There's only one thing that negative gearing supports Main and that's speculation, people who normally wouldn't afford it are given the ability to make a bet on rising prices in the property market

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Paddles B'mere said..
There's only one thing that negative gearing supports Main and that's speculation, people who normally wouldn't afford it are given the ability to make a bet on rising prices in the property market

Unfortunately unlike to stock or forex market you could not speculate on real estate selling short.Means you sell first something to buy cheaper later.

Yep, not quite as liquid and the transfer costs add up a bit when you buy/sell

A simple land tax paid on the value of property by the owner would generate enough revenue to get rid of most taxes, including most income taxes and the plethora of goverment agencies that do little more than to protect personal property rights. It will wash away the speculative economic rent generated by just owning the land. It will also force lending institutions to lend for productive purposes in that land. It will also reduce the amount the dormant land just left there to appreciate over time. All busts and booms have their source in this hungry grab for land to generate economic rent. Banks lend for this speculative purpose and when the productive economy can't afford the price (the price drops below lending value) the banks ledgers go into the red and lending dries up. This then in turn affects the entire economy and finnaly the share market.
we always see these busts by examining the share market crashes but few understand the initial source of these incidences. Which have occurred in clock work like fashion for the last 300 years or so.
The entire American continent was founded on land speculation!
so tax away the source of this problem. Ensure all land is put to productive purposes and we all share the benefits.
most the your thoughts above are developed through the prism of accepted modern economic theory which has shown time and time again to not work. Puts wealth in the hands of the few and causes an untamed boom and bust cycle.
and will do again ... soon enough.

Money markets have now priced a 90% chance of 50 point rate cuts to 0.25% in the next few months thanks to covid19 panic.

Going to be interesting to see how this affects the sydbourne property markets. My bet is we are nearing peak exhaustion of monetary policy and it will do fark all other than drop our AUD further and destroy our purchasing power even more than it has already.

Aussie houses are about to get even cheaper on an international comparison basis.

^^ Yep.

Great, let's address a looming debt crisis by......encouraging more unsustainable private debt.

A more prudential way to address a faltering economy is to stimulate sustainable investments in knowledge based sectors with cheap government stimulus. That would be too much of a stretch for a government hell bent on protecting it's own arse.

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holy guacamole said..
^^ Yep.

Great, let's address a looming debt crisis by......encouraging more unsustainable private debt.

A more prudential way to address a faltering economy is to stimulate sustainable investments in knowledge based sectors with cheap government stimulus. That would be too much of a stretch for a government hell bent on protecting it's own arse.

Since that greatest business in Australia is Real Estate- selling land and houses, why not to do so properly? Abu Dhabi and even Indonesia and China design and build brand new cities. Bringing the best mind in business, architects and planners they do try to build dream cities from scratch. Designed for sustainability, easy living, walking cycling.Can we design and build new cities where people want to come and live? Instead of building new ones we keep growing existing huge metropolis to the point they will choke up with pollution, rubbish and traffic jam.
www.thejakartapost.com/news/2020/02/29/indonesias-new-capital-city-will-be-very-special-tony-blair-says.html


www.thejakartapost.com/news/2020/02/28/mckinsey-nikken-sekkei-aecom-hired-to-design-indonesias-new-capital.html



then we could learn on mistakes made by others , in attempt to avoid



www.theguardian.com/environment/2016/feb/16/masdars-zero-carbon-dream-could-become-worlds-first-green-ghost-town

Select to expand quote

Macroscien said..

holy guacamole said..
^^ Yep.

Great, let's address a looming debt crisis by......encouraging more unsustainable private debt.

A more prudential way to address a faltering economy is to stimulate sustainable investments in knowledge based sectors with cheap government stimulus. That would be too much of a stretch for a government hell bent on protecting it's own arse.

Since that greatest business in Australia is Real Estate- selling land and houses, why not to do so properly? Abu Dhabi and even Indonesia and China design and build brand new cities. Bringing the best mind in business, architects and planners they do try to build dream cities from scratch. Designed for sustainability, easy living, walking cycling.Can we design and build new cities where people want to come and live? Instead of building new ones we keep growing existing huge metropolis to the point they will choke up with pollution, rubbish and traffic jam.
www.thejakartapost.com/news/2020/02/29/indonesias-new-capital-city-will-be-very-special-tony-blair-says.html


www.thejakartapost.com/news/2020/02/28/mckinsey-nikken-sekkei-aecom-hired-to-design-indonesias-new-capital.html



then we could learn on mistakes made by others , in attempt to avoid



www.theguardian.com/environment/2016/feb/16/masdars-zero-carbon-dream-could-become-worlds-first-green-ghost-town

State governments Won't release the land. If they did we would see falling land values.

