Hidden Truth Behind Negative Gearing Changes

Negative Gearing - Why Not Shares Too?

You’ve all heard Labor’s election promises. Bill Shorten doesn't want you taking the cost of your investments off your earned income - unless you have invested in shares! And that is okay?

Why attack property, Bill, and not shares? In fact, why attack any?

What is negative gearing?  A couple struggle to buy their home and after a couple of years they have good equity in it they can use as a Line of Credit. Their financial planner offers them $1m in shares.  Their Property Club Mentor suggests they buy $1.5m in well researched property with the same deposit (equity in their home).  Shares, being more risky, and the bank won’t lend you as much as they will for property!

I recently saw a promoter proudly boasting that he had put a person into a great number of properties.  With our resources we were able to find out the type of property and where they were.  To our dismay they were the same type and location of properties that sent a well known entertainer into bankruptcy some years ago.  As the RBA said a couple of years ago "buying a property is not a risk free investment".

Back to our story… The wise couple seek an average weekly cashflow on each option to see if they can afford the shortfall.

With the share portfolio they find funding has a higher interest rate than property and must be serviced each month.  The dividends, if paid, are paid only twice a year.   This money may come direct to them, but the financial planner has probably set it up in such a way that he gets a bi-annual draw down from their dividends.  The shortfall between their dividend and the payments to the bank becomes their negative gearing amount.  This loss amount is then transferred across and reduces their earned income by the same amount. Then they pay tax on this lesser amount.  Bill Shorten says that was okay and continues to be okay.

With the property the couple's shortfall is calculated after the allowable deductions, eg. rates, insurance, body corporate, property management and the mortgage interest.  The rent received is not enough to cover the costs of holding the property.  This weekly loss, as in the above example, is called a negative gearing amount and is transferred across to reduce their taxable income.  But it won't be if Bill Shorten gets in.   They will have to pay tax on their full earned income and find money to pay their shortfall on the investment property.  Bill has, however, allowed them to transfer their negative gearing only if they buy new investment properties.

What would happen to your own home?

Under Labor’s policy to only allow negative gearing on new property, buyers cannot buy in established areas.  Educated buyers will most likely reject the new supply of CBD apartments which are at risk of oversupply.  This means the existing market will lose 140,000 property investors.  Such a large number leaving the market reducing competition and prices of established residences – including your home!  Currently there are 340,000 buyers and this will reduce by 140,000 property investors which is a huge 32% drop in demand!

How can you protect yourself? Club members know the value of a high Line of Credit (used sensibly), so I suggest looking to your lender and applying to increase your Line of Credit.  This would probably lead to a re-valuation of your property. If left until after the election, this valuation may be lower and could reduce your available Line of Credit if property values fall - if Bill Shorten is elected.

Investors will demand, new properties in the areas they want. This is not where they are currently been supplied in huge numbers – the cities’ CBD’s. Property investors will want to buy where renters want to live. Builders will be forced to pay higher and higher prices to get development sites in these areas. This will lead to price inflation on the few properties that suit this zoning and can be demolished to make way for the low rise and townhouses that are in serious under supply right now.

Since 2009 the supply of these has been reduced 15% and 20% respectively.  In the same time in the CBD supply has jumped an amazing 60%.  This means there are too many “green” bananas!!

If there are too many bananas in the store, what happens to the price?

This new product, in the areas where they are required, will therefore have a high cost of land component. Thus we will have new property inflation in these desired areas.

From the above you can see that the claims made by Bill Shorten won't be met.  Jobs won't be created. The CBD intended "boom" simply won't happen.  Builders have no desire to go broke building units that aren't in demand.  It won't make housing more affordable but dearer.  It will cause rents to again rise as they did in the years following the reduction of negative gearing.  It took two years for the lack of supply to come back.

If 140,000 landlords a year withdraw from purchasing existing buildings, reduced rental supply will leave renters battling to find properties to rent.  Rents will rise.  If they rise as they have in the past, $500pw rents will go to $750pw in no time!  In short, rents and property inflation is inevitable.

Back to my original question.  Why wasn't this huge decision properly researched by Labor?  This research should have been done and should have been available for scrutiny.

The hidden truth is that tampering with negative gearing will only have damaging effects. Established home prices may fall but rents will skyrocket in areas of rental demand. Investors will be driven to shares to secure negative gearing, rather than buying into the oversupplied CBD high rise where rental vacancies are going to be highest.

Next week - what I will do to solve the "rent crisis" and the "property crisis".

I love Property

Kevin Young

Club Founder

P.S: Are you aware of my "Beat the Banks" campaign?  I'm excited about how much money each month we are ripping off the banks for you.  See our website, become a member or contact your Property Mentor for more details.

P.S.S:  Are you receiving my Facebook daily dates?  This week you would have seen my alert that the Share Market was going to fall and why.  Will UK leave the European Union?  So what will be the benefits for Australia? Check out the other snippets that I have shared on Facebook.

Is this what Bill SHOULD have done?!?