You might already know if the labour wins the next elections and comes to power, they are proposing to bring changes to negative gearing. One of which is the negative gearing applies to only new properties. I am someone who bought an apartment as my first property (because I am unable to afford a house, but I wish to move to a house) with the view that I can buy another property after a few years, move into it making the current one I am living into an investment property. I am confused as to what happens to my scenario when the new proposed negative gearing policy comes into place? I did not find much information related to this online. Can someone throw light on this? Thank you.
Change Current Owner Occupied Property into Investment Property after Labor's Proposed Negative Gearing Changes
usbc activist on 29/08/2018 - 12:01
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try germany, you don't need property market as a tool for propping economy
an economy based heavily on housing always never going to end well
Germany has the Euro and the rest of the Euro zone being unable to set their own national monetary policy. It's a bad analogy for basically any other country, because no other common currency zone exists.
To elaborate: The usual case is that when there is a significant trade imbalance, the net exporter's currency becomes inflated (in this case the Deutchmark if it existed), and the net importer's currency becomes deflated (for example, the Greek Drachma). This is because there is higher demand for the currency of net exporters (more German goods, more people needing Deutchmarks to pay), and conversely the supply of the net importer's currency increases (more Greeks buying using Drachma, more Drachma going overseas). Supply and Demand - Deutchmarks are worth more, Drachma are worth less.
The consequence of this would be that German exports become more expensive, and Greek exports become cheaper (in this hypothetical), which serves to act as a natural adjuster of trade imbalances.
Because of the Euro though, none of the above happens, which is why Germany is currently running a trade surplus of 21.8 Billion Euros in the year to June 2018, and ran a surplus of 22.1 Billion Euros the year before.
So sure - if you can duplicate that, you can have a 'healthy' economy without resorting to other domestic sources of economic activity like property. And 'healthy' is in quotation marks, because it's unsustainable to have such an economy which relies on effectively (and in the case of Greece, literally) bankrupting the economies of your trading partners.
I couldnt agree more with you, at a macro economic level greece entering the Euro zone eventually led to its own downfall and bankruptcy.
There is no question the property market here is in a bubble, anything could tip it over the edge. Right now its slowly starting to deflate like a balloon, but removing negative gearing is like putting a small pinprick to the balloon, and you will see a very big pop.
@garetz: Yeah, the property market is definitely in a bubble, but that's almost the nature of (modern?) economies (being cyclical). A responsible government's job is to smooth out the cycle, certainly not to try and instigate a crash.
It's been in a "bubble" for the last 30 years apparently. It's never going to crash because the demand is outstripping the supply. Everyone wants to live in the city. Prices might drop but they won't crash. It's just the cycle.
@subywagon: The last time we had a real recession was 1984, thats 34 years ago, interest rates went to about 18%, but houses were worth alot less. The problem is just that, there is no cycle, the cycle used to be recession, 7 years of appreciation, recession, 7 years of appreciation then minor depresson. 3 cycles of that then a great depression. Since the GFC we havent had a cycle cause the market was manipulated to prevent it, instead we have stagflation, now that we are at the lowest interest rates in history, quantative easing will not work, cause you cant go lower than what we are at without causing hyperinflation. So the cycle was broken, and we are living in a world of bubbles. When the tipping point comes there will be huge crashes. First we have tarrifs, which the usa is introducing, then those countries will return tarrifs, costing jobs, when unemployment hits a certain % you will see mortgage defaults rise, then that causes businesses to fail, and interest rates to rise, when rates rise property prices fall, causing more unemployment, it becomes a downward spiral. Most of us havent see this happen in our adult life, so when it does happen it will hit most people hard. In the last great depression unemployment went to 40%, people think that can never happen again, but its right around the corner.
@garetz:
Dreaming !!
There are so many more tools available to govt’s, and natural stabilisers embedded into economies now, I don’t think the probability of a ‘big crash’ is anywhere level or above ‘very unlikely’People have been saying this for 20+ years !!
Germany has the Euro and the rest of the Euro zone being unable to set their own national monetary policy. It's a bad analogy for basically any other country, because no other common currency zone exists.
Only for the last 20 years or so, the German property market has existed in a very similar form for 100+ years before that, so you can't claim that the Euro is having a significant effect on it.
@banana365: What is with people and just abysmal reading comprehension? I'm not saying the Eurozone has any effect on the German property market, I'm saying it's behind Germany's economic performance despite not having the same kind of property market. There's no direct correlation between the Eurozone and real property - of course not - because properties can't move across borders, and the richest people in the Eurozone are already German.
@HighAndDry: Having already failed at smoothing out the bubble, it's now their responsibility to crash it. They shouldn't have let it happen in the first place, but given what's happened the only thing worse than a crash is not having one.
@ely:
but given what's happened the only thing worse than a crash is not having one.
No - the only thing worse than a crash is a bigger crash. The market right now is already correcting, the government literally only needs to not put their grubby hands all over it.
@HighAndDry: The market is experiencing a moderate adjustment; it needs someone to stick the boot in though. Without the market distortions that incentivise property speculation over other forms of investment it will remain unaffordable and that has a significant economic cost that you appear to be ignoring. The unfortunate government meddling in the market has been a significant contributor to the problem and only by them getting out of it can we see a proper recovery.
