03 Mar Who is to blame for house prices? – Veronica Morgan
Veronica Morgan has some serious concerns about the ALP’s negative gearing policy. As she says – We love to find a culprit for why our kids can’t afford to buy a home. First we blame Chinese investors, then self-managed superannuation fund investors. Now it’s the wealthy. It’s an highly emotive topic and perfect for electioneering but what are the ramifications if it happens?
Kevin: Okay. We’re going to give you three reasons now why Labor’s negative gearing policy won’t achieve what it promises. Now don’t turn off. I know I’ve spoken about this on many occasions.
Kevin: My next guest admittedly is biassed. However, she makes some very, very good points. I’m going to read from a portion of a release from Veronica Morgan. She says, “I am biassed of course, but I do have some serious concerns about the ALP’s negative gearing policy. We love to find a culprit for why our kids can’t afford to buy a home. First we blame Chinese investors, then self-managed superannuation fund investors. Now it’s the wealthy,” or as Veronica calls them, attack the fat cat. “It’s an highly emotive topic, it certainly is, and perfect for electioneering.” I couldn’t agree more.
Kevin: Veronica Morgan, I’m going to challenge you on a few things that you’ve said here, because… Firstly, hello and welcome to the show.
Veronica: Thank you. Challenge away, Kevin.
Kevin: Yeah. Challenge away. I’ve got to say at the outset though, any regular listener to this show will know that I agree with you. However, I think we need to put some points forward. You make the point here that there are some very educated people who think that removing negative gearing is a good thing for Australia, but they need, and while they make some good salient points, they need to educate themselves on the property market. What do you mean by that? Where are they going wrong?
Veronica: Yeah, look I mean I’ve read a lot of reports and one institution for instance, the Grattan Institute.
Kevin: Yeah, but that’s a front for the Labor party anyway.
Veronica: Yes, yes. But, it’s supposedly full of economists and really intelligent people. So I mean, that’s just one example. I mean there’s a number of white pages, white papers that I’ve read on this. So what they’re failing to do is I think, look at actual behaviour. The way in which people in the property market actually do behave because what, they seem to believe there’s a number of things and there’s a lot of misinformation around the stats and the way in which the stats are put forward.
Veronica: It’s very emotive, and it does tap into the idea that, oh, it’s because of the investors that first time buyers can’t buy. And you know what, if you’re in Melbourne, that is largely true, but it isn’t true for the whole country, and this is a problem here. We have a local issue of affordability and they’re whacking it with a national solution, and I think that that is, at a macro level, the root of the problem.
Kevin: The difficulty for me is that they don’t seem to have learned from their past experiences, and this is certainly, as you said, just excellent for electioneering. It is low hanging fruit. It’s so easy to say, oh, well this is the reason why you can’t afford to buy a home, and the majority of people will say, well, yes, you’re right, so therefore we need to do something about it. But, I’d just like a little bit of evidence as to why you think it simply won’t work.
Veronica: Okay, so there’s a number of reasons, right? So if we, we need to look at the policy and break it apart for starters. The policy is, everyone’s calling it negative gearing, but it includes capital gains tax, and so the capital gains tax concession is the biggie in terms of future property investors. That’s the thing that really is going to make a massive impact on your future retirement or your future wealth plans. The negative gearing bit, that’s short term.
Veronica: Now, and we all love, particularly politics these days is so much more short term than long term. We don’t have any visionaries in our politicians any longer, I don’t think. And so, even just the electioneering around this and banging on about the negative gearing aspect of it and really focusing on the amount of tax deductions that higher income earners get, etc. etc. etc. That is really taking the eye off the ball
Veronica: Now, and this is really interesting because the reality is that the capital gains tax concession, and just for the listeners, currently it sits at 50%.
Veronica: So what that means is if you buy an investment property today under the current rules, and in fact this has been in place since 1999. If you buy property and then you go and sell it some time down the track. You take out costs, etc. etc. and you work out what your profit is. You only have to pay tax at whatever your marginal rate is or go up to 47% I’d imagine on half of that.
Veronica: Now in this policy is the change to reduce that concession to 25% so in the future you’d be paying tax if you buy a property after this comes in, assuming it comes in, and you’re paying tax on 75% of that and what that actually means, you’ll be paying 50% more tax on the capital gains on an investment.
Veronica: Now that’s a big, big, big issue. That’s a big deal. Whereas the negative gearing and saving a few thousand dollars here and there in the first few years of owning a property, that’s not such a big deal. And yet you’ll notice all the rhetoric does not focus on the capital gains tax, it’s even called negative gearing policy, and I reckon it’s a bit of a Trojan horse.
