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ACT Government Committed to Unaffordable Housing

By 20 January 2014 44

houses

The good folk over at Macrobusiness have been doing an excellent job over the past week highlighting the ACT Government’s outrageously terrible and damaging policy when it comes to supplying land for new homes (see here, here, and here).

Despite strong population growth, stratospheric house prices, and the ACT Auditor General finding the ACT’s land release program woefully inadequate, the ACT Government announced last week that it would be making the problem even worse by scaling back its land release program. This comes a little more than a month after the limited land release at Lawson saw blocks selling for around $100k over the asking price, at an average of ~$500k per block.

Today the Canberra Times reported that the LDA has decided it will no longer be selling land to developers, giving the Government a complete monopoly on the supply of new blocks.

I personally find this behaviour by the ACT Government unconscionable. The fact of the matter is Canberra is a tiny city blessed with abundant land suitable for residential building, but the Government insists on strangling supply to boost their land sales revenue, putting secure shelter, a fundamental human right, out of reach for an increasingly large segment of the community.

If you care about bringing the Australian dream of home ownership back within reach, then I’d urge you to get in touch with Andrew Barr and your other local members, and let them know.

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44 Responses to
ACT Government Committed to Unaffordable Housing
justsomeaussie 8:08 pm
20 Jan 14
#1

In Australia, our government provides incentives for people to buy homes e.g. First home buyers, builders grants, stamp duty concessions etc.

Assumptions:

1. Building houses occurs at a fairly constant rate dependant on demand
2. If supply and high demand are high, prices will rise

Argument:

In Australia there is both high demand and high prices for houses. Our government uses financial incentives for people to enter and stay in the property market.

This maintains a high price for property and only alleviates the supply issue by increasing demand for builders to build more houses.

This seems backward.

It makes more sense to me to increases levels of supply, not through builders building more houses but by encouraging people who own a large number of properties to sell the lower valued houses off.

This could be done by creating a tax disincentive for people to own houses above number x.

By utilising a number of properties rather than a value, people will be able to maintain their equity in the market but can sell the lower valued properties. This should increase supply via encouraging people to sell (those with multiple investment properties) rather than the current policy of encouraging people to buy (those with none)

Lets say x = 4 for arguments sake.

John owns 6 investment properties valued at $3million in total, due to the tax disincentive coming in the new financial year John needs to sell two of his properties. In order to keep the majority of his equity John sells the two cheapest properties allowing them to reenter the property market.

This option keeps the middle/upper end of the market while keeping newer properties entering the market.

I’ve posed this question to two economists and both agreed that the current system only encourages high prices to a point where new people will be unable to enter the market. Both thought that encouraging the sales of properties would be a way to alleviate the demand problem while keeping people’s equity in houses.

Can anyone please provide some feedback about this hypothesis or thoughts and comments?

wildturkeycanoe 8:49 pm
20 Jan 14
#2

There goes my dream of building one day in Moncrieff. And what the &^#%^&%^& $500k for 500sqm???? Just the land, not a house and land package mind you.
Still, I can see why they are doing this. Less land available will bump up prices and in turn increase their rates revenue. Extortionists.

Shirokuma 8:59 pm
20 Jan 14
#3

justsomeaussie said :

In Australia, our government provides incentives for people to buy homes e.g. First home buyers, builders grants, stamp duty concessions etc.

Assumptions:

1. Building houses occurs at a fairly constant rate dependant on demand
2. If supply and high demand are high, prices will rise

Argument:

In Australia there is both high demand and high prices for houses. Our government uses financial incentives for people to enter and stay in the property market.

This maintains a high price for property and only alleviates the supply issue by increasing demand for builders to build more houses.

This seems backward.

It makes more sense to me to increases levels of supply, not through builders building more houses but by encouraging people who own a large number of properties to sell the lower valued houses off.

This could be done by creating a tax disincentive for people to own houses above number x.

By utilising a number of properties rather than a value, people will be able to maintain their equity in the market but can sell the lower valued properties. This should increase supply via encouraging people to sell (those with multiple investment properties) rather than the current policy of encouraging people to buy (those with none)

Lets say x = 4 for arguments sake.

