Negative Gearing cops it again – Patrick Bright

Negative Gearing cops it again – Patrick Bright

It is a shame that we have to talk about the pros and cons of negative gearing again as it comes under attack from the federal opposition.  It is as if this is an evil capitalist strategy to make the rich richer.  Patrick Bright points out that it is a common strategy used in all forms of business and investment and it is misleading to attach it to property investment alone.   What would happen if Labor gets its way?

Transcript:

Kevin:  Well, here we go again, more talk about negative gearing, the pros and cons of it. A man I’ve spoken to about this off-air and on-air on a number of occasions is Patrick Bright from EPS Property Search.

Patrick, thank you for joining us today on the show, and good to be talking to you again.

Patrick:  A pleasure. Thanks, Kevin.

Kevin:  Let’s talk about negative gearing. Demystify it a bit for me, because a lot of people think that it’s really only big, fat, greedy investors who benefit from this, Patrick.

Patrick:  It’s interesting, this gearing thing. It exists in all forms of investing – business, shares. I look at property as a business, and sometimes you do make a short-term loss for a long-term gain. The policy, I guess, exists to encourage investment. That’s why they created it in the first place.

In businesses, you generally make a loss for a few years before you turn a profit, and then you pay tax on that, and it’s good for the economy. What’s really the difference with property is it was encouraged to investors to help fund construction of housing that the government doesn’t want to supply, and then people who become self-funded retirees can do it by helping to get ahead and maybe get off the pension.

And then you turn around and you have the government starting to want to change and tinker around with it. I’m not sure why – if it’s so successful – they don’t actually expand it?

Kevin:  I think it’s a very emotional issue, and it’s politically a bit of low-hanging fruit, I guess, a popular bandwagon to get on, particularly with the Labor opposition who say that they’re going to do it to help with housing affordability. If they were to do away with negative gearing, what’s your opinion on what impact it would have on affordability, Patrick?

Patrick:  I’m not an economist, but if you summarize what a lot of the economists are saying, then it will turn people away from investing. They won’t retrospectively do it, as they’ve said, so everything in place is in place. But in the future, that means it’ll probably be a disincentive for people to invest. They might turn to shares more or businesses more, because the negative gearing benefits will still be attached to those areas of investment. And so that’s going to have a knock-on effect, isn’t it?

Let’s think the policy through. If you discourage investment into the housing sector and let’s say we’re not building enough to support the population growth, therefore you’re going to have less construction of housing. That’s going to cause a greater supply and demand problem and put more pressure on prices down the track, not actually relieve pressure.

It’s also then going to have a knock-on effect of construction in your economy. Retail, people have to put washing machines and carpet and all that sort of stuff in these new properties, so if fewer are built because the demand is not there, because the investment is not there, you’re going to have a short-term maybe political gain to get elected, because it’s the populist thing attack, but long-term, really detrimental impacts on the economy.

If the government was serious about helping affordability, the truth is immigration and foreign investment are the real culprits. It’s absolutely out there and factual. Immigration is at record levels and foreign investment is at record levels, and these things are impacting the supply and demand equation. You just have to look at housing growth in all capital cities tracks immigration, and it’s also risen steadily quite strongly off the back of added foreign investment.

Pre-2008, before Rudd changed the foreign investment policy, only a few percent of foreigners were investing in Australia. This is not tracked accurately even today, but there are studies – you can Google NAB Bank and things like that who do studies and research and look at the sales and transactions. And I know Westpac Bank do it as well.

But upwards of the 2016–17 financial year, we had between 30% and 40% of foreign investors buying up new property. 30% to 40% of new property was going to foreign buyers, whereas it was a few percentage points a decade ago. So to think that’s not having an impact, you have rocks in your ear. It does.

That’s where they should be attacking, that area, tightening that up if you want to increase housing supply to locals.

Kevin:   I just want to pick up on another point that you made earlier too, Patrick, and that was about providing a disincentive to investors who provide this rental stock that is so greatly needed. Not everyone wants to buy a property; there will still always be a number of people who want to rent.

If you do take those investors out of the market, someone is going to have to supply those rental properties, and it would likely have to be the government. In my opinion, they don’t have a very good track record of doing that sort of supply.

Patrick:  No, they have a very ordinary track record. And it’s very capital-intensive, and they don’t want to do it, which is partly why they have policies in place that make it somewhat attractive for investors to enter the property market and supply housing for people who don’t want to buy their own home or can’t afford to buy their own home. But why let foreigners do it and reap the financial benefit? They should shut that door.

Maybe expand negative gearing. If it’s that good and it’s that attractive, and that many people get into it, and yes, okay, you make some short-term gains and carry forward your losses to offset your profits down the track that you pay tax on – same in business, same in shares – why not expand it and help more Australians become more self-funded retirees rather than attacking and making it harder for them?

Kevin:  So, the bottom line, Patrick, leave it alone, find other ways to improve affordability.

Patrick:  There are simpler ways to do it that would have much quicker impact – in my view – than doing away with negative gearing. I’m not saying you can’t tinker with it and improve it, but just taking it away may not be the answer. Expanding it in some areas in some way, incentivizing it in areas may actually be a better answer.

Kevin:  Now, there’s a good thought. We’ll take that further in some other chat. My guest has been Patrick Bright from EPSPropertySearch.com.au.

Patrick, thank you so much for your time.

Patrick:  A pleasure, Kevin. Have a good year.

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Kevin Turner
kevin@realestatetalk.com.au
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