Slay the Sacred Cow!!

Okay, we’re going to step on a few toes today, so if you’ve got sensitive toes you may wish to stop reading at this point.

Would you buy a business which was guaranteed to lose money for the next 10 or 15 years? Would you, as a taxpayer, be willing to reimburse the said business owner for his deliberate losses, year after year??

If you answered ‘no’ to either of these two questions, then let us ask it another way, what if we substitute the word “house” for “business”?

Negative gearing of rental properties by investors is nothing more than speculating (read gambling) that property prices will increase over a number of years and eventually return a tidy profit to the owner when sold.

The profit is then taxed at a heavily discounted rate, thanks to John Howard, who halved the Capital Gains tax rate in 1999, which made speculative investments very attractive.

There is nothing wrong with owning residential property as a means of wealth creation, but it seems unfair for taxpayers, who cannot afford to buy a home just to live in, to subsidise investors through the tax system.

I don’t necessarily support the view that investors compete with first home buyers for properties, thereby forcing prices up and making housing unaffordable.

There are a number of factors which effect the direction of property prices, not least of which is the availability of easy credit from the banks. When interest rates are low and banks relax their lending criteria, then it becomes easy and attractive to borrow a higher than normal amount of money to buy a property. This was the case when the Reserve Bank reduced the official cash rate to 3%, and the Federal government introduced the First Home Buyers Boost in October 2008, to stimulate the economy in response to the Global Financial Crisis (GFC).

Predictably first home buyers piled into the market in droves, artificially forcing prices up, thanks to increased affordability. Once the stimulus was removed and interest rates returned to ‘normal’, those first home buyers who had been lured into the market by easy credit were left with high levels of debt in a market where house prices have been steadily falling for the past 18 months.

Back to the question of negative gearing…

In 2008-9 taxpayers subsidised negatively gearing investors to the tune of around $4.3 billion. $4.3 billion would go a long way to building some much needed infrastructure which the nation as a whole would benefit from.

There is an excellent article on this subject at www.macrobusiness.com.au. It presents a very comprehensive argument against negative gearing and its inequitable effects on taxpayers as a whole.

However, don’t expect any government, Labor or Liberal, to restore equity to the tax system, it would be political suicide and governments are not usually noted for acting on principle.

Although to his credit John Howard fought and won an election in 1998 with the introduction of a GST as his policy centre piece, and Hawke and Keating introduced a capital gains tax in 1985 and went on to govern for another 11 years.

So major changes are possible it just needs some real political leadership to bring it about, and I don’t see it happening any time soon.

What do you think??

I’m interested in your thoughts so have your say….

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