John owns 6 investment properties valued at $3million in total, due to the tax disincentive coming in the new financial year John needs to sell two of his properties. In order to keep the majority of his equity John sells the two cheapest properties allowing them to reenter the property market.

This option keeps the middle/upper end of the market while keeping newer properties entering the market.

I’ve posed this question to two economists and both agreed that the current system only encourages high prices to a point where new people will be unable to enter the market. Both thought that encouraging the sales of properties would be a way to alleviate the demand problem while keeping people’s equity in houses.

Can anyone please provide some feedback about this hypothesis or thoughts and comments?

People with multiple properties become landlords who rent their properties to people who either can’t afford a house or don’t want to buy one, often because they are not planning to stay in an area long term. Negative gearing is an incentive to own multiple houses so there is a supply of rental properties.

Government has moved away from providing public housing for rent. It is expensive and often does not produce good social outcomes.

justsomeaussie 10:41 pm
20 Jan 14
#4

Shirokuma said :

People with multiple properties become landlords who rent their properties to people who either can’t afford a house or don’t want to buy one, often because they are not planning to stay in an area long term. Negative gearing is an incentive to own multiple houses so there is a supply of rental properties.

Government has moved away from providing public housing for rent. It is expensive and often does not produce good social outcomes.

I’m confused at what you are actually saying. Surely everyone who owns more than one property is a landlord. I’ve always understood negative gearing to be a bad thing, as in you are claim tax breaks because you are losing money on an investment. Why on earth would the government reward that activity with a tax break?

My entire point is that more incentives to buy are not the option, it should be incentives to sell. If I remember correctly in the 90s only 9% of home owners has at least one investment property other additional money was in shares or other investments. Now days it’s something like 50% of homeowners have at least one IP. So shouldn’t the government be encouraging people to sell up some of their IPs and put the money else where like the share market.

What about where the seller doesn’t pay capital gains tax on properties worth less than 500k (or some sweet spot)?

ksanded 10:49 pm
20 Jan 14
#5

Could the government cut stamp duty for retirees? Encourage them out of their big houses and into a flat or apartment? Surely that would bring more properties onto the market.

m_ratt 10:51 pm
20 Jan 14
#6

Shirokuma said :

Negative gearing is an incentive to own multiple houses so there is a supply of rental properties.

What a load of s*** – and this is exactly the problem.

The rental market is artificially inflated because of the artificially inflated property market. Many many renters would purchase property if they could afford it, and property investment (and the tax breaks given to property investors) hampers that.

I absolutely disagree with negative gearing. I do support tax deductibility for productive investment, however the purchasing of multiple properties (and receipt of tax benefits to do so) does nothing to improve productivity within the economy, nor does it provide net social benefit.

The ridiculous price of property/housing in this country is doing nothing but saddling ourselves with debt, causing living costs to skyrocket and reducing our ability to be competitive internationally – we’re literally pricing ourselves out of the global market. For the benefit of the few who already ‘invest’ and need to protect their interests.

To continue to fuel this destructive speculative activity is just irresponsible and it saddens me to see it so readily ‘justified’ and instead encouraged.

To go from being able to purchase on one income, to needing two incomes. To go from 20 year mortgages to thirty+ years. Where does it end? Will it eventually require multiple generations of a family to afford to ever pay off a mortgage – will parents need to sign their children up to massive debt before they are born so that they are able to own a house within their lifetime?

Maybe I’m exaggerating – maybe not. Time will tell…..

johnboy 11:00 pm
20 Jan 14
#7

Perhaps the biggest point is that thanks to the accounting treatment of public housing stocks any serious decrease in house prices would destroy the ACT Budget.

Shirokuma 11:41 pm
20 Jan 14
#8

justsomeaussie said :

Shirokuma said :

People with multiple properties become landlords who rent their properties to people who either can’t afford a house or don’t want to buy one, often because they are not planning to stay in an area long term. Negative gearing is an incentive to own multiple houses so there is a supply of rental properties.

