House affordability, where are the institutions?

It is understandable that negative gearing opposition gets most vocal when applied to residential housing. In reality it applies, of course, to all income-producing assets and activities, including share trading (when unrealised losses can be set off against income, unlike the normal investment activity when only realised gains and losses are taken into account). Being the common man's pick for negative gearing, housing is most visible in the debate (housing can be seen and felt physically, unlike financially engineered products including dent and equity).

If a tax system (such as ours) wishes to tax income and allow legitimate deductions against it, equity and symmetry demand that where the answer is negative, it should be allowed. Not that tax is known for equity or symmetry in most regimes, but taken to the extreme this would mean taxing all income but allowing no deductions. Strange one might say, but stranger things have been attempted. The idea of a flat rate of tax on income comes close to this possibility, with that rate so fixed as to generate sufficient revenue for Government activities. Imagine, the hordes of ATO officers can do something more useful, like planting a tomato sapling.

In Australia, abolishing negative gearing will in housing trigger squeals and potential diversion to other assets. At its worst, it might mean deliberate avoidance: the only tool with which the commoner can express dismay at the inequity, not to mention disturbing the status quo.

A more practical issue will arise when an investment weaves in and out of positive territory into the negative and back: after abolishing negative gearing on an asset, will we tax it or not when the deductions are less than the income? If yes, the obvious injustice will destroy confidence. Or we would need a complex administration scheme (as in the super surcharge, or contribution caps). Net of collection and policing costs, the revenue raised may not justify the angst.

A practical solution may be to cap the benefit at a reasonable dollar figure per taxpayer per annum. Even here, the inequity of taxing all income when it turns positive looms large.

Looks as though we will be debating this for a while!

Are our memories so short that we have forgotten the Paul Keating removed negative gearing with a great fanfare of trumpets only to re-introduce it within 24 months because the number of rental properties dropped dramatically and as a result the rental charges increased accordingly and adversely effected many that supported the Labor Party.

Perhaps annual negative gearing losses could be carried forward, and added to the cost base of the asset. This would reduce capital gains tax payable upon sale, rather than providing a tax saving each and every year.
For every tenant there is a landlord (property investor). If there were less landlords there would be less tenants. Many current tenants would become owners if prices weren't artificially inflated by investors looking for a tax benefit.

What is lacking in the debate is a broad discussion about the tax system and its role. The particular topic of negative gearing is filled with claims, some of them listed above. The Macro Business analysis of this area is worth reading. The latest is today, reporting on the Grattan Institute article in the Australian: http://www.macrobusiness.com.au/2015/07/grattan-debunks-property-lobbys-negative-gearing-lies/

The reason institutions shun residential real estate in Australia is quite simple: they won't invest in a sector which is so grossly overvalued. Yes, it has continued to climb in value but just because a bubble continues to get bigger doesn't mean it isn't a bubble.

Institutions elsewhere in the world like North America and Europe have huge residential portfolios. There's a reason for this.

Negative gearing is continually demonised in this country despite the following facts. (a) Negative gearing generally becomes positive gearing after about ten years or less (real estate) depending on the LVR to begin with. (b) Negative gearing doesn’t only concern real estate investments. It concerns all investments where a cash-flow loss (not capital loss) is made. (c) Negative gearing exists to compensate the investor by reducing his/her tax burden for taking on the risk that the investments’ value may not keep pace with inflation. (d) When negatively geared, losses are compounded if the investment doesn’t increase in capital value in real terms. (e) Negative gearing is not a panacea for wealth creation. In fact, if an investor seeks to become rich by only focusing on tax minimisation, then he will surely fail in the endeavour of wealth creation. The focus should always be on wealth creation with tax considerations secondary. (f) If negative gearing were to be abolished, it would logically follow that capital gains tax (CGT) should also be abolished. If negative gearing were abolished and CGT kept, then most retail investors would not be adequately compensated for the investment risks being undertaken. This would mean that investor demand for rental properties would decline significantly, the supply of rental properties would then dramatically reduce, with the predictable result of increasing rents which would arguably adversely affect the low income groups the most. This is exactly what happened in 1985 when the Hawke Govt. abolished negative gearing.

It's strange to think the Government should compensate investors for taking risk. One might argue that the return, if adequately measured, valued and realised, ought to do that.

The myopic property investor barrow is being pushed here again. What's at risk is the broader economy, however, please don't take my tax breaks away say the vested interests.

You can get bogged down in the semantics but the debate (if there is one) is best kept to the broader theory and implications.

Negative gearing is, in effect, a distortion of supply and demand and price discovery - the very forces you cite as taking effect should it be stripped away. Price manipulation is never a good idea. In this instance it is encouraging speculation on property prices - and if anything is certain is that asset prices do not rise forever and that when the debt fueled investment that typically inflates these prices (as is the case with Australian housing) is inevitably unwound, there will be a price to pay.

The banks' have been running up Australia's foreign debt to lend the money to home buyers.

Australia's banks have almost half their total assets concentrated in residential real estate. By international standards this is beyond excessive.

We need only look to Ireland and Spain to see what this does if foreign investment takes flight.

Negative gearing isn't the only problem here but it certainly hasn't helped moderate speculation. Removing it may be one way to cool the hot air flying into the inflating bubble.

This may hurt personal balance sheets but the alternative (a banking crisis) may do so with greater severity. That is why the Central Bank has recently been cracking down on lending.

Finally, maybe the former head of Australia's biggest home lender, David Murray's opinion will have greater credibility than my own anonymous blog comment post, he came out recently and said negative gearing is a potentially dangerous distortion.

Negative gearing is bad policy. That it has tenure doesn't make it good policy.

Logically the removal of borrowed money would cause a decline in housing prices allowing more people to be able to afford homes which would reduce the demand for rental accommodation. Those at the bottom would benefit at the expense of those able to buy multiple houses.

Naturally the banking sector (smaller loans equals smaller profits) and the real estate sales industry (lower commissions) will ensure it never happens.