A crash is painful short term, given how incredibly expensive Australian property is, very painful. If it doesn't crash that cost is instead borne by all subsequent generations that will pay more for the basic essentials for life, and eventually by everyone else as entire generations go through life with a higher cost of living due to larger mortgages or permanent renting, retiring with fewer assets and requiring more support from our tax.
I own a property, purchased relatively recently, but I'd be happy to see a 50% drop across the AU market even though it would be painful for me personally.
@ely:
I hope you haven't had any formal economics education because you'd be due a refund. I actually edited this out of my last comment because it felt too harsh, but it seems warranted after all.
I own a property, purchased relatively recently, but I'd be happy to see a 50% drop across the AU market even though it would be painful for me personally.
Oh yeah. It might be financially 'painful' for you, but a 50% drop in property prices across the AU market will absolutely and utterly crater the entire Australian economy, and those who're on minimum wage or already financially struggling? It will be physically painful for them because they'll actually be reduced to starving.
Don't be so blase about the economy. It's kind of important.
@HighAndDry: What is with people and just abysmal reading comprehension?
If you're finding that a common problem, then perhaps you need to examine your writing skills.
@banana365: Comment I replied to said:
try germany, you don't need property market as a tool for propping economy
an economy based heavily on housing always never going to end well
And my comment concluded with:
So sure - if you can duplicate that, you can have a 'healthy' economy without resorting to other domestic sources of economic activity like property.
Seems pretty clear we're both talking about the economy there. So nope, check your reading skills bud.
@HighAndDry: I saw it before you edited it anyway ;)
The economy is important, so it's a problem that we have become so dependent on property speculation, which is ultimately destructive to the overall quality of life of Australians and pushes money away from more productive investment.
You seem imagine that you have a solid grasp on the economic fundamentals; please do go on about how a 50% drop in prices, which would return to prices that we had just a few years ago, will cause people on minimum wage or those already financially struggling to starve?
@ely: I wouldn't even say I have a solid grasp on economic fundamentals - it's just such a broad and deep field. But any significant part of the Australian economy suffering a 50% fall in value will crater the economy, property isn't special in that regard.
In broad strokes:
Property values in Australia fall 50%. (This happening in the US is basically what triggered the GFC).
Something like 80-90% of property owners find themselves underwater on their mortgages, owing about 1.5x-2x what their properties are worth.
That immediately triggers default provisions in any standard mortgage, meaning those properties are now foreclosed on, meaning an additional 10-20% (probably much more) fall in property prices because they're now being sold at firesale prices.
So now you have about, what 50%? more? of Australian households effectively bankrupt. Consumer spending falls by about the same amount, 50%, because bankrupt people aren't out buying coffees or new clothes. (Conversely, public healthcare costs probably skyrocket from emergency psychiatric care and suicide attempts, congrats).
If consumer spending falls by 50%, far more than 50% of retailers and other small businesses close because no one can stay viable at half their current level of business.
That has on-flow effects on every other link in the supply chain, from couriers (half of all delivery contractors lose their jobs, pretty much), to wholesalers, to manufacturers to primary producers like farmers.
Oh - did I mention? Every step of the way compounds the fall in consumer spending. So what started as say, a 50% fall in consumer spending - now after you add the other sales people, check out assistants, bank tellers, warehouse staff, small business owners, farmers etc - you're looking at, again far more than a 50% fall in consumer spending.
I mean, the rest is basically free-fall to outright recession, desperate moves by the government to prop up the economy (which inevitably fails), leading to Australia ultimately being unable to pay back the holders of its national debt and defaulting. We probably end up getting bought out by New Zealand.
Premise #2 is grossly overstated; an enormous number of properties are owned outright, an enormous number of those not owned will have mortgages significantly smaller than their house values even after a 50% decline, having held the properties through the recent price increases, and many of the remainder, while having an initial mortgage greater than their house value after a 50% decline, will still not be in negative equity because they've paid off much of their mortgage. Of those that end up in negative equity, again most will not be deeply so. The majority, probably a vast majority, of owners will still be above water even with a 50% decline.
Premise #3 is incorrect; banks can't generally foreclose on you because the property has lost value, only if you're not meeting your payments. Even if they could they would be insane to do so, because you owe them the full amount you borrowed and if they foreclose they won't get it.
Conclusions: irrelevant, due to the premises being incorrect.
@ely:
Premise #2 is grossly overstated; an enormous number of properties are owned outright
Overstated? Eh, maybe. Grossly? No:
https://thenewdaily.com.au/money/property/2018/01/19/places-…
The absolute numbers don't matter, the proportion does. So apparently only the majority of people in rich suburbs own their properties outright, in additional to regional areas where:
one of the main reasons for the strong outright home-ownership levels in these areas is the influx of cashed-up retirees who have sold city homes.
So great, you've screwed over everyone but rich people, and retirees have now seen their nest egg which represents their life savings halved. Congrats again.
As to (3)
Premise #3 is incorrect; banks can't generally foreclose on you because the property has lost value
How many loan documents have you read? Banks can absolutely foreclose on you if the mortgage outstanding exceeds the valuation of the property.
Even if they could they would be insane to do so, because you owe them the full amount you borrowed and if they foreclose they won't get it.