Kevin: Yeah, the other dangers too of course are the ones that you talk about and that is that spruikers, it’s going to open the opportunity for spruikers to become a lot more active. And also the emotional debate about what’s going to happen to rents. I mean rents are going to have to rise. It’s just a consequence of what will happen.
Veronica: Well, this is interesting. So there’s two things there. The rise of the spruikers, that is massively alarming to me because obviously the less savvy, lesser educated investor is going to fall for that idea of negative gearing because once again, it’s that short term thinking, so spruikers will love it. Developers will love it because of course, they’re going to be able to sell their properties to investors on the basis of that.
Veronica: However, an investor has to just stop for a moment and look at two things. One is history because brand new property has historically, and we’re talking say the last 10 years, there’s a lot of evidence to show that this is the highest loss making sector in the property market, so that’s number one. You’ll look at history and say, well actually in the past, brand new hasn’t been such a great investment even with all this negative gearing.
Kevin: That’s right.
Veronica: Right? What’s to say it’s going to continue or get any better? Now so you’re then moving to the future. The second thing to consider is, okay, well the only way in which negative gearing makes sense is if I’m going to make a lot of money on the capital growth. Because in order to negative gear, you’re still losing money. And so if you don’t make a capital gain, what is the point?
Veronica: And so if you have no secondary market, i.e. no investors will buy that unit that you’ve just bought because they don’t get all the negative gearing. It’s not attractive to them as it was to you. It doesn’t make as much sense to them on a cash flow perspective as it did to you. Then who is going to buy that apartment and there’s not enough first home buyers to fill the gap and they don’t build this stuff to appeal to first home buyers.
Kevin: I mentioned earlier too about why can’t Labor learn from their past experiences when they did this last time, but it took them, I think was it six or 12 months to realise that they were actually on a disaster course and they turned it around.
Kevin: But I want to talk about something even more current, and that is what’s currently happening with Brexit. I think if you look at the debate that happened leading up to Brexit, it was very emotional. It was very political. This is what’s, this is why we should be leaving the EU, and it was all about how much money we’re paying. And it was only after the public voted to leave that they really started to understand what the ramifications were. So much so that now they can’t even get a solution to it.
Kevin: I think we’ve got to be very careful that we don’t get caught up in the emotional debate here and look at what the real issues are.
Veronica: Well, this is the thing, and so you mentioned don’t they learn from their mistakes? And I have to say I was guilty of just not investigating myself when I put out a tweet saying something about rents rose in 1985 to 1987 when Labor, the Hawke government put in, removing negative gearing back then.
Veronica: And it’s interesting. Actually I was challenged on that so I went and investigated that and I did discover that rents only rose in Sydney and Perth. And what is interesting though is that though they rose in Sydney and Perth because vacancy rates at the beginning of this period where really, really low and so in a cyclical sense, they were due to rise anyway.
Veronica: But in a submission, because it only lasted two years before they reversed it.
Kevin: Was it two years, yeah.
Veronica: Yeah, and so in a submission to the cabinet at the time, Paul Keating, who was then treasurer, he made reference to the fact that local factors determine what happens in these markets, not tax. So that’s the first thing.
Veronica: So back to that affordability piece, which I know is a separate issue to the rent. But they are basically, as I said, it’s a local issue particularly to Sydney and Melbourne and they’re applying this national solution. And even though history has told them that local factors will play out in each property market.
Veronica: On the rent side, I think one of the weakest arguments for the property industry, they just come out and say, well, rents will have to rise because landlords will put their rents up to pay, to cover their additional costs. Well, that’s a really weak argument because (a) current landlords won’t have an additional cost, and (b) just because you put the price up doesn’t mean that there’s a capacity for somebody to pay it.
Veronica: But what I do think is that it will impact supply. There is no doubt and that is what is going to result in rents going up. And so there’s a lot of figures out, again, once again, the Grattan Institute love banding this figure out, which is more than 90% of funds borrowed for investment property goes to existing and they want to tip that balance.
Veronica: But the thing is, they’re looking at ABS data that talks about the total amount of money that is spent in buying investment properties. There’s no actual data on the actual amount of properties, and also they haven’t really mentioned how many existing actually exist versus brand new. You know, proportionately there’s a lot more existing stock out there.
Veronica: So, they pull these figures out. There’s been modelling by the Parliamentary Budget Committee, I think it’s called, that suggests that they think that it will double the amount of investment in new property. And so you’ve just got to look at those two figures and say, well there’s still going to be a supply shortage, a massive shortage of supply.
Kevin: Veronica, great talking to you. We’re out of time. There is a white paper that Veronica has produced. Look for it on our website, PropertyTV.io.
Kevin: Hey, Veronica Morgan from Good Deeds, thank you so much for your time.
Veronica: No worries. Thank you, Kevin.