I’m an avid Triple J listener and every day they have a half hour session called Hack where they cover the tough stories in the news…

Well last Wednesday they obviously covered the Budget and had an Economist named Richard Dennis on air, and boy didn’t he put his foot in his mouth.

 

 

 

Never had I ever heard of an economist who has never even put any thought into his comments.

Where it touched home was when the scrapping of negative gearing was back on the table.

Richard told of an example of a 1^st homebuyer at an auction verse an older investor. If they were to battle over a house, then the old investor would be willing to pay more for a property as they can negative gear the losses.

So Richard, when did age make a difference to negative gearing? Sorry did they say you were an Economist???

And secondly, what a load of crap… why would an investor pay more for a property to simply lose more… investors generally have done their homework and know, at what value, that the property is a good investment.

If anything it would be the reverse, as the 1^st homebuyer is an emotional buyer and they buy for love. As someone who goes to around 50 auctions per annum, I am yet to see investors pay more for properties than 1st homebuyers.

And given the First Home Owners Grant is pretty much only offered to new properties now in all states, show me where these auctions on new properties are?

To think you said this on national radio is beyond me…

As an economist, one would think that you understand how negative gearing is calculated… and the last time I checked, age had nothing to do with it.

The last time I checked it was calculated on your income and the losses on the property.

The last time I checked, negative gearing means you can claim back some of your loss, but no matter the income, there is still an out of your pocket loss that you, the investor, must pay… so why would you pay more than you have to, to simply lose more???

But like usual, let’s look at the flip side of the coin – negative gearing is abolished. Now what?

Well let me tell you what I think (and I have actually put some thought into this, not just got on the radio and spoke before I thought)…

Losing negative gearing means that a very large proportion of investment properties would be dumped on the market to sell at the same time. For those properties negatively geared today, they will put them up for sale now. When interest rates go up (and they will at some stage) more and more properties will go onto the market. This will create a massive oversupply of properties on the market, as 1 in 3 properties are investment properties on average.

This oversupply will see desperate vendors drop their prices, and drop their prices and drop their prices again until they get a homebuyer to purchase their home. Property values across Australia will plummet.

The potential CGT that the government would have received on these investment properties will be diminished due to lower sales figures.

Due to the shortage of available rental properties, rents will skyrocket. Not to mention for those who keep their investment properties, the rents will also skyrocket to make sure the rent covers your ongoing costs, as they can no longer claim any losses.

These massive rental increases completely defeat the purpose of what this budget set out to do, and that was to help the less fortunate. In fact it will do the exact opposite. There will be massive public outcry.

Small coastal towns known for investors owning holiday homes will become ghost towns, as owners of these properties will take huge losses to liquidate their properties. This effect will ruin small towns that rely on holidaymakers. Many businesses will simply close the doors.

The losses from the sales of these properties will be offset in future years when those people makes gains (property losses can be carried forward indefinitely), so the government will lose massive taxes they would have normally received.

The government will go further into deficit due to the massive loss of revenue from stamp duty they collect on every investment property purchase.

This loss will also filter down to even bigger losses for the government as home owners will have larger mortgages than their property values, due to property values plummeting, and therefore unable to change or buy a new home. The banks will not release the security as the loan balance is higher than the value. So even normal home purchases will be almost zero.

Stamp duty will be a very small revenue collector for the government for a very long time. And given that the First Home Owners Grant is for new properties only, the stamp duty is calculated only on land value, not the end product value. This stamp duty difference is significant.

Tradies, solicitors, conveyancers, building and pest inspectors, real estate agencies, property managers & builders will go into a financial crisis or bankruptcy due to loss of revenue that they would normally receive from investors.

New home construction will almost be non-existent. For those construction companies still around, building costs will increase significantly due to a lesser buying power of bulk goods as much less product is required.

Mortgage volumes will reduce dramatically as well, therefore resulting in bank profits reducing… which flows onto shareholder dividends, or lack thereof. To combat this the banks would increase the interest rates to keep profits high knowing that you cannot refinance your loan as the loan balance is higher than the property value. The new lender simply won’t take on this high risk debt.

The government then introduces CGT on the sale of your home to compensate for the loss of stamp duty and CGT from investment properties.

And if you think they won’t… well it happens in Sweden already… yes you pay CGT when you sell your home for a profit!!!

Although it may take some time for them to realize any CGT as the property values would have plummeted. They would receive it from homeowners who have owned for a very long time.

These same property values that are going to fund our retirement when we choose to downsize and invest and live off the remainder as the pension is no longer. And with no money in the government kitty = no pension.

Am I painting a clear enough picture?

And if you think that I am being a little overboard, do you remember when Bob Carr introduced the NSW Investors Tax… thousands of investment properties were sold in months and many heavily discounted in the rush to make the cut off date… and consider 1 in every three properties is an investment property… that’s a big chunk!

Now in time all would be restored if negative gearing was abolished, but this would be a 20 or 30 year process which for most of us is all too late…

Now to make it clear, the property investment market currently should all be cash flow positive given the ultra low interest rates, but cash flow positive includes negative gearing to make a property positive.

I think maybe the government should have thought more about the ramifications of abolishing this now that is has been around for such a long time…

I have included a link to pod cast for those who want to listen http://mpegmedia.abc.net.au/triplej/hack/daily/hack_wed_2013_5_15.mp3 The negative gearing part starts at the 14 minute mark.