The property is now worth 50%. The market is only going further downwards. The bank is never getting the full amount back, and as an owner you'd be stupid not to default.
Conclusions:
You still have zero idea what you're talking about. Stay in school kid.
Overstated? Eh, maybe. Grossly? No:
Yes, and yes. If I had a mortgage from ~10 years ago and had not paid off a single cent (e.g. interest only mortgage the whole time), then my property would probably have doubled in that time and so even if it halved now I still wouldn't be in negative equity. Most Australians that own property have have owned property longer than that and will be fine. Having a mortgage does not mean that you owe much relative to the value of the property, nor that you have no assets outside that mortgage that you could use to improve that equity.
How many loan documents have you read?
Only my own.
Banks can absolutely foreclose on you if the mortgage outstanding exceeds the valuation of the property.
Assuming that's true (and it appears to be questionable whether this can actually be done), then as above that's still a relatively small number of properties.
The bank is never getting the full amount back
They're not if they foreclose; if the borrower still has the capacity to make their repayments then they might.
The risk of foreclosure is very small unless you lose your job; due to the economic impact of a crash this is more likely, so it does go up, but it's far from a given that a drop in property value will result in the lender foreclosing on you.
Conclusions: You still have zero idea what you're talking about. Stay in school kid.
Hey, we agree on those!
@ely: I give up. You think cutting the value of all Australian property by half won't crater the economy. WTf am I doing even trying to argue, Jesus christ.
@HighAndDry: I'm not sure what I've said that would give you that impression; I said straight up it was going to be painful. Just better than the alternative, which is a decreased standard of living for the majority of all subsequent generations until such time as the necessary correction is had. That's a lot of low level pain for a lot of people over a very long time vs a high level of pain for a much smaller number of people for a longer period of time.
You also seem to think that it would be worse than it will be because of some misunderstandings of the general indebtedness of the Aussie population and the behaviour of lenders, which probably makes you fear it more. Maybe you're worried about your own situation? Don't worry - it won't be that bad. If you happen to end up in negative equity, just keep paying - you had a house, you still have a house, and you can still keep paying the mortgage. Not much has really changed.
@ely: My own situation doesn't factor into it at all. You're acting as if the subprime crisis in the US didn't happen and didn't lead directly to the GFC. You're basically debating the outcome of a hypothetical which has already happened.
@HighAndDry: You're basically missing the point, as well as making an invalid comparison between Australia and the US.
You're missing the point because nobody is arguing that the GFC was painful (or that a hypothetical AU crash would not also be so), just that it's less painful than the damage inflicted by persistently unaffordable housing. One crams the suffering into a short period and fewer people, one spreads it out potentially indefinitely.
You're making an invalid comparison because the markets are not the same - however even if a crash in AU was just as bad as the GCF was for the US it would still be better than not having that crash, assuming (and this is a big one) that the government has the sense to then keep prices low instead of seeing them bubble back up again.
@ely: I'm too tired to keep this going. You're now arguing the GFC was a good thing. I'd have been more productive banging my head against a wall - it would've made an impression at least.
Maybe… I don't now. Go google "inflation".
Edit: You know what, I've already wasted this much time, a little more can't hurt, can it?
The actual number price doesn't matter. What you're complaining about is affordability. If you crater prices 50%, but because of the economic downturn everyone loses their jobs and their incomes fall 70%, you haven't helped. You've made things less affordable.
@HighAndDry: You probably should go with the head banging thing; it might help.
After you finish googling inflation you can look up the rate of increase in house prices in Australia. See if you notice any difference between the two and when you've thought about it for a while, and done a bit more head banging, come back and talk about it.
Edit: you should have just posted a new comment so that I don't have to edit mine.
The actual number price doesn't matter.
Correct.
What you're complaining about is affordability
You're getting it.
If you crater prices 50%, but because of the economic downturn everyone loses their jobs and their incomes fall 70%, you haven't helped. You've made things less affordable.
Also correct if that happened, but "everyone loses their jobs and their incomes fall 70%" doesn't happen. Some will lose their jobs, some will lose income, but far from all (even in the GFC in the US unemployment peaked around 10%). Eventually those recover and, if the distortions that incentivise property speculation have been removed, the affordability will be better.
If it was the head banging that helped you figure that out then keep it up, it's working!
@ely: For the record, along the same lines, I'd also be OK with keeping the house prices as is, correcting the distortions (negative gearing, CGT, no CG tax on owner occupiers, exemption of primary residences from means testing), and doubling everyone's income.
That seems a bit less achievable, but if you have a plan to pull it off I'm all ears.
We've established that you think a crash would be a bad thing and I don't think we're going to make any further progress there; I think you understand where I'm coming from now, but I'm curious about your own thoughts on the situation. Do you consider house prices to be a problem? If so, what do you think the right approach to resolve it is? If you don't, why not?
@ely:
Eventually those recover
You know what will also recover in line with incomes? Property prices.
Do you consider house prices to be a problem?
I don't. Our standards of living have never been higher, even taking into account property price increases. I also disagree with everyone putting home ownership up on a pedestal like that hot girl in high school - there's nothing magical about home ownership - the essential point is having somewhere to live. If you have that, rent or own, that's a roof over your head sorted.