Government has moved away from providing public housing for rent. It is expensive and often does not produce good social outcomes.

I’m confused at what you are actually saying. Surely everyone who owns more than one property is a landlord. I’ve always understood negative gearing to be a bad thing, as in you are claim tax breaks because you are losing money on an investment. Why on earth would the government reward that activity with a tax break?

My entire point is that more incentives to buy are not the option, it should be incentives to sell. If I remember correctly in the 90s only 9% of home owners has at least one investment property other additional money was in shares or other investments. Now days it’s something like 50% of homeowners have at least one IP. So shouldn’t the government be encouraging people to sell up some of their IPs and put the money else where like the share market.

What about where the seller doesn’t pay capital gains tax on properties worth less than 500k (or some sweet spot)?

Rather than me try to explain this to you more simply, you could just go google ‘negative gearing’ to find out the positives and negatives of negative gearing, and why your idea of ‘incentives to sell’ is too simplistic.

Shirokuma 11:52 pm
20 Jan 14
#9

m_ratt said :

Shirokuma said :

Negative gearing is an incentive to own multiple houses so there is a supply of rental properties.

What a load of s*** – and this is exactly the problem.

The rental market is artificially inflated because of the artificially inflated property market. Many many renters would purchase property if they could afford it, and property investment (and the tax breaks given to property investors) hampers that.

I absolutely disagree with negative gearing. I do support tax deductibility for productive investment, however the purchasing of multiple properties (and receipt of tax benefits to do so) does nothing to improve productivity within the economy, nor does it provide net social benefit.

The ridiculous price of property/housing in this country is doing nothing but saddling ourselves with debt, causing living costs to skyrocket and reducing our ability to be competitive internationally – we’re literally pricing ourselves out of the global market. For the benefit of the few who already ‘invest’ and need to protect their interests.

To continue to fuel this destructive speculative activity is just irresponsible and it saddens me to see it so readily ‘justified’ and instead encouraged.

To go from being able to purchase on one income, to needing two incomes. To go from 20 year mortgages to thirty+ years. Where does it end? Will it eventually require multiple generations of a family to afford to ever pay off a mortgage – will parents need to sign their children up to massive debt before they are born so that they are able to own a house within their lifetime?

Maybe I’m exaggerating – maybe not. Time will tell…..

Just because you disagree does not make it untrue – like it or not the policy objective of negative gearing is ultimately to provide the market with a steady rental supply so that government doesn’t need to go out and build expensive public housing.

Negative gearing has positive and negative aspects. Yes, it inflates prices, but so too does limited land releases. Personally, I’m not a fan and there is merit in much of what you say. Certainly there could be limits placed on negative gearing. but I can’t see it being removed altogether. Hawke and Keating tried in about 1985, but brought it back a couple of years later, apparently because the number of rental properties were drying up and rents were rapidly increasing due to lack of supply.

This is not a problem easily solved.

Maya123 12:37 am
21 Jan 14
#10

wildturkeycanoe said :

There goes my dream of building one day in Moncrieff. And what the &^#%^&%^& $500k for 500sqm???? Just the land, not a house and land package mind you.
Still, I can see why they are doing this. Less land available will bump up prices and in turn increase their rates revenue. Extortionists.

Why only focus on Moncrieff and new houses? I take it you are a first home buyer. Existing houses and apartments are available for less than that. As an example check Narrabundah on Allhomes. Among the under $500,000 properties there is a three bedroom house for $435,000. It’s far better than my first home; a 99square metre fibro house I bought from a family of five, on a 465 square metre block. That was big enough for a big vegetable garden and several fruit trees. Many people have too great an expectation for a first home. The better house can come later.

HiddenDragon 12:45 am
21 Jan 14
#11

johnboy said :

Perhaps the biggest point is that thanks to the accounting treatment of public housing stocks any serious decrease in house prices would destroy the ACT Budget.

Most interesting – some might say that such an eventuality would largely be a case of crystallising, and bringing forward, a big, lurking problem which is already there.

