25 May Why so negative on negative gearing? – Michael Yardney
Always around budget time, there’s lots of talk about negative gearing – whether or not it should be there, and if it’s all about greedy investors getting richer. Let’s get another perspective on this.
Michael Yardney, from Metropole Property Strategists, is our guest today.
Kevin: Always around budget time, there’s lots of talk about negative gearing – whether or not it should be there, and if it’s all about greedy investors getting richer. Let’s get another perspective on this, because there has been a lot of discussion this year about it. Joining me to discuss this is Michael Yardney from Metropole Property Strategists.
Michael, welcome to the show. Firstly, I thought it might be handy for you to give us a bit of an overview about what negative gearing really is.
Michael: Thanks, Kevin. A property is negatively geared when the cost of owning it – in other words, the interest on the loan, the bank charges, the maintenance, repairs, and depreciation – exceeds the income you’re getting. A property itself isn’t a negatively or positively geared property; it really is a function of how you finance it.
The concern for some people is if you are negatively geared, you can actually write it off other income. Some would argue that less-fortunate taxpayers therefore help property investors meet the costs of them running their property investment business.
Kevin: We talk about that you should approach property investing like a business. If that is the case, why would you go into business to lose money?
Michael: Well, you don’t. And if you do go into a property investment with the main aim of getting tax benefits and depreciation, you’re likely to make a mistake. You’re right, Kevin. Generally, it’s done because property investors hope that the income loss will be more than offset by the capital gains when they eventually refinance or eventually sell the property. In Australia, of course, that’s not taxed, so there is clearly a tax benefit if you own the right sort of investment property.
Kevin: One of the major criticisms of negative gearing is it’s the richer getting richer, but you and I know that that’s not necessarily the case, don’t we?
Michael: When you look at the tax office statistics of who negatively gears, the vast majority – more than 80% of them – are ordinary Australian taxpayers, what some people would call battlers, people who have actually taken the trouble to save a deposit, to invest, to take a risk to secure their financial future. It’s not ugly, rich investors who do that.
Kevin: What surprises me, Michael, is that there are some very educated people who are very critical about negative gearing without necessarily taking into account the fact that investors are actually providing a very valuable service.
Michael: Kevin, when we grew up, a lot of the public housing in Australia was provided by the government, as it is in other countries overseas. In particular, in Melbourne and Sydney, you’ll see Soviet-style concrete high-rise towers where people used to have to live because that’s all the government could afford.
But today, just like private hospitals, schools, and public transport is shared between the private sector and the public sector, so is public housing, and that’s what ordinary investors like you and I are doing. We’re providing a service. We are running a business in the process of providing that service, and we’re just looking for the same tax incentives that anyone else who runs a business gets from the government.
Kevin: Ken Raiss is a good friend of ours, of course, from Chan & Naylor. He was very adamant about his criticism of any fiddling with negative gearing and what impact it would have on rental prices.
Michael: Ken Raiss is only one of the many who remember way back in the 1980s when negative gearing was removed and rents went up. There are other factors involved in that, as well. I know there’s a lobby out there – usually those who’ve missed out on the recent property boom or who can’t get into property at the moment – saying, “Just get rid of negative gearing, and that’s going to solve all the problems.” That’s a simplistic argument in my view. I agree that it’s likely in the short term to raise rents, because as an investor, I have to get my return somehow or other.
Kevin: Yes, indeed. In that case, Michael, does negative gearing actually push property prices up?
Michael: Negative gearing allows investors to buy property and get into the property market. I’m not sure that it actually pushes up values of it, because it’s really meant to be the cream, just the little bit that makes it doable.
What pushes up property values is the fact that still, in general, 70% of properties bought in Australia are owner-occupiers. They’re the ones who investors have to compete against. They’re the ones who are pushing up property values. The argument that properties are unaffordable is probably a moot one, in my opinion, because other than New South Wales, where currently about 50% of people buying are investors, most properties are still bought by homeowners.
Kevin: You’ll have a view on this, no doubt, so let us know through the website if you’d like. We’d love you to join the conversation. Just send a comment into us. It’s very easy to do that; it’s on the homepage. If you have any questions or comments for Michael Yardney or any of our experts on the show, we’d love to hear from you.
Michael Yardney is from Metropole Property Strategists. Michael, once again, thank you so much for your time.
Michael: My pleasure, Kevin.