If instead, you think home ownership is or should be the primary wealth creation tool, or a sink for people's savings, the fact that you want to keep property value increases down defeats that purpose. If property prices are guaranteed to stagnate, I'd advise people to rent and put their savings into other better performing investments.
I'll turn it around: Why do you think home ownership is the holy grail?
@ely: Just one more point - do you know what was a consequence of the GFC cratering property prices? Private equity firms, you know, the rich people who own their homes outright and weren't affected in your hypothetical - buying up the dirt cheap properties and waiting for the recovery, because they were the only people with money to buy then.
Look - if you ever have an idea you think is brilliant, and you're struck by a "Why hasn't anyone else thought of this?" It's probably because you're overlooking some huge flaw in the plan.
@HighAndDry:
You would probably do better if you didn't assume everyone else was an idiot and keep on explaining the obvious. You'd come across as less condescending and would save yourself some typing as well.You know what will also recover in line with incomes? Property prices.
Well duh, which is why I mention "correcting the distortions (negative gearing, CGT, no CG tax on owner occupiers, exemption of primary residences from means testing)". Those are also the changes I'd like to see made in order to "stick the boot in" to cause a crash in the first place. A crash without changes to the market fixes nothing. A crash caused by changing the flaws in the market fixes a lot.
Our standard of living have never been higher, even taking into account property price increases.
Arguably right now, because (as I've pointed out above) the majority of people here already held property before it because so unaffordable. That will decrease as time goes on.
the essential point is having somewhere to live
I agree.
If instead, you think home ownership is or should be the primary wealth creation tool
I don't.
Why do you think home ownership is the holy grail?
Because "the essential point is having somewhere to live. If you have that, rent or own, that's a roof over your head sorted" and high property prices challenge that whether you buy or rent. High property prices lead to less money whether you buy (in order to service that mortgage) or rent (in order for the owner to service that mortgage). Decreased personal wealth for most of the population as we have entire generations coming through where the majority rent has significant economic implications down the line - many will not have that "essential point" covered.
You know what was a consequence of the GFC cratering property prices
Yeah, as noted, the fundamental distortions of the market need to be corrected. If you remove those then there's no point in them buying up all the cheap property because the rules should be corrected such that property is no longer a high return investment.
Look - if you ever thing a point is so obvious that you shouldn't have to explain it, take a deep breath, consider that the person you're disagreeing with is not actually an idiot, and that maybe you're not as smart as you think you are.
@ely:
Look - if you ever thing a point is so obvious that you shouldn't have to explain it, take a deep breath, consider that the person you're disagreeing with is not actually an idiot, and that maybe you're not as smart as you think you are.
I consider this discussion past this point because again, you seem to think the GFC was a good thing.
"correcting the distortions (negative gearing, CGT, no CG tax on owner occupiers, exemption of primary residences from means testing)"
Negative gearing is not a distortion - it's applying "taxes are levied on income less expenses".
No CGT on homeowners is good for home ownership - isn't that what you want?
Same with exemption of primary residences from means testing. What's the point of increasing affordability if you're forcing one owner-occupier to sell to another owner-occupier?
High property prices lead to less money whether you buy (in order to service that mortgage) or rent (in order for the owner to service that mortgage).
Except negative gearing makes it more viable to rent out at less than mortgage service costs, making rentals relatively cheaper. But you want to eliminate negative gearing.
Decreased personal wealth for most of the population as we have entire generations coming through where the majority rent has significant economic implications down the line - many will not have that "essential point" covered.
The value of their property is the most significant asset for most households. You want to halve that, yet you're talking about worrying about the personal wealth of people?
Your ideas not only contradict each other, but your own stated goals.
You would probably do better if you didn't assume everyone else was an idiot
Maybe, but it seems to be an accurate one so far.
@ely:
Why would you want that ???
Surely you’d want a period of sideways movement over a number of years ??Good God man
Negative gearing is not a distortion - it's applying "taxes are levied on income less expenses".
It's primarily a problem because of the CGT discount, as it incentivises running a tax deductible loss which can be offset against fully taxed income in order to reap an eventual capital gain that will be taxed at a reduced rate (possibly much, much reduced if the capital gains event can be scheduled to occur at a time of low income, e.g. in retirement).
I agree that expenses incurred should be claimable, however they should only be claimable against income relating to the same asset - e.g you should be able to claim them against rental income on the property, and eventual capital gains, but not against your personal income.
No CGT on homeowners is good for home ownership - isn't that what you want?
Ironically it's not; it encourages speculation in the property market, pushing up prices and so increasing unaffordability. If all capital gains were taxed, there would be less speculation, so less capital gains, and so we would end up with more affordable property.
Same with exemption of primary residences from means testing
Yes, same again. It incentivises people to push more money in to housing as an investment (even though they're an owner occupier), hoping that they can cash it in untaxed and downsize later.
Except negative gearing makes it more viable to rent out at less than mortgage service costs, making rentals relatively cheaper. But you want to eliminate negative gearing.
It does somewhat, yes, but not to the same extent that simply having lower house prices would have. Lower prices would make that redundant.
The value of their property is the most significant asset for most households. You want to halve that, yet you're talking about worrying about the personal wealth of people?