All of this makes somewhat of a mockery of the claims that the planned revenue shift from one-off transaction taxes to annual land taxes will, amongst other things, improve affordability and make Canberra a more attractive place for people to move to. Even before this came up, I had assumed that any incidental private benefits from that revenue shift would tend to end up in pockets other than those suggested, and that the primary purpose of the shift was to lock in windfall revenue levels from the boom years.

justsomeaussie 7:17 am
21 Jan 14
#12

Could anyone explain why with a limited supply of houses and high demand the government further increases demand by giving money to people? That FHB Grants and such doesn’t end up in the buyers pocket it ends up at the sellers’ as the market adjusts to individuals having more money to buy.

The market will always charge as much as it can bear. So giving people money and incentatives is the worst thing. We should be encouraging people to sell and move their money into other forms of assets.

wildturkeycanoe 7:24 am
21 Jan 14
#13

Maya123 said :

wildturkeycanoe said :

There goes my dream of building one day in Moncrieff. And what the &^#%^&%^& $500k for 500sqm???? Just the land, not a house and land package mind you.
Still, I can see why they are doing this. Less land available will bump up prices and in turn increase their rates revenue. Extortionists.

Why only focus on Moncrieff and new houses? I take it you are a first home buyer. Existing houses and apartments are available for less than that. As an example check Narrabundah on Allhomes. Among the under $500,000 properties there is a three bedroom house for $435,000. It’s far better than my first home; a 99square metre fibro house I bought from a family of five, on a 465 square metre block. That was big enough for a big vegetable garden and several fruit trees. Many people have too great an expectation for a first home. The better house can come later.

Nice way to make incorrect assumptions.
No I am not a first home buyer, I already have my first home, a modest 3 bedroom on 460sqm.
I mentioned Moncrieff because when we lived in Gungahlin years ago the area of Moncrieff looked beautiful, with its views toward the south and nice leafy trees [though it probably won't be so leafy when it gets sud-divided]. It became a dream of ours to one day buy land there and build “our house”, the way we want it, with enough rooms for the kids and enough garage space to fit our cars and camping gear. It’s a dream that may never come true, but if the government is not releasing it for development like it is destined to in the master plan, there isn’t even a hope of that dream getting off the ground.
It is so nice of you to tell me not to wish for better things. Maybe we will stay in our modest 3 bedroom and watch our children fight over study space as they get older and we fill the yard with clutter instead of putting it away into a nice storage area. Apparently wanting nice things isn’t the right thing to do, we should all just accept what we have and be happy. Isn’t that sort of like Communism?
I will take it you work for the government, LDA media division, and are trying out your damage control measures to see if they are effective in calming down the citizens of Canberra who are in outrage at the strangle hold this government has, monopolizing their little territory for profit. Am I close, or is it a mistake to make assumptions based on one sentence a person has said?

rommeldog56 7:54 am
21 Jan 14
#14

HiddenDragon said :

johnboy said :

Perhaps the biggest point is that thanks to the accounting treatment of public housing stocks any serious decrease in house prices would destroy the ACT Budget.

Most interesting – some might say that such an eventuality would largely be a case of crystallising, and bringing forward, a big, lurking problem which is already there.

All of this makes somewhat of a mockery of the claims that the planned revenue shift from one-off transaction taxes to annual land taxes will, amongst other things, improve affordability and make Canberra a more attractive place for people to move to. Even before this came up, I had assumed that any incidental private benefits from that revenue shift would tend to end up in pockets other than those suggested, and that the primary purpose of the shift was to lock in windfall revenue levels from the boom years.

Good point HiddenDragon. One that most people have missed in the decision to progressively abolish stamp duty on purchase of a property in the ACT, and parallel increasing of Annual Rates.

I have been writing to the ACT Government for ages about the lack of fairness of the Gallagher/Barr “Fairer Taxation System” because I strongly object to paying my Stamp Duty on purchase of a house here, twice or more. It is a slight of hand by the ACT Government. It is legalised theft.

The progressive abolition of other stamp duty, like on Insurance Policies, will be soaked up in other premium adjustments or simply not passed on in full to ACT consumers. Likewise for abolition of stamp duty on purchase of a house in the ACT. Many self funded retirees in particular will simply have to sell up and move out of the ACT in coming years as the increases to Annual Rates accelerates.

