In the media and particularly the Labor Government of late we have heard a lot of grumblings about how we need to improve the affordability of property. There have been some great ideas like looking at the types of property people are trying to buy and altering their level of expectation and some not so great ideas like getting rid of Negative Gearing.
People seem to believe that if Negative Gearing is abolished it will be a miracle cure to the growing property market. They believe it will stop people investing in property and thus there will be more available property to buy pushing prices down.
In isolation this idea is correct as it’s basically the supply and demand theory if you increase supply it will bring down prices as it suppresses demand. Whilst this is correct it does not take into account that some people A) don’t want to buy a property and are happy to rent and B) if the Government was to get rid of Negative Gearing we would see a spike in rental prices as landlords increase their rents to subsidise the removal of tax benefits.
To give you an example a property that is currently leased may be grossing a rental of return of 3.5% against purchase price, this means a shortfall of roughly 1% or on a purchase price of $600,000 the current rent would be $400 p.w. this would need to increase to $520 p.w. just to cover the mortgage that doesn’t include associated costs like repairs and maintenance and body corporate fee’s. These would also need to be covered by the rent now due to the fact that these expenses can’t be offset against the potential income.
What people seem to think will occur is that people will simply stop buying investment properties but sadly we have been down this path before in 1985. The then Labor Government of the time abolished the Negative Gearing benefit and whilst we didn’t see an across the board increase in rents we did see a large increase in areas of high demand (inner suburbs) the exact areas that people think sale prices will drop and assist affordability. This theory also seems to not take into account people acquiring property as a capital investment over the long term. If the property market was to drop due to the abolishment of Negative Gearing we wouldn’t see that drop last for long as wealthy investors would start to acquire blue chip property for the portfolios and would thus force prices back up as they compete with each other. This may actually cause a consolidation of wealth as those in a position to react quickly could build upon their current holdings and increase their wealth.
Secondly if the Government was to abolish the Negative Gearing incentive then they would also be losing revenue from CGT (Capital Gains Tax). You can’t very well say a property is no longer going to be treated as an investment by the ATO one way but on the flip side treat it as an investment when it’s sold. Obviously it’s very hard to figure out exactly how much CGT is paid yearly from the profits on the sale of people’s investment property.
Sadly there is no silver bullet to reduce property prices in Melbourne without upsetting the other side of the equation (rental prices). What actually needs to occur is a realistic conversation without vitriol about what peoples level of expectations are, obviously people need to realise that we all can’t afford to live in a fully renovated single front cottage in Carlton or a 4 bedroom family home in Toorak. Sadly somewhere along the line the concept of stepping stone houses has died and people expect to have their best house as their first house.
There is only so much a Government can do when it starts to look at controlling what is essentially an investment/free market, as it may actually affect those that can least afford to be hurt the most. As mentioned previously this was done in the past and proved to be a major problem for the Government at the time. If the Government really wants to solve the issue it isn’t actually the Government who need to do anything, it’s us the buying public who need to solve the problem.
We have become a society that doesn’t want to solve our own issues and truly believe that it’s the Governments responsibility to be involved in every facet of our lives. If the Government was to get involved we would have people rioting in the streets as rents jump in the vicinity of 25%. Really the only true solution to the issue of affordability is that we have to look at what occurs overseas. If you want to own a home you must work long and hard and make sacrifices and or you may need assistance from your family. The other option is to buy in the outer lying suburbs or adapt your living style to what you can afford.
When it comes to solving the property shortage there is no easy option and we need to stop thinking there is.
