Catherine May Smith
“Australia is the lucky country, a country born from hardship and a desire for freedom and fairness for all. So lets make housing affordable for all.” ~ Catherine May Smith
As the Negative Gearing debate emerges once again, the below ABC Facts Sheet is a very interesting read.
Fact check: Do most negative gearers earn a modest income? ~ ABC News 3 March 2016
So, is Negative Gearing a Reason to Invest?
An investment tip I repeated to many of my past Financial Planning clients was “Do not make investment decisions based on tax avoidance (Legal Definition of Tax Avoidance)”.
If you do, you risk future changes in Tax Rulings impacting on your monetary flow. But do you risk impact on investment profits?
The principal of considering all “investment risks” is prudent investment decision-making.
You wouldn’t take out an investment loan unless you factor in possible future changes in monetary & fiscal policies, rising interest rates, property maintenance costs, rental vacancy, capital gains tax on realised property etc.
But many property investors have invested without thorough research, seeking unbiased advice and implementing risk management plans.
Ironically though as you read this Fact Sheet you will have some pretty mind blowing facts placed before you.
In Australia, out of the current population of 24 million for 2016, we have 12 million tax payers. Out of 12.7 million taxpayers we have 1.2 million who claim negative gearing deductions.
10.4 million of the taxpayers earn less than $80,000. Of those only 8% have negatively geared rentals, but are they? Their tax thresholds are so high and interest rates are so low the actual tax relief from negatively gearing would be minimal or nil (positively geared).
” that’s equates to 838 thousand Property Investors receiving little benefit from a negatively geared investment strategy”
So if 10.4 million have 8% of the rental housing market in a low or positively geared tax environment, that’s equates to 838 thousand Property Investors receiving little benefit from a negatively geared investment strategy within the rental housing market.
Out of the remaining 2.37 million high income earning property investors, 18% are invested in the rental market. This equates to 421 thousand, 1/2 the number of the “below $80,000 income earning” property investors. Now one variable this calculation doesn’t take into account is the number of properties each investor owns.
So out of 12.7 million tax payers 426 thousand high income earning investors are the ones that will be impacted the most by the removal of negative gearing, for they use negative gearing as a tax shelter to offset their other income. And they have the money to afford the change, unless of course they are in so much debt they are living beyond their means… at the expense of other tax payers. Another thought for another time.
But what does all those facts tell us?
The biggest concern is the impact on rental property market if negative gearing is removed… And with the current information provided I would say very little impact at all. There is strong factual information available from the Australian Bureau of Statistics showing the impact on the rental market when negative gearing was removed by the “Hawk” government in 1985 – 1987. The following information & graphs from the ABS shows rentals in fact fell during this time in Australia except in WA & NSW. WA’s rental statistics was directly affected by the America’s Cup challenge during this time.
Did rents increase from 1985 to 1987?
To get a clear picture of how rents changed between 1985 and 1987, inflation must first be removed.
Inflation is a measure of the increase in the general level of prices in the economy.
If inflation is included in the rental price analysis it is not apparent what change in prices is merely due to inflation.
Subtracting inflation from rental prices changes is termed the “real” rental price.
Over the period when negative gearing was abolished only Sydney and Perth experienced strong growth in real rental prices.
Real rents in Adelaide and Brisbane fell considerably over the period, whilst Melbourne experienced low, or at times no, real growth in rents.
Being able to pay tax is a Privilege…
I also had a piece of advice for past clients, which always caused internal conflict “If you are paying tax, you don’t have a money flow problem, it’s a privilege to be able to pay tax”.
So if high income earners find themselves paying more tax from the removal of negative gearing its part of the benefits of being financially better off than the average Australian. Their helping fund for themselves and the rest of community all the infrastructure, public utilities, support services etc. provided by the government for the wider community and those in need and underprivileged.
The Average & The Affluent
The types of properties a “below $80,000 income earner” will own in comparison to a high income earner means they are, in general, invested in two different rental markets, “average” and “affluent” (although Average is arguably moving into Affluent as AWOTE (Average Wage) & housing prices gap increases).
The “below $80,000 income earner” is most likely dominating the average housing rental market, where as above $80,000 income earners will be exposed to the more affluent housing rental market.
The greatest concern out there on the removal of negative gearing is how it will impact on low income earners caught in the rental market, unable to or refusing to commit to high Housing Prices and inevitable high Home Loan repayments which is now very disproportionate to A.W.O.T.E. (Average Wage). Banks & other lending financial institutions being the major benefactor in this ever increasing housing price manipulation.
Pave way for responsible Rental Property Owners
With many not reaping the rewards of negative gearing anyway, perhaps removal of negative gearing will encourage serious & responsible property investors to enter the market. Those with the cash liquidity and funding to maintain investments properties properly until its time to sell; ensuring strong investment returns for the effort put in during the investment time frame.
If you can understand property maintenance costs are the same as your investment fees on your managed superannuation, your accountant, compliance & investments fees on your self-managed super fund, you will appreciate property maintenance costs are no different. These costs are necessary to pay if you wish to generate high long term investment profits.
Is there help for those currently unable to enter the Property Market?
In the meantime will this help our young people, sole parents, unemployed, seniors, disabled etc. enter the housing market? No, not unless the government uses these profits to provide subsidies to low income earners to help pay high mortgage repayments.
Australia’s economy and strong financial regulations & reforms will never see the property crash America experienced in the Financial Crisis of 2009. Corruption and Misconduct in the Mortgage market was the main ingredient that lead to this financial catastrophe.
More Australians than ever cannot afford to purchase their own home, ensuring low vacancies in the rental market. I reflect to the late 1900 when most families where only 1 income and still able to afford an average priced home. Unless the government starts looking at implementing housing price thresholds and/or using tax gains from the removal of negative gearing to subsidies the cost of housing for lower-income earners, more Australian’s citizens will be unable to enter or pushed out of the housing market, so whose buying? Another thought for another day.
The government needs to also stop the manipulation of the housing prices by those in power and a position to do so. Just as there are penalties for insider trading in the Share Market, its time for the government to implement much needed investigations and impose high penalties for misleading and manipulation of the Property Market Prices by those involved in the Mortgage/Banking, Property Development and Real Estate industries.
Australia is the lucky country, a country born from hardship and a desire for freedom and fairness for all. So lets make housing affordable for all.
All in Perfection.
Author
Catherine May Smith, Abundance Life Coach
Catherine has successfully completed an Advanced Diploma in Financial Planning, Associate Diploma in Accounting, as well as being a Master Practitioner in Neuro-Linguistic Programming (NLP). Catherine is an Energy Healer, obtaining Certificates in Reiki & Pranic Healing, Hypnotherapy and Time Line Therapy and has also completed an Angel Intuitive Communication Certification with World renowned Author Master and Teacher Doreen Virtue Ph.D. She has had various articles published in the Nova Magazine.
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