Does anyone seriously believe that less stamp duty on purchase of a house in A.C.T. will make it more affordable ??? Seriously ??? Blocks are over $500K in Lawson. 1st home buyers can not afford that. It just makes it cheaper for the wealthier and 2nd home buyers.

Ratepayers should look past the political spin (which, I admit, the ACT Gov’t are pretty good at !) and do the Math on your Annual Rates. If it is “Revenue Neutral” as Barr/Gallagher claim, then Annual Rates will not able to be contained to the10% “average” increase pa because the ACT Gov’t need to raise more revenue partly to cover the utter rubbish/non cost effective projects they are entering into.

In reality, as has often been observed and reported, in no small part it’s the land release/development policies of the ACT Government that is driving up housing/land prices here beyond belief. The “Fairer Taxation System” introduced by the ACT Gov’t, just seeks to take advantage of that. In future years, I think that the dramatic increases in Annual Rates is a terrible legacy for Barr/Gallagher to be remembered by. As if they care……..

arescarti42 8:33 am
21 Jan 14
#15

justsomeaussie said :

It makes more sense to me to increases levels of supply, not through builders building more houses but by encouraging people who own a large number of properties to sell the lower valued houses off.

The problem with this line of thinking is that it doesn’t increase the overall number of houses, it increases the supply of properties for sale whilst reducing the number for rent. The net number of properties available for people to live in stays to same.

If, for example, investors decide to sell 10% of their investment properties, then 10% of renter households now need to buy a new home, cancelling out the effect the increased supply of properties for sale. Of course the way the market works in the real world isn’t quite that simple (not all will buy, the number of households can change, etc.) but the key point is that unless you’re adding to the overall number of houses, then all you’re doing is changing the relative sizes of the rental and owner occupier markets.

To have any significant impact on prices in either the rental or owner occupier markets, you need to increase the overall supply of houses, which can only be done through new construction.

IrishPete 9:15 am
21 Jan 14
#16

Shirokuma said :

Just because you disagree does not make it untrue – like it or not the policy objective of negative gearing is ultimately to provide the market with a steady rental supply so that government doesn’t need to go out and build expensive public housing.

I was doing a bit of reading on NG recently, and I thought I had read that NG applies to all business activity not just housing. The inclusion of housing (investment properties) may have been a deliberate decision, or the failure to exclude it may have been a deliberate decision, but NG wasn’t invented for the housing market.

I’ve always thought it a bit odd to treat me as a business with multiple arms – one arm earns a salary from a job, another arm runs an investment property, but for taxation purposes the two arms are combined. Losses from the business (investment property, or any other business) can be offset against income tax liability from my job.

Sounds reasonable except that salaries are VERY different for taxation purposes than a business’ profits or losses. For example, my substantial commuting costs, my childcare, etc for my job are not tax-deductible. But for running a business I think they would be.

I’m definitely not a tax expert – am I missing something key?

IP

justsomeaussie 9:22 am
21 Jan 14
#17

arescarti42 said :

If, for example, investors decide to sell 10% of their investment properties, then 10% of renter households now need to buy a new home, cancelling out the effect the increased supply of properties for sale.

This doesn’t make sense.

If I own an investment property (of which it is rented out) and I sell it, the new owners can either live in it or continue to rent it out.

The number of properties on the market stays the same.

The core problem I believe is housing affordability more than rent affordability. Surely it’s a societal goal for the majority of Australians to have the ability to own their own home.

So the problem is entering the market, the cheapest of properties. It’s these properties that need to be removed from the real estate game. The system could be structured so that RE investors can still battle it out but for middle to upper homes.

The system is unsurprisingly favours those with large amounts of capital and investment properties.

arescarti42 9:26 am
21 Jan 14
#18

ksanded said :

Could the government cut stamp duty for retirees? Encourage them out of their big houses and into a flat or apartment? Surely that would bring more properties onto the market.

