The War on Negative Gearing

Never underestimate a desperate man. Especially one with nothing to lose like Bill Shorten.

Only four weeks ago, Opposition Leader Bill Shorten was dropping like a stone in the polls and getting the tripe kicked out of him on the way down. He desperately needed a circuit breaker so he played a wild card (proposing a ban on negative gearing) and BINGO! Billy pulled a jackpot.

He got the cut-through in the media he needed and finally salvaged some political capital. Since then, his polls have improved and his proposed changes have gained traction and gravitas. Now the Labor party look like genuine contenders for the next election again.

Meanwhile, Prime Minister Malcolm Turnbull looks lost and far from home and the electorate have quickly lost confidence in him. And rightly so. He doesn’t have any conviction. Right now he’d struggle selling rice to a hungry Chinaman.

So, does Shorten’s idea of banning all negative gearing except on new properties post June 2017 have any legs?

Personally, I don’t think so. To begin with, the Labor party is supposed to be about social equality, yet his idea is discriminative and divisive.

His proposal will skew demand towards new properties making them more attractive to investors because they will be easier to cashflow due to the tax relief (negative gearing).

Worst of all, while Shorten thinks he’s protecting current investors by ‘grandfathering’ (quarantining) those who are already negatively geared, he’s actually hurting them. Their properties will be harder to sell because investors will no longer be attracted to them. Demand will be replaced by discrimination and division.

At the same time, Shorten also wants to reduce the 50% capital gains tax concession. This means investors will get less tax relief to help fund their properties on the way through and then get slugged with a greater tax bill when they sell. It’s all take and no give.

Shorten’s idea could also skew asset markets because there has been no mention of banning negative gearing on shares, which is very common. More discrimination.

The idea of banning negative gearing is so typical of what governments do in market tops. Remember the super profits mining tax the previous government tried to introduce during the mining boom. Another dud.

Many think that property investors get rich at the tax payer’s expense. At least the jealous ones do. But there are two things worth keeping in mind:

I. Most investors fork out two dollars to save one dollar in tax. That hardly sounds like ripping off the tax office to me.
II. It usually takes two property cycles to profit from a negatively geared investment because of all the outlays. You need the first cycle to break even and the second one to profit. And that takes time, lots of it.

Therefore, if we get a significant cooling off in the property market, or another GFC, I reckon the idea of banning negative gearing will disappear in double time.

But while all this is going on, there is an interesting paradox at play here as well.

If things get worse for Turnbull, he’ll be in real trouble. Not that it will come as any surprise. (see last year’s Moowsletter – The Politics of Dancing). Turnbull may have been a good businessman but he’s not a leader. He’ll get torpedoed by the same people who put him in power.

Ironically, the stronger Shorten looks in the polls the more tenuous his position seems because Labor must be wondering what their chances of winning more seats would be under a more inspiring leader.

So here’s the rub. The war on negative gearing will continue but when push comes to shove, I think the back-benchers on either side will get too much pressure from their respective electorates to support it. 75% of negative gearing is used by income earners on $80,000pa or less. I.e. it’s a working man’s means to wealth.

If there is a change, I am tipping it won’t be worth implementing. Like the mining tax.

Have a great weekend!

Adam

p.s there won’t be a Moowsletter next week.

Back paddock – A mate of mine’s youngest son started school this year and last Friday he came home with this…

“Mum, I made a girl friend!”
“Really?? Wow!! What’s her name?”
“She didn’t tell me”
“Well what does she look like?”
“Medium”
“How tall is she?”
“Medium”
“What colour is her hair?”
“Medium”