It's only the most significant asset for those that can afford one; average wealth would increase if house prices were more affordable because it would be more evenly spread.
Your ideas not only contradict each other, but your own stated goals.
As it turns out, no.
You would probably do better if you didn't assume everyone else was an idiot
Maybe, but it seems to be an accurate one so far.
As it turns out, no.
@Yimmy: At the current rates of wage growth the "number of years" is decades. I'd rather that a few people (including myself, as noted a recent home buyer) end up worse of when it benefits the majority.
@ely:
It's primarily a problem because of the CGT discount
This is to incentivise capital investment over pure consumption spending. Capital investment is generally better for an economy.
however they should only be claimable against income relating to the same asset
This is not a principle in any taxation system. Say a company buys a car - can they only offset depreciation against any income derived directly from use of that car? No, it's a stupid and utterly unenforceable idea.
Ironically it's not; it encourages speculation in the property market
We're talking about CGT on owner occupied properties - i.e. those which are purchased not for speculation. So no, it doesn't encourage speculation at all.
not to the same extent that simply having lower house prices would have. Lower prices would make that redundant.
No, there's no direct correlation or causal relationship between property prices and rental prices. They are two different markets.
It's only the most significant asset for those that can afford one; average wealth would increase if house prices were more affordable because it would be more evenly spread.
Average = Total / Number of people.
Unless you're also planning on killing 50% of the population, wiping out 50% of property value won't increase average wealth.
Great, now I'm giving basic maths lessons. Yeah I think I'm done here.
@Yimmy: I've been asking that question, in different ways, for what it seems like an eternity. Care to take over? I'm exhausted, and I still haven't gotten an answer.
Great, now I'm giving basic maths lessons. Yeah I think I'm done here.
You're giving maths lessons not because anyone needs them, but because you want give them so as to imply that the person you're giving them needs them. Stay condescending HighAndDry, you wouldn't be the same otherwise.
This is to incentivise capital investment over pure consumption spending. Capital investment is generally better for an economy.
It's because capital gains are not consistent; taxing the gain only in the year that it occurs if the gains were made over multiple years would be an unfairly high rate of tax on capital gains. Assuming a 50% discount is a rough way to resolve this, but not a good one.
however they should only be claimable against income relating to the same asset
Obviously a car is not the same as a property.
We're talking about CGT on owner occupied properties - i.e. those which are purchased not for speculation.
Your i.e. is a false assumption; people expect that their primary residence will make them a tax free gain as well, which they hope to cash in and downsize for a tax free cash payout later. You're not really that credulous are you?
No, there's no direct correlation or causal relationship between property prices and rental prices.
You… you can't possibly be that stupid, can you? Perhaps I should be the one doling out math lessons here. If you half the amount that an investor needs to pay for a property then you half the amount that they need to charge on it to in order to make the same ROI, holding all else (e.g. interest rates) constant. It's not the only factor in the market, but it's a pretty fundamental one and to imagine that there's no relationship is either foolish or (because you seem like you're probably not an idiot) disingenuous.
Average = Total / Number of people
Oh look, you're giving out math lessons but failing English ones, showing how to calculate a mean but imagining that medians don't exist.
Unless you're also planning on killing 50% of the population, wiping out 50% of property value won't increase average wealth.
It won't do it right away, no. And just halving the prices without preventing it from happening again won't fix it either. But fixing the market, which will cause prices to fall, will eventually increase the median wealth (and will not have much impact on the mean wealth).
@HighAndDry: Poor HighAndDry, don't you know that not understanding answers is not the same as not getting them?
@ely:
will eventually increase the median wealth
You keep saying this. But it doesn't matter that someone can now convert their $50,000 in cash into $50,000 in property - it's still worth $50,000. No one's wealth has increased.
Credulous means "willing to believe." You're probably looking for "naive" here.
No, I mean that you're "willing to believe" that just because someone lives in it they're not speculating. Naive would also apply.
Halve
Yes
ROI is not a factor other than setting a rough floor on rentals
If landlords can get tenants in their door by dropping prices while still retaining the same ROI they will. Unless you're at zero percent vacancy then it will push prices down.
You said average. "Average" means the mean, not the median.
It doesn't specify which average - https://www.google.com.au/search?q=define%3A+average&oq=defi… - "a number expressing the central or typical value in a set of data, in particular the mode, median, or (most commonly) the mean".
But it doesn't matter that someone can now convert their $50,000 in cash into $50,000 in property - it's still worth $50,000. No one's wealth has increased.
I can't tell if you're stupid, trying your best to strawman things, or just want to be condescending so badly that you have to come up with bizarre interpretations.
Someone that doesn't have to pay rent all their life, by instead owning their own property, will end up with more wealth - the cheaper the property, the more they'll end up with. It's not complicated.
The current approach, where some (an ever decreasing proportion) own property that they later cash out, while many (an ever increasing proportion) do not ends up with (probably) a comparable mean wealth but a lower median as more and more end up in the renting for life category.
@ely:
But it doesn't matter that someone can now convert their $50,000 in cash into $50,000 in property - it's still worth $50,000. No one's wealth has increased.
I can't tell if you're stupid, trying your best to strawman things, or just want to be condescending so badly that you have to come up with bizarre interpretations.
