- Tech & Gadgets
- BRW. lounge
Published 16 July 2012 05:48, Updated 17 July 2012 03:58
The legacy of negative gearing is a nation of “Ponzi borrowers”, heavily reliant on capital gains to repay debt and interest, former Treasury economist Leith van Onselen says. Illustration: Karl Hilzinger
The number of landlords is in decline as the benefits of negative gearing disappear in an environment of stagnant house prices.
This is the view of former Treasury economist Leith van Onselen, who spent a week going through Australian Taxation Office statistics for 2009-10 (so we didn’t have to) and emerged with a depressing picture of worsening negative income yields on rental properties, which will not be recovered by the limited capital appreciation being forecast for the next decade.
Up until 2000, the net rental income earned from all of Australia’s investment properties was enough to cover all the costs, including interest repayments and maintenance.
Things then went steadily into the red, to the point in 2007-08 when the nation’s property investors claimed losses of an aggregate $9 billion.
The losses fell to $4.8 billion by 2009-10, due to cuts in average mortgage interest rates from 8.8 per cent to 6.55 per cent over that time.
But investors are still losing a lot of money, in fact an average of $2750 for 1.75 million landlords in 2009-10, rising to $9100 for the 1.1 million of those in properties that are negatively geared.
At the state level, actual average dollar losses per property investor in 2009-10 were highest in Western Australia ($4720) and Queensland ($3957), and lowest in Victoria ($1786).
Van Onselen expects things will be worse by the time 2010-11 numbers are released about next April, because the average mortgage interest rate has shot back up to 7.67 per cent.
So what went wrong?
Van Onselen blames a perfect storm of demographics and government policy.
“From about 1998 onwards,” he says, “you’ve had the baby boomers hitting their peak earning capacity and also starting to worry about their retirement.
“Then in 2000, the Howard government halved the rate of capital gains tax and they really piled in.
“Negative gearing became a highly profitable, ‘heads I win, tails you lose’ strategy, because you could wipe the losses off your marginal tax rate and only get the gains taxed at half.”
Negative gearing helped inflate Australia’s property market more than in most other places. Our rules are unusual in that they allow investors to write off the costs of any borrowings used to acquire an asset, as well as other holding costs, against all sources of income – not just the income generated by the asset.
The Keating government in 1987 restricted negative gearing to property-related income, but restored the old rules in the dying days of the 1989 election campaign, in the face of what van Onselen says was a scare campaign from vested interests in the property industry.
“Rents rose in Perth and Sydney but actually fell everywhere else,” he says. “Yet the myth was perpetuated that rents skyrocketed across the board.”
The legacy of negative gearing is a nation of “Ponzi borrowers”, heavily reliant on capital gains to repay debt and interest, he argues.
However, those capital gains will evaporate now that the oldest of the baby boomers have begun to retire and negative gearing ceases to be a useful tax minimisation strategy (where there’s no tax on labour income to offset).
“Anecdotally, my Dad’s 64, at the front end of the baby boomer bulge,” van Onselen says. “He and most of his friends have already sold out of their investment properties.
“Why have something that in Melbourne’s case yields 3.7 per cent gross, when you can put it in the bank and earn a lot more, risk-free?”
Negative gearing may eventually be limited or abolished, van Onselen hopes, but not before “the baby boomers have retired and are done with it”.
The damage it has done, he argues, is reflected in a declining number of landlords. The 1,752,000 taxpayers reporting rental income to the ATO in 2009-10 was 12,575 less than in 2008-09.