Select to expand quote

Main said..

Macroscien said..

holy guacamole said..
^^ Yep.

Great, let's address a looming debt crisis by......encouraging more unsustainable private debt.

A more prudential way to address a faltering economy is to stimulate sustainable investments in knowledge based sectors with cheap government stimulus. That would be too much of a stretch for a government hell bent on protecting it's own arse.

Since that greatest business in Australia is Real Estate- selling land and houses, why not to do so properly? Abu Dhabi and even Indonesia and China design and build brand new cities. Bringing the best mind in business, architects and planners they do try to build dream cities from scratch. Designed for sustainability, easy living, walking cycling.Can we design and build new cities where people want to come and live? Instead of building new ones we keep growing existing huge metropolis to the point they will choke up with pollution, rubbish and traffic jam.
www.thejakartapost.com/news/2020/02/29/indonesias-new-capital-city-will-be-very-special-tony-blair-says.html


www.thejakartapost.com/news/2020/02/28/mckinsey-nikken-sekkei-aecom-hired-to-design-indonesias-new-capital.html



then we could learn on mistakes made by others , in attempt to avoid



www.theguardian.com/environment/2016/feb/16/masdars-zero-carbon-dream-could-become-worlds-first-green-ghost-town

State governments Won't release the land. If they did we would see falling land values.

Maybe they will not release to australian public , but there is nothing to prevent to sell to overseas owner at the right price.The plan could be like that. We Australian don't have money , so lets Chinese to build a new modern city in the middle of desert here in Australia. If they want to build modern city in the middle of Alice Springs , they lets allow them to take a risk. For Chinese risk is lower then building sinking artificial Islands.

I can not find a industrial land to buy at $2000 per meter is 150 km radius near Brisbane.


en.wikipedia.org/wiki/Cubbie_Station
www.seabreeze.com.au/img/photos/other/16155571.jpghttps://www.seabreeze.com.au/img/photos/other/16155701.jpg' />Not such bad investment after all. After price tag 240mln paid , farm generate $80mln in income every year. Compare those to negative yields on financial markets.





www.dailymail.co.uk/news/article-7725675/How-China-owns-Australia-buying-infrastructure-land-water.html

Could we vote one day for equal rights ? So Australian citizens could buy a land at prices overseas investors could ?

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Macroscien said..

Main said..

Macroscien said..

holy guacamole said..
^^ Yep.

Great, let's address a looming debt crisis by......encouraging more unsustainable private debt.

A more prudential way to address a faltering economy is to stimulate sustainable investments in knowledge based sectors with cheap government stimulus. That would be too much of a stretch for a government hell bent on protecting it's own arse.

Since that greatest business in Australia is Real Estate- selling land and houses, why not to do so properly? Abu Dhabi and even Indonesia and China design and build brand new cities. Bringing the best mind in business, architects and planners they do try to build dream cities from scratch. Designed for sustainability, easy living, walking cycling.Can we design and build new cities where people want to come and live? Instead of building new ones we keep growing existing huge metropolis to the point they will choke up with pollution, rubbish and traffic jam.
www.thejakartapost.com/news/2020/02/29/indonesias-new-capital-city-will-be-very-special-tony-blair-says.html


www.thejakartapost.com/news/2020/02/28/mckinsey-nikken-sekkei-aecom-hired-to-design-indonesias-new-capital.html



then we could learn on mistakes made by others , in attempt to avoid



www.theguardian.com/environment/2016/feb/16/masdars-zero-carbon-dream-could-become-worlds-first-green-ghost-town

State governments Won't release the land. If they did we would see falling land values.

Maybe they will not release to australian public , but there is nothing to prevent to sell to overseas owner at the right price.The plan could be like that. We Australian don't have money , so lets Chinese to build a new modern city in the middle of desert here in Australia. If they want to build modern city in the middle of Alice Springs , they lets allow them to take a risk. For Chinese risk is lower then building sinking artificial Islands.

