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.