The looming demise of negative gearing has triggered a tsunami of investor activity: Robert Simeon
In my 30 years of selling real estate I’ve seen some amazing market trends - but what I am seeing now is arguably the most amazing trend that Australian real estate has ever witnessed before.
The last such event, which happened on a much smaller scale, was the introduction of the capital gains tax on 20 September 1985. I was a real estate agent on my L plates who was just learning the trade and caught the back end of a mad investor rush to buy investment properties before the new legislation was enacted.
It’s called the Grandfather clause or the Grandfather Policy. It's where an old rule continues to apply in certain existing situations, while a new rule is introduced and will apply to all future cases. Cue negative gearing which is now front and centre of Australia’s great tax debate. What we are seeing today is just how smart and savvy Australian property investors are as they vigorously gold-plate their property investment portfolios. The reality of being guaranteed full deductions on your investment property explains exactly why property investors have run amok with Sydney real estate.
The government recently released its tax discussion paper which just so happens to be spruiking debate on negative gearing and capital gains tax. Property investors in Australia are all over the “Grandfather clause” simply because of the sheer weight in numbers of property investors - in 2011-12 a staggering 883,325 of 1.266 million taxpayers claimed deductions. Negative gearing by property investors reduced personal income tax revenue in Australia by $600 million in the 2001-02 tax year, $3.9 billion in 2004-05 and $13.2 billion in 2010-11. So one can only shudder to think what this year’s deductions will be like given the investor boom.
But let’s now look at what effect this is having on local real estate markets. They reveal (something that I have been alluding to for ages) exactly how household sentiment has radically changed when it comes to buying the principal place of residence today – thanks mainly to the global financial crisis which has re-calibrated how households approach their modern day property folios.
Trading up is now a thing of the past with households now opting to renovate and then leverage investment properties from their principal place of residence – that’s right, the gold plated guaranteed tax deduction.
Look at how many houses are available today in Neutral Bay - the number is zero. If you look at the number of houses available today in Cremorne the number is also zero. When I go back over our house data for the last five years on a weekly basis Neutral Bay averaged 12 houses on the market each week and Cremorne averaged 15. Mosman houses have averaged 88 houses and today there are just 57 and going lower. What we are seeing is unprecedented given whilst the principal place of residence is tax free, households have decided to stay put and lock in long-term real estate investment property with a locked-in maximum tax deduction. All thanks to the Grandfather clause.
For the record this is the very first time that no houses have ever not been for sale in Cremorne and Neutral Bay. A coincidence? I don’t believe so.
The Sydney Morning Herald ran a piece last week – Property investors’ use of negative gearing contentious.
My commentary: “Given all that’s currently going on with overseas buyers – more particularly, the uncertainty of exactly what’s happening – it would only be reasonable that with all new developments, only Australian citizens can qualify to buy. The Australian government has lost all control for new developments where it is now imperative that the multitude of loopholes are immediately addressed. It’s that serious that our government is only now just starting to understand the debacle we have with overseas buyers who are the driving force behind these booming markets.
"When negative gearing was introduced back in July 1985 by the Hawke/Keating government, the architects would never have calculated the effects it would have in the market when you have a present cash rate of 2.25% and going lower. Only when the Liberal and Labor parties agree that they will support a bipartisan inquiry into negative gearing will we see a (probable) slowing down of the Australian property investor tsunami.
"Having said that, negative gearing is now 30 years old, where only in the last five years has it reached maturity. The fact that after each financial year we have now seen a new Australian record deduction clearly shows how well the system is being manipulated by investors.
"The consensus is not calling for its abolition – rather an intelligent discussion on what is a fair and reasonable outcome that best suits our property industry today. Given we have a record low cash rate that looks to go even lower, we could then see the cash rate at or around this level for well over a decade to come – maybe even longer, if Australian Treasury bonds are any indication.
"Instead of burying the negative gearing debate in that too-hard basket, the time has now arrived for it to be debated warts and all. It would be a fascinating debate.”
The reality of the matter is that Australia is not in one of the worst ever housing bubbles we have ever seen, rather household’s cherry-picking investment properties over trading up simply because we have a record low cash rate and with negative gearing a gold plated tax deduction which won’t be available for much longer if rumor and speculation prove to be correct.
Sydney is also on track to become the first Australian city with a population to hit 5,000,000 with demand consistently outperforming supply.
I’m of the opinion that too many commentators have completely missed the ‘big’ housing picture and are way off the mark with their persistent household debt criticism lecturing.