It’s not a bad idea, and IIRC the 2013/14 budget had some trial program to do essentially that. It may not bring more properties to market overall, but it could certainly make the allocation of the existing stock more efficient (fewer elderly people struggling to maintain 1/4 acre blocks, and fewer families stuck in 1 bedroom apartments).

Ideally you’d want to get rid of stamp duties for all buyers, any economist will tell you what a terrible tax they are.

Genie 9:27 am
21 Jan 14
#19

wildturkeycanoe said :

There goes my dream of building one day in Moncrieff. And what the &^#%^&%^& $500k for 500sqm???? Just the land, not a house and land package mind you.
Still, I can see why they are doing this. Less land available will bump up prices and in turn increase their rates revenue. Extortionists.

Don’t stress too much. Moncrief will be significantly cheaper than Lawson as it is further away from the CBD.

My 500+ sqm block in Bonner was only $250k and Jacka is cheaper still. A block of my size was about $30k less than what I’ve paid (rented)

arescarti42 9:36 am
21 Jan 14
#20

m_ratt said :

The rental market is artificially inflated because of the artificially inflated property market. Many many renters would purchase property if they could afford it, and property investment (and the tax breaks given to property investors) hampers that.

I absolutely disagree with negative gearing. I do support tax deductibility for productive investment, however the purchasing of multiple properties (and receipt of tax benefits to do so) does nothing to improve productivity within the economy, nor does it provide net social benefit.

The ridiculous price of property/housing in this country is doing nothing but saddling ourselves with debt, causing living costs to skyrocket and reducing our ability to be competitive internationally – we’re literally pricing ourselves out of the global market. For the benefit of the few who already ‘invest’ and need to protect their interests.

To continue to fuel this destructive speculative activity is just irresponsible and it saddens me to see it so readily ‘justified’ and instead encouraged.

To go from being able to purchase on one income, to needing two incomes. To go from 20 year mortgages to thirty+ years. Where does it end? Will it eventually require multiple generations of a family to afford to ever pay off a mortgage – will parents need to sign their children up to massive debt before they are born so that they are able to own a house within their lifetime?

Maybe I’m exaggerating – maybe not. Time will tell…..

+1

Spot on.

The point on how expensive property is damaging our international competitiveness is an extremely good one that not many people seem to get.

Part of the reason why the cost of doing business here is so high is that businesses have to pay huge rents and wages high enough to allow their employees to rent or buy extremely expensive housing.

Land and labour is ultimately an input in to every good and service we produce, and inflating the cost of either makes us less competitive.

rommeldog56 9:54 am
21 Jan 14
#21

” The point on how expensive property is damaging our international competitiveness is an extremely good one that not many people seem to get.

Part of the reason why the cost of doing business here is so high is that businesses have to pay huge rents and wages high enough to allow their employees to rent or buy extremely expensive housing.

Land and labour is ultimately an input in to every good and service we produce, and inflating the cost of either makes us less competitive. “

Correct arescarti42 – it’s so bleedin’ obvious. So, why, why, why did the (hopeless) ACT Gov’t skyrocket Commercial Rates along with Resendental Rates in their “Fairer Taxation System “. Higher Commercial Rates = Higher business outgoings = less profit margins or higher prices = less employment = less spending on goods/services = lack of business confidence (witness recent report showing ACT economy is slipping, especially in terms of business confidence.

And still the Gallagher/Barr/Rattenbury A.C.T Government want to spend $ they don’t yet have on things like the (probable) loss making Light Rail, a M$90+ traffic management system (like, we need that here like a hole in the head !), doomed to fail challenges to Federal Laws in the High Court, etc. This ACT Gov’t really is a basket case in terms of economic management and business based decision making. All “spin” – nothing else.

arescarti42 9:54 am
21 Jan 14
#22

Shirokuma said :

like it or not the policy objective of negative gearing is ultimately to provide the market with a steady rental supply so that government doesn’t need to go out and build expensive public housing.