Someone that doesn't have to pay rent all their life, by instead owning their own property, will end up with more wealth - the cheaper the property, the more they'll end up with. It's not complicated.
Again, if something seems too simple to you, you probably haven't thought about it enough. Owning property comes with its own costs. There is a live (but very old) debate on whether it's more cost effective to rent or to buy. The fact you seem to not even be AWARE that this is a debate just drives the point of how much a waste of my time this is.
https://www.news.com.au/finance/real-estate/buying/the-defin…
[EDIT] I"m serious, do you think owning a property is putting down the purchase price, maybe interest, and that's it? [/EDIT]
In your hypothetical that both rents and property prices fall, this debate will remain the same. And in your hypothetical that property prices basically flatline, the argument for buying property as a way to amass wealth dies.
F*** I'm out.
@HighAndDry: Again, I own a house, I'm well aware of the other costs but you keep on trying to spell out the obvious because you either assume or want to imply that I don't already know (or you're genuinely stupid enough not to realise that).
As stated, higher property prices increase rents and so lowering the makes both more affordable. The fact that you seem to not even be aware of this makes it clear how much of a waste of my time this is ;)
In your hypothetical that both rents and property prices fall, this debate will remain the same.
Yes exactly, lowering property prices would not resolve that debate, it would just make both of them more affordable.
It's not the buying the property that amasses wealth, it's the drop in expenses.
Given that you're either an idiot or not even trying to argue in good faith I'm out at this point (on this topic anyway, I'm sure I'll see you being wrong somewhere else soon enough).
@ely:
It's not the buying the property that amasses wealth, it's the drop in expenses.
Stop backtracking. This is what you said before:
Someone that doesn't have to pay rent all their life, by instead owning their own property, will end up with more wealth
Ok. I'm glad we confirmed you're just trolling.
@HighAndDry:
"It's primarily a problem because of the CGT discount"
Correct this is one major concern.
The CGT discount was introduced by Howard in place of the discount for inflation method, which is still available by the way. Inflation has been running at low levels now for decades and the CGT discount of 50% is applicable after one year. It is a rort and has been used primarily for investment in existing property which adds close to zero value to the economy. Equally important is negative gearing, which is basically a tax payer subsidy for property investors.
"however they should only be claimable against income relating to the same asset"
Correct again. It is a general principle of taxation that expenses can only be offset against Income in cases where those expenses were directly related to the earning of that Income. The car in your example is owned by the company and used by someone working for the company, that someone is presumably involved directly in company operations.
"No, there's no direct correlation or causal relationship between property prices and rental prices. They are two different markets."
Correct however they are not different markets in a pure sense.Rental rates for Residential property ( I assume that's what we are talking about here - commercial is very different )have not changed in line with property prices ( not sure of regional locations ). The ability of the rental market to pay increases in rent is dependent on many factors some of which are unrelated to property prices.
But there is no doubt at all prices have moved in Capital Cities to a point where huge numbers of people, who decades ago could afford to buy cannot now. The main way this can change is supply. Don't hold your breath.
Well Germany has BMW, VAG, Daimlar, Siemens and Allianz what do we have here?
Woolworth?
Why would they be selling??? Infact, due to grandfathering there will be more a reason to hold plus there will be a sudden rush to get in before the change takes place…
Why would there be a sudden rush to buy an investment with a negative yield? To get the capital gains to offset that loss you'd need to sell to someone who cannot negatively gear that same property. Why would they pay more than you for the same asset that loses them even more money?
Being able to claim negative gearing has an implied value attached to it - value increases higher the income up to highest marginal tax rate. This is income loss we are talking and can be utilised year after year.
Capital loss which you note - if there is one is book loss and only crystallises if someone was to sell the property and if you hold long enough through the cycle - should convert into capital gain as well.
hope it makes sense
@CheapSticks: Yeah I understand what negative gearing is, and why it's attractive. What I don't understand is why it would be more attractive if they were about to quarantine it to new builds. You're still losing money year on year, so it's not a good investment from a cashflow perspective. And capital gain potential would be lessened because the potential buyer pool would not be able to negatively gear that same property. If you were dead set on buying a loss-making property I can see why'd you bring that purchase forward before the deadline, but that would just be demand shifted forward - any temporary upward pressure on prices would reverse after the deadline.
And if you have to 'hold long enough through the cycle' for capital loss to capital gain, why would you buy that property if it had a negative yield? Why not wait until the market was anticipated to rise before buying? Negative gearing only makes financial sense when capital gains are expected in the near future. Removing/quarantining negative gearing has a downward impact on house prices. House prices in cities with a negative net yield are already flat or in decline. I see no reason to expect people to want to rush to lock in that negative yielding asset in a down cycle before demand takes an even bigger hit.
it means people will go out of their way to get rid of under performing properties, it might even lead to a property crash in the most extreme scenario
Wouldn't that mean housing is more affordable?
Although that will be the case, the "intention" is to lower prices gently and funnel it into tax revenue. The implication they're making is that it will instead crash entirely and prices will plummet. I'm personally very doubtful that's going to be the case however as negative gearing makes only one small reason to invest in property.
They shoudl go further:
Tax based on how long you keep the property: 1-5 years 90% of capital gain has to be paid as taxes, 5-10 years 70% of capital gain to be paid, 10-15 years: 50, 15+ capital gain tax as now.
