February 2017 Newsletter

HOUSING AFFORDABILITY

By David Servi

Housing affordability is a hot button issue for politicians early in 2017, but nobody seems to have come up with a solution that will keep everyone happy – investors, home-owners, tenants, and the taxmen.

Maybe, says Spencer & Servi principal David Servi, it’s time for politicians to look to their own revenue streams – stamp duty and land tax.

Prime Minister Malcolm Turnbull has recently been forced to flatly state that there will be no change to negative gearing or capital gains tax rules on his watch. The government has had to deal with competing interests: first home-buyers (and their parents) upset they cannot easily break into the soaring Sydney property market, and investors concerned that too-blunt financial tuning will affect the worth of their assets, or even their ability to pay down their debts.

Politicians have been pushed to find a solution to Sydney’s perennial problem of housing affordability, and it seems there has been some consideration of fiddling with the policy settings, and changing, or even abolishing negative gearing or capital gains tax discounts, preferably in time for the May budget.

But pushed on the subject, Mr Turnbull told Parliament on Thursday last week (feb 16) that nothing would move.
“The government has no intention or plan to change capital gains tax or negative gearing,” the prime minister told the house. “That has been our position, is our position, the only party with a commitment to increasing capital gains tax and abolishing negative gearing is the Labor party”.

Despite all the grandstanding, Spencer & Servi principal David Servi does not believe that abolishing negative gearing would have much of an effect on housing affordability anyway.
“Interest rates are so low that it’s unlikely abolishing negative gearing would make a huge difference”, he said – adding that for many owners of investment properties negative gearing simply doesn’t figure into their calculations.

For instance, say you own an investment property worth one million dollars and its rental income is, say, $50,000 a year.
 
Assume that a property has a 100 per cent interest-only mortgage. Interest rates are so low, the current mortgage repayments are about $50,000 annually. Then you add rates, water, upkeep etcetera, resulting in annual outgoings of, say, $10,000, for a total of $60,000. Subtracted from the rental income, the overall loss is less than $10,000 before tax.

“So even if the property is as highly mortgaged as it can be, there’s little loss to set against your personal income,” David said. “Negative gearing isn’t pushing up prices. It doesn’t make sense to say that it is. The investor doesn’t have to fund a huge difference, it’s a small shortfall, and whether or not it can be negatively geared makes little difference in the long run”.

“With the greatest respect to the Labor party, politicians should knock off the bluster, he added. “To say that negative gearing is affecting everyone’s income, it’s just not true. The benefits aren’t there to encourage an investor to rush out and negative gear, it just doesn’t make sense”.

The knotty problem of Sydney housing affordability appears to be here to stay, David says, and comes from a number of factors: the limitations of Sydney’s physical area, bound by the sea, by national parks and by the mountains, along with an ever-growing population.

If the NSW government was serious about housing affordability it would review stamp duty and land tax levies, David added. Stamp duty bumps up the price of property, and banks don’t much like lending home-buyers funds to pay stamp duty. The burden of land tax, meanwhile, pushes up rents. But politicians love those rivers of gold.