Negative gearing has positive and negative aspects. Yes, it inflates prices, but so too does limited land releases. Personally, I’m not a fan and there is merit in much of what you say. Certainly there could be limits placed on negative gearing. but I can’t see it being removed altogether. Hawke and Keating tried in about 1985, but brought it back a couple of years later, apparently because the number of rental properties were drying up and rents were rapidly increasing due to lack of supply.

The story that rents increased rapidly when negative gearing was briefly removed is one that has been touted for ages in the popular media and by vested interests, but is factually untrue. If you actually look at the ABS data for that period, rents only increased in Sydney and Perth (which by the way had extremely low vacancy rates before negative gearing was removed). Rents were more or less unchanged in other capitals, and actually fell in Melbourne during the period that negative gearing was lifted.

Negative gearing is also a horrendous policy failure when it comes to improving rental supply as well, because 90+ of investors buy existing homes, rather than new ones. When you’re not actually growing the overall stock of houses, then additional purchases by investors just turn potential homeowners in to renters.

Saul Eslake covered both these points in detail in an excellent presentation on Australia’s housing failure he gave last year.

dtc 9:55 am
21 Jan 14
#23

IrishPete said :

I’ve always thought it a bit odd to treat me as a business with multiple arms – one arm earns a salary from a job, another arm runs an investment property, but for taxation purposes the two arms are combined. Losses from the business (investment property, or any other business) can be offset against income tax liability from my job.

Sounds reasonable except that salaries are VERY different for taxation purposes than a business’ profits or losses. For example, my substantial commuting costs, my childcare, etc for my job are not tax-deductible. But for running a business I think they would be.

I’m definitely not a tax expert – am I missing something key?

IP

Well, income from your investments (shares, bank accounts) are added to your income. Rent is added to your income. Therefore logically the costs of those investments (borrowings) can be deducted from your income.

There is no difference, in economic terms, between borrowing to invest in shares and borrowing to invest in housing. Both allow you to deduct the costs of borrowing and then you add income back into your tax return.

The difference between shares and housing is purely social ie there is a social benefit to housing (perhaps lower prices) whereas while there is a social benefit to shares (eg allowing investment, business development etc) its a bit more removed from day to day life and not seen as important – when was the last time you heard people argue that the interest costs from borrowing to invest in a business should not be deductible, or should be quarantined.

The reason why many people invest in property is that they ‘understand’ property more than shares, plus traditionally property prices have steadily increased whereas shares are all over the place. Your house will never go into liquidation.

Some cities in the US basically are unregulated – you can build houses whereever you want. So if you can convince a farmer to sell you one of his paddocks, you can build a house there. The result (eg in Texas) is very cheap housing (under $200k) but massive sprawl and high infrastructure costs (all those roads etc).

Housing prices are, like everything, supply and demand. The ACT restricts supply, so prices go up. Sydney restricts supply (partially due to geographic issues) and prices go up. I have no doubt that if the ACT released 5000 new blocks of land a year then housing prices would go down quite a bit in many areas; although whether the ACT’s revenue would be sufficient to cope with the reduced pricing and the increased infrastructure costs is another issue.

Demand is in part driven by investment properties and the incentives there, but down the line the higher the rent the more incentive to buy and hence the greater the demand and higher prices. So reducing the incentive to buy investment properties (eg NG) will result in increased rent which in turn increases demand because people now want to buy – if they can afford it. Whether a reduction in NG reduces prices or has no actual effect is subject to much debate. And if you cannot afford to buy, then you end up paying more rent.

So abolishing NG may have limited effect on pricing but increase rent for poorer people…

Economics requires you to look at more than just one thing, everything is connected.

A_Cog 10:14 am
21 Jan 14
#24

johnboy said :

Perhaps the biggest point is that thanks to the accounting treatment of public housing stocks any serious decrease in house prices would destroy the ACT Budget.

*interest piqued*

Can someone explain this?

johnboy 10:18 am
21 Jan 14
#25

The value of the properties in ACT housing is billions in assets.

maxblues 10:36 am
21 Jan 14
#26

There is some kerfuffle on the airwaves this morning about the ACT government incorrectly charging stamp duty on houses as well as land and being tardy giving refunds. Does anyone know the details of this?