Increase Ghost house tax
Simply put: stop treating housing as a speculation instrument.Negative gearing had nothing to do with Australia's experience of the GFC. Who on earth taught you that?
Any investment that relies on huge taxpayer subsidies from the majority to the few rather than fundamentals to support its value was always going to end in a crash.
My understanding is thr Govt will limit the negative loss claiming year by year to dampen the effect.
Imo, only Sydney and Melbourne market are dangerously over inflated so the other residents and investors shouldn’t worry too much about the changes.
OP, is your money currently in offset account ?
You don't need negative gearing if your rental yields are good.
Positive gearing is better and cashflow is king.
"the government pay for a fairly substantial portion of your properties"
Do you have the financial figures on this as I call BS?
For every dollar you lose you are able to offset a portion against tax (at you marginal tax rate).
You are not getting each dollar back and it only works well in a rising property market which is gone now.
Correct, and as a result every dollar I save on my income tax I can put that dollar into an offset account or pay into the mortgage directly if I want.
@Drew22: you are not saving a dollar. You are most like losing about 60 cents for each dollar you have to put in out of your own pocket.
There's going to be a lot of property investors in financial difficulty over the coming few years as they have this kind of mentality and don't look at history
Again, you are correct. I still have to pay the delta out of my pocket.
Rent and tax combined pays most of the mortgage. I only pay a small portion of the mortgage out of my pocket.
I could raise the rent so it's positively geared but then it will be way above market and I won't find a tenant. Then I'm paying the full mortgage myself.
I can service the mortgages myself without tenants but why would I when someone else can effectively pay 80% of it for me?
@Drew22: but I'm guessing your mortgage is interest only being an investment property? The money your tenants, tax man and yourself are contributing to is the banks profit.
In a market where house prices are more likely to fall than rise, what is the benefit of 60cents in the dollar that you are paying out of your own pocket going to banks profit and an asset that isn't increasing in value? May as well just burn the 60c in the dollar you are currently spending.
Not under my control, so meh.
I don't think my property is positively geared yet. It might cover the monthly payments, but the strata, council and water are going to be additional costs for me. I planned and bought an apartment that is right next to train station, surrounded by all amenities required for a family so that it will go for rent even if there is an explosion of apartments available, which is what exactly happened. Though the oversupply of apartments affected my apartment price, it still has the location advantage which should guarantee a rental income. But it will not cover the expenses. It is not positively geared yet.
Yes, I have my money in offset account.
hi genuinedude, was your original question ever answered (the thread became more like a debate)? —-
You might already know if the labour wins the next elections and comes to power, they are proposing to bring changes to negative gearing. One of which is the negative gearing applies to only new properties. I am someone who bought an apartment as my first property (because I am unable to afford a house, but I wish to move to a house) with the view that I can buy another property after a few years, move into it making the current one I am living into an investment property. I am confused as to what happens to my scenario when the new proposed negative gearing policy comes into place? I did not find much information related to this online. Can someone throw light on this? Thank you.Nope. Haven't got a proper answer. Not just in this forum, but few other forums as well.
I wouldn't worry about it at this point. A proposal isn't even an election promise.
I don't think our politicians are thinking too hard about what is happening next week, let alone their excuses for breaking election promises at a future date.
Yup, it's also concerning what Labour plan to do with franked dividends but I can't imagine the heavily invested pollies backing that one and if it does get up it will mostly effect the low income retirees (under 20K) forcing them to drag more heavily on the public pension.
I reckon they will water down this policy.
I do agree with it in principle but it's been around for so long it may need a long term phase in to not impact the one's not rorting it
Franked dividends or negative gearing?
Both are basically applying standard concepts to certain things - income, and dividends. There's no "rorting" because it's not a loophole, it's how tax works for every other form of income normally.
@HighAndDry: franking credits. If you have zero income you can claim franking credits so you get a refund.
The whole franking credit system should be ablolished and let the savings partly pay for the company tax cuts
@chumlee:
Franking credits are because tax has already been paid. Without franking, dividends would be effectively double-taxed.franking credits. If you have zero income you can claim franking credits so you get a refund.
Yes, because the franking credits represent the taxes already paid on the dividend which is disbursed to the shareholder. Think of it as PAYG tax for your shares. If the franking credits are more than the tax you already paid, think of the refund like any other tax refund you claim from the ATO.
@HighAndDry: i know what franking credits are. I'm saying you shouldn't receive the credit if you aren't paying tax.
If the government wants to lower the corporate tax rate the should abolish franking credits anyway
i know what franking credits are. I'm saying you shouldn't receive the credit if you aren't paying tax.
Why not? Franking credits are effectively prepaid tax (again, like PAYG). If you shouldn't be paying tax, you'd get the prepaid tax back (again, like PAYG: if your boss paid more than they should've, you get a refund from the ATO).
@HighAndDry: because the company paid tax not you. It worked well when it first came in but now it's being rorted by family trusts and SMSF's and no longer affordable
because the company paid tax not you.
Yes…. but that's like saying your boss paid PAYG, not you. Ultimately dividends are income from a shareholder's ownership in the company. The company pays tax on the income it keeps, but tax paid on any income that flows on through to the shareholder is literally tax paid on behalf of that shareholder.
