Oliver Searles - Perth Real Estate Agent

According to some economists negative gearing is an unfair complexity in the tax system that allows people to pay less tax and adds nothing to the housing supply. $4.5 billion a year is lost every year in negative gearing allow more people to borrow more and hence pay more interest. This not affect the housing supply as 90% of people who negatively gear purchase established properties rather than new ones.

Negative gearing effectively allows more to purchase property and hence creates more competition amongst property buyers and hence creates an upward pressure on prices. There are calls from people to either have it banned or limited to lower incomes earners or only those who new properties.

What do you think?

After another slow week and weekend of real estate here in Perth I am starting to wonder why no one seems to be wanting to purchase property here currently. To me it seems like a great time to buy. Property prices are low, rents are high and rental vacancy rates are at near record lows. Add to this the fact that WA has the highest migration and immigration rates of any state of Australia and the lack of interest by purchasers boggles me. Also WA currently has one of the strongest economies in Australia and people have a lot of disposable income. So why are people not purchasing property?

Here are my thoughts:

1) People think prices will go lower.

There is a lot of talk in the media that property prices are likely to fall, therefore holding off on your purchase makes sense. While this might be true, who can say how much they will fall and if this happens. They might just remain flat or they might go up. One thing is sure, the market is either at the bottom or close to it.

Also this only really effects first home buyers or investors. If you are not a first home buyer then this point is does not affect you as you will likely to buying and selling in the same market. In fact if you are selling now and moving to a more expensive property you gain from this market as the percentage drop of your property in dollar terms is less then the dollar terms of the more expensive property. i.e If you lost 5% on your $400,000 property you lose $20,000. If the $800,000 property you wish to purchase dropped 5% then that went down $40,000. So you gain $20,000 in this market.

2) People are uncertain.

Well i understand that after the global financial crisis people are unsure as to the future of property. But if you look historically property has always been a secure investment and likely will continue to be.

3) There are better investments

Well that is true currently. Rent returns are good now, but capital appreciation is slow. However in the long term property has always been a good investment with prices doubling every 7-10 years. Also property provides great tax benefits.

4) People are happy to rent

With people starting to queue for rentals this may not be a good long term strategy. Also by renting you are paying off someone else’s mortgage instead of building your own equity.

5) Finance is hard to get from the banks

This is a valid point and one that is hard to overcome. Banks are tightening up on there lending criteria. That being said if you are a good candidate you can still get finance without too many hassles.

Also with increased competition between banks, banks have started to offer new products which better suit potential buyers i.e lower deposit loans etc

I have read lots of articles recently suggesting that the Government should look at banning or at least limiting negative gearing on property. The argument for and against this are:

For:

Will make property cheaper and more affordable for all, as first home buyers will not be competing with as many investors for the property.

Investing in property does nothing for the economy. Unless of course they invest in new builds but most investors seem to invest in established properties.

With over 1.7 million people negative gearing property, the Government will get more tax and hence revenue if they abolish the rules.

Pros:

What happens to all of those people who currently have invested in property and are negatively geared.

This will encourage less investors in the market and hence less buyers.

My Thoughts:

I like the idea of reducing the effects of negative gearing. I believe it should be available to new builds, but not for house and land packages. Also if they are going to implement it they will likely have to grandfather existing people in so that they still retain they current negative gearing.

This policy would cause short term pain but will likely help the housing market in the long run.

What do you think?