There’s nothing new or inherently wrong about negative gearing
but concerns about the extent of its use for speculative property investment
use have been raised by economists for more than a decade. Those concerns were
heightened when in 2014/2015, the value of loans to property investors for the
first time exceeded loans to owner occupiers.
Further, it was obvious both from official statistics and casual
observance that investors were fighting with first home buyers for established lower
to middle priced homes in the suburbs: typically the types of homes sought by
young couples and families.
We were eating our young. While on the one
hand governments and various industry groups mouthed concerns about housing
affordability, we at the same time applauded ever increasing housing prices and
the wealth creation that on paper went with it. Mid last year, then Prime
Minister Tony Abbott went as far as to suggest that he hoped prices were
increasing – on the very same day that the head of Treasury expressed concerns
about a housing bubble in Sydney.
Fast forward to 2106 and a new Prime Minister: Malcolm Turnbull. In February, Bill
Shorten - a Labor Opposition Leader (who
few give any chance of actually winning the next election anyway) – suggests
that negative gearing should be pulled back to apply to new property only and that the
capital gains tax concessions should be pulled back from 50% to 25%. In response, PM Turnbull suggests this might lead to a form of economic
Armageddon.
Supporters of the status quo are claiming
that ‘average mums and dads’ are the biggest beneficiaries of negatively geared
property investment, which many indeed are and have been. But equally, there are
some obvious excesses which even the most ardent supporter would struggle to
hold up as models of equitable tax or housing policy or lending practices or indeed economic policy generally.
Take the now famous example of ‘Property
Investor of the Year’ from Your
Investment Property Magazine of 2012. Kate Maloney and her partner, at the
age of just 24, won plaudits from various judges (some of them still high
profile housing market commentators) for amassing a substantial property
portfolio. (The full copy of the article
announcing winners and runners up is
here).
“Three years later,” she now writes, “if we
were to sell our properties, we would still owe the banks about three million dollars
not including arrears interest and selling costs. We are currently in the
process of sorting out the debts. The outcome at this stage is uncertain.”
Or what of the story in the Australian Financial
Review of the 15th of February, which was intended to paint a picture of some
‘average mums and dads’ using negative gearing, who would presumably in the
future not have the same opportunity should Shorten’s proposals get up? The
story, entitled “Investors to lose under Labor’s gearing plan” profiled a young
couple, Simon and Rebecca Cooney, with two young children and who “are nurses
who both earn more than $100,000 and bought their first unit in Darwin in 2006.
They now have four properties in the Northern Territory capital, Brisbane and
Katherine and owe $1.7 million on the homes worth about $1.95 million.”
That’s right – this level of indebtedness
is put forward as an example of people who will ‘lose out’ should negative
gearing be changed. If owing $1.7m on a $1.95m portfolio when pulling in a
combined $200k with two young kids is now a good thing, then everything I
learned at high school economics and accounting was wrong. Everything my
parents taught me was wrong. Plus the lessons of history are also wrong. Hell, even the leadership of the country is wrong. Yikes,
what a dope I’ve been!
Another frightening yarn (unlikely to be
the last) in the Australian Financial Review of the 24th February
told the story of a hedge fund manager and an economist who posed as a gay
couple with a combined $125,000 in income who toured the western suburbs of
Sydney looking for property, to see what was really happening at the coalface.
Like a scene straight from the movie ‘The Big Short’: “both men encountered many investors who were
able to get revaluations on their properties to increase their equity for
speculative purposes. ‘We met one who was able to do this 20 times in a year
with their portfolio… They (mortgage brokers) wanted to put you into 10 to 15
apartments… (and) the only way they could do that was getting the bank to
revalue the property so you could revalue properties quickly.”
Yep, it’s all good. Nothing to see here.
Move along.
Sadly, what has become obvious is that we
have become a nation divided. There are those exposed to the property sector
who will fight against any policies which could even hint at cooling markets
and lowering prices. Our ‘battlers’ from Darwin would be just another round of
casualties - like Ms Maloney - should that happen. But at the same time, we have a
pressing problem with affordability and know that the very high prices of
housing in major centres is leading young couples and families – including our
own children - to defer entering the market, or to be entirely precluded from
it. Their housing choices are being forcibly compromised by social engineers
who have deemed it only fair that in the future, we raise families in (mainly small) inner city apartments and abandon private transport in favour of public (or cycling). Evidently, detached homes in the suburbs are now for
high income earners or investors, actively accumulating ever bigger portfolios.
Meanwhile, the entire supply side of this
discussion has (again) been pushed to one side. We have artificially inflated
land prices by creating contrived growth boundaries around urban centres, intensifying
competition for development sites to dizzying levels which flow directly to the
consumer. Then we choke that limited supply with byzantine planning controls
that even senior lawyers struggle to interpret, leading to high compliance and
delay costs. For good measure we then tax that limited supply with excessive “user
pays” levies for infrastructure that doesn’t yet exist, while buyers of
established homes in pampered inner city areas are surrounded by quality
infrastructure they pay comparatively little for.
Our housing markets, the policies that
guide them and the way in which new supply is controlled, have been allowed for
successive years to get progressively worse, with little intervention other
than to add complexity. We stand idly by and ‘tutt tutt’ the mounting
generational affordability problem, all the while clipping the ticket as our
existing portfolios rise in value.
It’s as if the Property Council’s latest campaign to defeat even
the mention of changes to negative gearing – posed as it was by an opposition
leader that few give a chance of winning – was spot on by picturing
our housing markets as one big collective house of cards. Touch or tinker with
any part of it, and the entire house of cards might come crashing down. Even
raising this as a proposal from opposition benches is apparently perceived an
act of war.
I’m not sure whether that was the intention
or not but it’s a scary thought to think that our markets might now be so
distorted and vulnerable that even a discussion about changes to one aspect of
housing policy is something to be attacked with hostile intensity.
Better it
seems to instead cry havoc, and let loose the dogs of war.
