Download Podcast

In This Video:

00:28 What is negative gearing?
02:38 What are the changes that they are proposing with negative gearing at the moment?
04:15 What policy though they are proposing?
07:16 The New Market

Good day everybody Daimien Patterson here from Integrity Property Education. If you are looking for property investment advice or property investment strategies and basic property investment knowledge then you come to the right place. Today’s blog video is all about negative gearing and the proposed changes to negative gearing.

What is negative gearing?

What is negative gearing first and foremost, it all depends on what context you are talking about now if you are talking about government policy we say “negative gearing” but really what they should be saying is just “gearing”. Now there are positively geared properties and there are negatively geared properties what is that actually mean? Well what it means is that the government allows us to claim any losses associated with an investment property on our tax and then reduce our taxable income and get a tax return. So how does it work? Well quite simple, your rent that you receive from your investment property is added to your income and then all the expenses associated with that property then get deducted so the interest on the loan, the insurances, the maintenance cost, rental management and all those other things depreciation then reduce your income down and then more often than not especially when you add depreciation you’ll end up on paper looking like you made a lost and therefore you will be able to claim that loss on tax and get whatever tax bracket you are in 32 and a half,37 and a half back on tax. So that’s what negative gearing is in concept.

Now why do we have negative gearing? Well, have you ever stopped to think about who owns all the rental properties? Now the banks will only lend money to people who have enough money to save the deposit and so therefore not everyone can afford to buy their own home. SO we must have rental properties available for the population who can’t afford to buy their own home. Now there is two ways to do that.

  1. Is we can have a government housing which is proven to be a very negative way of providing housing.
  2. To encourage investors to buy houses and make them available as rentals.

So this is what negative gearing policy is really all about. It is about encouraging Australians to own investment properties so that there are rental properties available for those who can’t buy their own.

What are the changes that they are proposing with negative gearing at the moment?

Well depending on which way you look at it, some people see negative gearing as a massive impulse on Australian budget with billions and billions of dollars being refunded to property investors every year to say “thanks for having investment properties.” Some people say that is a bad thing, but the wiser people actually see it as a good thing because without those investors, the government will have to provide that housing anyway and they will be spending money on government housing rather than on tax returns.
So why not do it? My personal view, this is not bragging so not trying to fix it however, it continues to come up as a political hot topic.

There are two statistics you need to know about the chances of any legislation getting changed and they are:

  1. 88% of Australian tax payers now own investment property. So making any changes to negative gearing policy could potential be a literal suicide and I will be very hesitant to do so.
  2. 55% of members of parliament own investment properties.

So those two factors are quite relevant if you do bring in such a policy you might face electoral backlash and if you are going to try and get approve you still need to convince all the members of parliament to pass the bill itself. So before any change will go through those two obstacles would need to be changed.

What policy though they are proposing?

The liberal came out with a policy which they are using a bit of a teenage of the witch strategy. And the first thing they are saying is they are going to “Grand Father” any existing arrangement for negative gearing. If you already have a property and you are claiming negative gearing benefits they won’t take that away from you. But what they are also saying is now is going forward into the future they only going allow negative gearing on properties that are purchased brand new.

The theory behind that be that we want to build more houses so that our growing population has got somewhere to live. So that’s sounds good in theory and it sounds like it would bit this two statistics which is the net avoid the backlash and try to get to parliament because both the vouchers and the members of the parliament won’t be affected by policy change if its grand fathered so that the important point to that. But let us talk about basic economics now that won’t fit on the property market. Now the first thing is going to happen is we will talk about old houses. Now old houses at the moment 25% of buyers are investors and 75% are new occupiers. So ones this policy comes in were going to see reduction in buyers for existing homes. Now basic supply in demand economics says that “if you have the reduction in supply or an increase in demand you will have an upward pressure on process if you have an increase in supply and or if reduction in demand you will downward in process. If would take away negative gearing from all the properties, investors are going to stop buying all the properties or significant reduction on those who do. So what does that mean? Well first of all it means all the suburb are not going to see as much price growth, there is going to be 25% of buyers are now no longer going be there will see significantly reduce percentage you’re going to be investors and therefore there is going less the mark of the properties and prices will go down in theory.

But another thing that is quite interesting as well in all the suburbs there’s then going to be less and less properties available for rent. Now that is a reduction in supply of rental properties. What is that mean? That means the cost of renting in all the suburb in particular in city suburbs is going to go up. So if we bring in this policy with grand fathering, we will going to see downward pressure on process in all the suburbs and upward pressure on rents. That may not be a good thing for a government who is trying to get elected.

The New Market

Now let us talk about the new market. Now if we are going to bring it in only for the new market what
effect is that going to have on new suburbs. First of all, all the investors is going to shift their buying power to newer states. What is that mean? That means we are going to see a dramatic increase in the amount of properties in newer states that is up for investment versus the amount of properties that is up for owner occupiers that will mean that there will be more renters in the suburb and all may rent will drop on the newer suburbs, because there will be more rental properties in their suburb so it will be over supply of rental properties. Now most of the newer suburbs is on the up skirts of town as well and a lot of renters who need public transport won’t be able to live there because, generally new suburbs have poor public transport infrastructure. So what we are going to see there is a drop in rents in the new suburbs, but what we will also see in an increase in prices in new suburbs because we are going to have lots of investors going in there. So what is that mean? Older suburbs price is going to come down, rents are going to go up. Newer suburbs prices going to go up, rent is going to come down. Interesting isn’t it, how it works? Either way I don’t think anyone going is to be happy about it. So will this policy comes in I highly doubt it that negative gearing is going to come in. I highly doubt that they are going to change the policy. But if you are already an investor and they do ring in the policy don’t fear because it’s not going to be a bigger fit on your current situation from a cash flow perspective because if you have an existing properties, rents will go up and you are going to grandfather the policy so you are going to retain your tax benefits and if you are an investor looking into stuff well then it is going to be great for a capital growth cause prices in new area is going to go up so you are going to make a good initial capital growth while those areas are being delivered and there’s a lot of demand but perhaps your cash flow won’t be so great when the rents starts take off like what we’ve hope to.

So that’s Negative Gearing a long blog video today with a very complex issue that people need to understand. If you like this blog video please share with you friends if learn something share because there is a lot of people out there who have no idea what they are talking about when it comes to Negative Gearing and I really would like you to get out there and educate people the quickest way is just to share this video that’s it for me today.

Leave your comments below