May 5, 2016 by Dymphna 10 Comments

Negative Gearing killed my frog!


We’re finding out that negative gearing is responsible for more and more evils every day. Who would have thunk?

Wow, rate cut and budget all in one week!

I’m coordinating a podcast with my gun property economist to break down what the rate cut and budget means for property investors. It’ll be epic!

And once it’s done, I’ll send it to you.

But for now, there’s another hot potato – and that’s all to do with negative gearing. Let’s get into it.

I used to think I knew a lot about property.

But I’ve been amazed at what I’ve learnt over the past few months, especially about negative gearing.

Did you know that the collapse of the arctic ice shelf and rising sea levels – that’s mostly negative gearing’s fault.

Or the loss of manufacturing jobs to China and falling productivity levels – that’s also thanks to negative gearing.

The assassination of Arch Duke Franz Ferdinand, which plunged the world into one of the most bloody periods in history – yep, negative gearing was lurking in the shadows there too.

I even have it on good authority that the blight that’s devastating the population of the Pullen’s blue-bellied Eastern grass frog – that originated in a particular negatively geared investment property in Brisbane’s western suburbs.

At the risk of sounding like an idiot, I never knew about ANY of this.

But thankfully, day by day, we are being edumecated. Tireless crusaders are alerting us to the evils negative gearing is lumping on our doorstep, like a flaming bag of dog poo.

Astronomical prices, soaring rents, homelessness, budget black holes, moody teenagers. It’s all thanks to negative gearing.

And then last week I saw this one, which really takes the cake.

Empty homes.

Negative gearing is encouraging landlords to leave their homes empty, apparently. That’s what UNSW researchers Bill Randolph and Laurence Troy reckon:

“Leaving housing empty is both profitable and subsidised by government… This is taxation lunacy and a national scandal.”

I’m not even sure where to start with this one.

The most basic misunderstanding about negative gearing is that it somehow pays you to have a property that is losing money.

It doesn’t. You’re still losing money, you just get to use a fraction of your losses to reduce your taxable income.

But the point is you’re still losing money. There’s no getting around that.

And so I find it hard to imagine an investor where they prefer no rent to at least some rent. It’s money in the hand after all.

Maybe there’s someone who wants to lose a truckload of money to drop down into a lower tax bracket. I guess that’s conceivable, but I don’t imagine it’s common.

But the last point is, to be eligible for negative gearing, your property has to be available for rent. It needs to be functioning like an income producing asset, not like a store room for a smattering of Ikea furniture.

And so if you left it empty, you might face some awkward questions from the tax man. It’s a hard story to sell that you spent 365 days this financial year looking for a tenant, but couldn’t find anyone suitably qualified to care for your minimalist lamp collection.

So I don’t know, maybe there is some way you could leave a home empty and still claim negative gearing. But I doubt it. Have you ever heard of anyone doing it?

But this has been one of the things that has flavoured the whole negative gearing debate, since Labor announced their ‘courageous’ policy reforms.

It seems to me that people don’t get negative gearing, and they don’t get the housing market. As a result, the blame for every evil in the housing market gets laid at negative gearing’s feet.

House prices are expensive. It’s tough to buy a house. I’m not going to argue with you on that one. But there are reasons for this. We’ve had an on-going undersupply of housing for years, we’ve had over two decades without recession and average incomes are high, financial sector liberalisation over the past 30 years has funnelled more and more credit into the system…

I could go on.

The truth is the housing market is a complex beast.

But people don’t want complexity. People don’t want nuance. They want something to blame for the cost of housing and rents, and negative gearing is just the perfect villain for the midday matinee.

That said, I’m not here to defend negative gearing, and I’m certainly not about to jump into bed with those marketeers whose entire business model is built on flogging off one negatively geared property after another.

You should hear some of their self-interested bleating.

I heard one of them say in the same breath that negative gearing doesn’t push up house prices, but removing it would cause a collapse in property values.

Stop it. You’re making yourself look stupid.

Look, at the end of the day, I don’t think negative gearing is the devil people make it out to be, and whether it stays or goes, I don’t see it having a huge impact on the market.

There’s a lot of fear-mongering on both sides, but I’m not buying any of it.  And my advice to investors is sure, enjoy the political theatre, but don’t take it too seriously.

Is negative gearing causing empty homes? What do you think will happen?