I don't know how many times I need to bring up this analogy, but - exactly like PAYG. Tax paid on dividends is tax paid by the company on a shareholder's behalf, just like PAYG paid by your boss is tax paid on your behalf.
@chumlee: Yes, good we're getting somewhere (kind of).
As an owner of a company, the company's income is also the shareholder's income.
@chumlee: If there was not franking credits it would be double taxation, so the companies would just distribute profit through another mechanism that didn't involve double taxation. Removing franking credits would achieve nothing and practically makes no sense.
@HighAndDry:
Why not? Are you serious. Because the tax that is with held by the company on behalf of the shareholder is tax that that the company paid on profits! If it is returned to the shareholder the the company pays zero tax on this proportion of its profit. This little scam, introduce again by Howard is costing the budget over 5B$ a year.If it is returned to the shareholder the the company pays zero tax on this proportion of its profit.
Because they also obviously don't keep the dividend that they pay out.
It mostly affects high income retirees. They own more shares and receive more dividends. They pay miniscule tax in super. Poor retirees don't receive dividends…
The new labour rule was only going to apply to low income earners who did not pay any tax anyway (last I read about it that is). The higher income earners who DO pay tax were still going to be eligible for franking credits. Just another ill though out labour connivance which hopefully wont pass through the rest of government anyway.
@EightImmortals: it was designed to catch family trusts and SMSF'S but obviously low income retirees will be caught up also and the SMSF industry is flogging this to protect their interests
@EightImmortals: Huh? This rule will save the budget around 5B$ a year. As it currently stands if you are say a self funded retiree with 1.6M$ in Super and over 60 you pay zero tax on the income this generates. Around $95,000-00 a year. If you are a couple double that. Then on top of that if you hold shares you also get all of the tax the company paid on the dividend proportion of the profit. It's a joke.
Labour intends to exempt some lower income earners who rely on dividend income to supplement their income, but even that's just welfare in disguise.
A company is a completely separate identity, it runs a business makes a profit, it pays tax. If you earn enough income such that your personal tax rate over 30% ( at the margin ) can cover the 30% tax component of the dividend then your position will be neutral, but the 30% is still paid.
But if you don't pay income tax you are not entitled to a refund on tax a company has paid on profits. No other country allows this.
If they remove negative gearing, it could cause a mass exodus in the housing market. But they could also potentially prop it up again by simultaneously allowing people to use their super funds towards the purchase of their principal home.
It could also mean rent goes up en-mass as leases are renewed.
Or make interest on the family home tax deductible.
that would be awesome!
It would certainly help a lot of struggling families AND the economy in general.
What's the bet that someone's going to argue that it's not fair that the people on higher incomes get more benefit than the lower income earners? Happens every time there's some tax relief! lol
@EightImmortals:
You don't think the huge rise in other taxes to off-set the loss of tax revenue would be damaging to the economy? Struggling families can qualify for means tested financial help. A tax cut helps the rich and struggling indiscriminately. If the goal is to help the struggling, target the help there.@bobbified: Yup, there's always someone who wants to cut off their nose to spite their face. As for me, I'd appreciate any tax breaks rather than comparing them to someone else.
@mskeggs: The goal is, or should be, to help the country as the whole and everyone fairly, not just a specific subset.
A tax cut helps the rich and struggling indiscriminately.
You say this like it's a bad thing. Last I checked, "discrimination" was the bad thing.
@HighAndDry:
We have a progressive tax system as society recognises that the rich are more able to afford taxes than the poor, and that 10% of a poor person's pay packet is a more difficult sacrifice than 10% of a rich person's, even though the dollar amount the wealthy are asked to pay is higher.
Tax cuts that work against this mean the difference has to made up elsewhere via higher other taxes or reduced services.I'm happy to be called a "Richist" as somebody that discriminates against the wealthy when it comes to tax policy.
as somebody that discriminates
Good for you, I like to be more consistent in my principles, instead of picking and choosing.
We have a progressive tax system as society recognises that the rich are more able to afford taxes than the poor
That's one interpretation. My interpretation is that we have a progressive tax system because otherwise society falls apart and the poor start eating each other. I.e. we have one out of necessity, not because of some underlying moral rationale.
Even at flat tax rates, the rich would necessarily pay more actual tax than the poor, proportional to how much richer they are. A progressive system needs incredible amounts of mental gymnastics to be justified as being moral or fair. Necessary, I'll concede, and to me that's the best, and only, justification for it.
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Negative gearing is one of the mechanisms that are over inflating property prices, if the new changes come into effect people are going to be selling their negatively geared properties in droves, i would expect this to have a downward trend on the property market, especially in sydney. The government doesnt understand that if they remove negative gearing for existing properties it will not magically mean they will get more taxes, it means people will go out of their way to get rid of under performing properties, it might even lead to a property crash in the most extreme scenario. Negative gearing was propably one of the main reasons the GFC didnt hit property prices as hard in Australia as it did in the USA and Europe.
In the usa you can tax deduct interest for your main property even if you live in it, which we do not have here, negative gearing is our version of that, if they proposed to remove that tax deductibility in the USA the property market would crash overnight there.