Negative gearing proposals are reportedly being considered by the federal government.
ANALYSIS
Way back when I first turned 18 and began going to pubs, I would often get tempted by the novelty of the pokies.
A couple of $3 beers consumed, then a fiver in the Queen of the Nile … no harm done.
Most of the time, that fiver would be lost, but one night I put $3 in a machine called Top Banana. I won $250, which equalled a fortnight’s rent, so I promptly pulled out the money and stashed it for the landlord.
That small victory was enough to get me having a flutter more frequently, but never with the same success.
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One night, I got talking to a bloke who was high up in the RSL Australia organisation.
He told me that pokies were programmed to pay out about 85 per cent of the money that was put into them. So if I played for any length of time, I’d be at least 15 per cent poorer.
That conversation was all it took for the novelty to wear off. I’ve never played the pokies since. Why put money into something that will result in a guaranteed loss?
Which brings me to property investing and negative gearing. I’ve never understood why anyone would do it.
Do the numbers ever really stack up?
Why burden yourself with having to make extra monthly repayments on an investment property, opening yourself to plenty of risk and losing thousands of dollars each year just to save a bit on income tax and hope that it all becomes worth it in the long run when your property grows in value?
For example, imagine you purchase a $900,000 apartment as an investment property, using a 20 per cent deposit. Your loan is $720,000 and you pay 6.2 per cent interest on repayments. Over a year, you pay $44,600 in interest, plus a total of $11,200 on strata fees, property management, council rates, insurance and maintenance.
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An average rent of $750 a week brings income of $39,000 a year. You’re losing more than $16,000 a year. If you’re in the top tax bracket, paying 45 per cent tax, you can save $7500. So the property is costing you more than $9000 a year.
Yes, you can claim a paper loss for depreciation, but you are still forking out thousands in actual cash each year to try to make the scheme work.
Say the property doubles in value over the next 10 years, you have still lost $90,000 by paying the difference. You have already paid an extra $400,000 in interest. If you had been paying down principal too, you would still owe around $550,000 on the loan. If not, you’d still owe $720,000. And if you wanted to sell it, you’d be paying tax on hundreds of thousands in capital gains, even after the 50 per cent discount is applied. Spending all that extra money for the tiniest of gains. Surely there’s a better way?
Property investor Nathan Birch built his portfolio on positive gearing.
I once spoke about negative gearing to Nathan Birch, an investor with more than 300 properties. His portfolio would be impossible with negative gearing. All his assets are positively geared. He targets affordable properties and pays interest only on the loans until periodic rent increases allow him to pay down the principal using the rental income alone.
“Why would I lose a dollar just to save 30 cents?” he shrugged. “It doesn’t make sense.”
Granted, I’ve never earned the type of income that would make negative gearing worthwhile. Only a tiny fraction of Australians do.
Yet we often hear that negative gearing is what makes buying and renting properties unaffordable for younger generations.
A proposal to restrict negative gearing benefits to two properties per investor, currently being explored by Treasury, is slated to apparently lead to falling rents and more affordable properties for first home buyers.
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But the numbers don’t stack up.
The most recent tax office statistics showed there were about 2.261 million property investors in Australia three years ago.
Of those, 1.117 million were negatively geared. That’s less than half.
And 810,000 of those, or 73 per cent, only had one property.
Just 97,000 had three or more negatively geared properties.
That’s 4 per cent of the nation’s property investors who would be affected by the proposed cap.
If those investors didn’t like it, they could either sell their investment properties, meaning removing rental stock from the market; or raise their rents to cover their losses. Both options would lead to higher rents. Neither option would lead to a meaningful change to housing affordability.
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