Sunday, 10 April 2011

Sacred Cows

A few days ago Unconventional Economist wrote an excellent expose of the rort that is negative gearing.

You can read  it here.

The call to end the rort is growing louder from journos such as Michael McNamara at Fairfax writing the blasphemous.

So its obvious, instead of entrepreneurial activity (that might actually add to the productivity of our economy) we instead encourage investors to gear themselves up to speculate on property. Hang-on, isn’t asset price speculation the sort of thing that creates bubbles? Sure does baby!

In short, negative gearing misallocates resources in the economy by ripping funds out of the small business sector and pouring it back into highly geared property speculation. Is that really what we want as the focus of our economy? Sounds like a one way ticket down sub-prime-collapse street to me
Stop, hey, what's that sound, everybody look what's going down*. Its the penny dropping or the whistling sound of an inbound Irish style financial missile, depending on your glass half full/empty perspective. Further,

Those like the PCA would say that negative gearing assists affordability issues because of the stimulus to supply. Tanya Plibersek as Federal Housing Minister also pushes this argument “any change in negative gearing would be a disaster for rental availability in this country”.
The nail in the coffin in this spurious argument about the possible disastrous affects on supply is found in the lending Commitments data. In 1986, smack bang in the middle of Keating’s dalliance with negative gearing reform, the proportion of investors buying newly constructed properties rather than established ones was a healthy 62%.

Today, according to the RBA, that proportion has shrunk alarmingly to only 6%. This means that these days negative gearing is used by investors to buy established properties – not new ones.

Surely, if negative gearing was meant to encourage a lift in our nation’s housing stock then these figures show that policy to be a spectacular failure.
6%? WTF!

94% of NG is for existing properties. My rort alarm just went off...

Now the property speculation taxation rorts that feed  the bubble has gained a foothold at groups like Prosper Australia and Get Up but any low to mid-income, property investing, bogan wouldn't touch them with a jousting stick (especially the Global Warming spruiking Homo luvvies at Get Up).

I mean look at the income demographic of the property investor.

The earner on >$150k that get the most tax benefit, comparatively, wont touch this glittered turd with their G.Loomis custom made fly rod.

Bogans like:
(Things Bogans Like - The Full List).

So this is where we get to my point. Scott Pape of Barefoot Investor fame went live on talkback radio on his views as to why negative gearing is a dud policy. The information source for the Bogan Intelligentsia south of The Rio Grande, The Herald sun published this gem.

I WAS getting absolutely annihilated. Live on radio. And I was the host
For reasons I'm still trying to piece together, I agreed to be a fill-in host for a talkback radio station.
My topic?

That negative gearing - the tax perk relied on by over a million landlords - should be banned.

The hate from callers spewed through my headphones and right around the country - a parade of old, white, angry men taking turns to chew me up and spit me out.

Not for the first time in my career, I was completely out of my depth.

Don't get me wrong. As a (barefoot) investor I've been a big beneficiary of negative gearing over the years. (For those of you who've never dated an accountant, negative gearing essentially allows you to borrow to buy assets, and then claim the loss as a deduction on your tax return. Even better, if you hold the asset for more than 12 months, you get a 50 per cent discount on any capital gain you make.)

Superannuation aside, it's one of the last great (legal) tax dodges.

Over 1.7 million Aussies have worked out that you're better off from a tax point of view becoming a landlord (well, so long as your loss-making investment gets bid up by other investors using negative gearing) than you are working and saving your dough - which attracts no tax breaks.

And that's why it's a dud policy.

I suggest you read the whole article, you get a bonus story about the nutty dude that became a Real Estate Agent (obviously missed his medication) after the rudimentary 3 year apprenticeship in turd polishing. Here is the link again.

I love this bit.
The hate from callers spewed through my headphones and right around the country - a parade of old, white, angry men taking turns to chew me up and spit me out.

I think a reference back to Jefferson Airplane* is the best response.
"Paranoia strikes deep
Into your life it will creep
It starts when you're always afraid
You step out of line, the man come and take you away

We better stop, hey, what's that sound
Everybody look what's going down"

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