A_Cog 10:47 am
21 Jan 14
#27

johnboy said :

The value of the properties in ACT housing is billions in assets.

But how would that destroy the budget? [Does the ACT Govt use the value of that housing as an asset to borrow against?]

IrishPete 10:51 am
21 Jan 14
#28

dtc said :

Economics requires you to look at more than just one thing, everything is connected.

Thanks for the explanation.

I wonder though how complete it is, as shares and savings accounts are somewhat different to housing and other businesses (e.g.a cafe or shop). There’s nothing concrete (pardon the pun) with shares or savings, and no maintenance costs, depreciation etc. They’re clearly conceptually a bit different to salaried income, but also a bit different to a traditional business.

Looking at NG for housing from another perspective – why not be allowed to run one’s owner-occupied home as a business? It is, after all, an investment, that adds (occasionally loses) value, but only if adequately maintained and re-equipped from time to time (i.e. parts of it depreciate just like a rental property). Charge yourself rent (income to the “business”) and offset that against interest, depreciation and maintenance, rates, body corporate fees, buildings insurance, and any other relevant costs (Land Tax does not apply). Obviously an owner-occupied home is currently treated differently for Capital Gains Tax purposes, but if it was treated the same as an investment property for the purposes of NG and CGT, , would the net benefit be in my favour or the ATO’s?

The applicable question might be “did I buy it as an investment or did I buy it as somewhere to live?”. I think for most of us the answer is the former, as we could have chosen to rent instead.

How does it work for renters who buy a house and rent it out rather than move into it?

So what I am boiling this down to is, why treat “investment properties” differently because they are the second or third investment property rather than the first (owner-occupied)? My cynical nature tends to make me think it is to keep accountants and tax lawyers in jobs (just like the ridiculously complicated Tax Pack which motivates many taxpayers to employ an accountant – I’ve known people whose only income is a government benefit to do so.)

IP

IrishPete 10:55 am
21 Jan 14
#29

johnboy said :

The value of the properties in ACT housing is billions in assets.

I think the point is that just as depreciation of an asset comes off the “bottom line”, appreciation (which land does, and to a lesser extent buildings do) adds to the bottom line. It would be interesting to run your own or your family’s budget like that.

IP

justsomeaussie 11:02 am
21 Jan 14
#30

dtc said :

Demand is in part driven by investment properties and the incentives there, but down the line the higher the rent the more incentive to buy and hence the greater the demand and higher prices. So reducing the incentive to buy investment properties (eg NG) will result in increased rent which in turn increases demand because people now want to buy – if they can afford it. Whether a reduction in NG reduces prices or has no actual effect is subject to much debate. And if you cannot afford to buy, then you end up paying more rent.

So abolishing NG may have limited effect on pricing but increase rent for poorer people…

Economics requires you to look at more than just one thing, everything is connected.

I think your conclusions are a little pushed. You are treating the symptoms that NG has caused by saying we can’t remove NG.

We can make one fairly obvious assumption. That renters are very typically, non home owners. So the incentive shouldn’t be for existing home owners to buy more properties but to create a market where renters can transition into home owners.

Economics 101 teaches us that giving people money (increasing demand) with a limited supply only increases prices. So those FHB grants actually ends up in the pockets of the sellers as the market will just charge more now that it knows that buyers have the ability to pay more.

So the only way to treat the problem without causing the entire market to stagnate for 10 years (hurting everyone) is to create an opening where there are cheaper houses on the market of which there is a disincentive for them to be purchased as an investment property.

In my first example, the simplest mechanism is to simply limit the number of properties of which NG can apply to. Thereby causing owners to sell their biggest losers back onto the market. Over time NG can be scaled more and more back so that the market gradually adjusts. It might look something like this in 2015 any individual can own 10 IPies and utilise NG. Each year after that the number of IP drops by one so after ten years we’ve removed NG but kept the market from fluctuating wildly. Of course the starting number sweet spot needs to be determined.

The strangest thing I find is that those that have multiple (<10) NG IPies are of course against these proposals however they forget that they also will be eventually priced out of the market but those with far more capital and IP than they do.

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