17. Jun, 2016

Housing affordability - extended policy

The Veterans Party believes Negative gearing is an issue that has an enormous impact on housing affordability and needs a wider understanding of what happens.

The Veterans Party understand that negative gearing itself is an issue but not one that has the impact that people think it has. Property portfolios actually take some pressure off government to supply services when people are secure in their ability to supply suitable income for themselves by investing in Property. The benefit of negative gearing is that it supplies many jobs to building companies and trades people associated with the building industry. However there is room in the market to supply relief to first home buyers by way of applying a moratorium on property under the median house price (say 10%) that is already had its first owner. For example the median house price in Brisbane in 2015 was approaching $500000 ($498000) for a normal house in and standard suburb. Applying the 10% makes the price range $450000-550000. Therefore the government (ATO) could withdraw the provisions of negative gearing for houses in that range or lower. It doesn’t stop people from buying as an investment but makes them think about, how do I afford this property without the tax concessions?

Sean Macnamara from The Veterans Party explains; The issue of capital gains tax is an issue an old friend and industry associate John Symonds have discussed 2 decades ago. John is correct but from a very misunderstood position.  Many wealth creators use their home. For example the first –ve gearing purchase is done using equity. In say 5 years as prices rise along with wages the investor could purchase a second property for investment. This could be repeated every 3-5 years. An investor could own 4-5 properties including their home and have 1-3 still on mortgages. In planning for retirement they may sell their old home and move to one of the latest investment properties and sell another to discharge all mortgage debt. This in effect could negate the capital gains as much as 100%. There needs to be some research done at the ATO on this. However the plan had and still is being promoted widely by accountants and planners. The median house pricing approach also nips this in the bud.

The ALP policy possibly wouldn’t work given a number of issues… one is the renovation industry which in itself generates a massive tax and revenue pool and employs any number of trades people and other associated industries such as legal, real estate agents and so on. Also the Parliamentary budget office hasn’t accounted for affordability and overseas buyer impacts.

Sean Macnamara says with current mortgage rates being at historical low’s you would think anyone can afford to buy a home. It simply isn’t the case. Buying a home in Sydney can cost $1m in many suburbs. In that price range you will require a minimum $50000 deposit, Lenders mortgage insurance in the range of $40000 and fees and cost of $15000 odd. That’s if you can take on a mortgage of $950000. On a government assessed medium wage of $80000 and your partner earing $40000 and using 30% of gross income. You have $36000 to pay toward your mortgage not including any other debt you may have… it simply doesn’t work, even on current low mortgage rates.

Lenders factor in an additional 2% for forward and future risk.  Using a standard 1-2 year IO loan reverting to P&I over 20 years, the example above might only afford a loan of $600000-650000. That is if they have the deposit and costs and fees. So pricing is the problem as is savings… not mortgages!

There has been much analysis on the cost of developing new land and also on the GST impact (on the way through) for new homes. I don’t believe this is still a direct issue as it has its impact on new property and not on older property. However rises in valuations does have some impact and should not be dismissed without some consideration, says Sean Macnamara.

He also states. Young Australians have been priced out of the Australian market by buyers from overseas. The reason is that overseas buyers come here cashed up and have no problem buying at our median prices… if they really want a property they will buy above value because they do not require finance to settle. I believe FIRB can be used here… many international buyers do so for student family or as investments for future plans or as a fall back scenario to exit their own country. However they often remain attached to their own country. International purchases of this nature can be both means and in the best interest of the nation tested. In many other countries such tests exit as well as the need to have an interest in that country such as a company that employs a local director and shareholder. In many of these cases the local owns at least 51% of the company.

Other background information:

There are over 900000 Australian claiming negative gearing deductions.

There are no statistics on exactly how many properties are negatively geared.

Negative gearing applies to other asset classes such as shares, bonds and negotiable instruments. Even plantation timbers have been negatively geared, mostly using equity. This paper only deals with real property as a negative gearing proposition.

In the last 3-5 years FIRB has approved in excess of 5-6000 overseas property purchases each year. The amount has risen from $17.5B to $25B in 2-3 years to EOFY 2014.