tax relief in the early days during the accumulation phrase so that you can afford to buy the property. Let’s be honest because most people, if they have an investment property, doesn’t mean they’re rich, it just means that they are trying to get ahead and they still got to provide food on the table and they still got to meet their own obligations. But at some point in time as the value increases and as the rents also increase, we get to the point where we reach equilibrium where the income matches your expenses and then moving forward we go into positive territory, positive cash flow territory which the investor starts to rely on so that I can get that passive income to retire on. But the important point about that is as soon as it becomes positive, it becomes a taxable income which then we have to pay tax on which contributes positively again to the economy.
So there’s five reasons that I hope provide a balanced view on negative gearing. Yes I do have an agenda but I also think it’s good for the economy and I think the discussion right now around whether or not it’s a good thing or a bad thing, my fear is it’s just short sighted in terms of the reasons why people want to tinker with it. I think the medium and the long-term benefits of negative gearing is really positive for the economy and I also think it’s a great way for the average Australians to create a self-funded retirements.