I don't think you understand why China are building up islands. Its not to try and build more housing.


Let them build the equivalent in Aus? Right....

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Paddles B'mere said..
There's only one thing that negative gearing supports Main and that's speculation, people who normally wouldn't afford it are given the ability to make a bet on rising prices in the property market

It also supports reducing the government's tax income.

I know plenty of people that "pay too much tax" (perhaps true) and figure they might as well claim interest and losses on an investment property as a deduction; have other tax payers help them pay for it.

I have to admit it does make sense.

(personally I positive gear because cash flow)

We got the rate cut yet?

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evlPanda said..
We got the rate cut yet?

yep and the last line in the statement all but confirms another one soon after. We will be at 0.25% within months. Cant see how on earth we will ever raise them back to normal without unleashing armageddon.

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evlPanda said..

(personally I positive gear because cash flow)

Not sure how you positive gear a resi property at current prices (even if investor loans drop to 3.25% shortly) Sydbourne yields are around 2% GROSS and around 0.8% NET....

Care to elaborate?

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Bara said..

evlPanda said..
We got the rate cut yet?

yep and the last line in the statement all but confirms another one soon after. We will be at 0.25% within months. Cant see how on earth we will ever raise them back to normal without unleashing armageddon.

evlPanda said..

(personally I positive gear because cash flow)

Not sure how you positive gear a resi property at current prices (even if investor loans drop to 3.25% shortly) Sydbourne yields are around 2% GROSS and around 0.8% NET....

Care to elaborate?

increase the equity !

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Main said..

increase the equity !

You mean the cash you tip into the property that then gets you zero yield?

you need around 50% gearing to be cashflow neutral let alone positive on current numbers so on the average sydney house of $1m thats 1/2 mill of your own money earning you no income and being eroded by inflation

Whats the opportunity cost of that? 6% is pretty conservative ie 30k of missed income pa.

Either way you are going backwards whether its from cash going out the door on neg gearing or from lost capital from parking your equity at zero yield while inflation and falling exchange rates erodes it.

your just betting the property will go up enough to offset these losses but using current market values its a loss making proposition regardless of gearing level.

Select to expand quote

Main said..

Bara said..

evlPanda said..
We got the rate cut yet?

yep and the last line in the statement all but confirms another one soon after. We will be at 0.25% within months. Cant see how on earth we will ever raise them back to normal without unleashing armageddon.

evlPanda said..

(personally I positive gear because cash flow)

Not sure how you positive gear a resi property at current prices (even if investor loans drop to 3.25% shortly) Sydbourne yields are around 2% GROSS and around 0.8% NET....

Care to elaborate?

increase the equity !

As Bara talks about, you need to value the cash that you otherwise put into this. Its not free.

I think somepeople get a shock when they see their NSW landtax bill. I know i did the first time. $3.5k for something that is already a poor investment...

The cash is worth very little FN, what's a good/ low risk liquid investment that will give you a return? There aren't many out there. When we consider the 10 year bond yield (considered to be the risk free rate of return) is now down around 0.78% the market thinks that the next best thing is simply putting it under your mattress.

Hey Bara, if China cannot supply the goods we used to buy from them and there are either shortages; or we buy from different (more expensive) suppliers; then the result will be inflation. I wonder how the central bank will react if it gets to a point where monetary policy dictates they must raise interest rates ..................... and unleash the armageddon you speak of

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Paddles B'mere said..
The cash is worth very little FN, what's a good/ low risk liquid investment that will give you a return? There aren't many out there. When we consider the 10 year bond yield (considered to be the risk free rate of return) is now down around 0.78% the market thinks that the next best thing is simply putting it under your mattress.

Hey Bara, if China cannot supply the goods we used to buy from them and there are either shortages; or we buy from different (more expensive) suppliers; then the result will be inflation. I wonder how the central bank will react if it gets to a point where monetary policy dictates they must raise interest rates ..................... and unleash the armageddon you speak of

The cash has some opportunity cost. Granted, at the moment in a savings account it is worth very little, but there is still a cost to it. In a normal world where rates are not skewed so much by the banks, it would be closer in rates.

But calling an investment positively geared is hiding the true nature of the investment. If something cost $1M and you pumped in $990k, and returned $10.1K a year, would you still call it a positively geared property? Mehh, not me.

Now I am even re-thinking the idea of the definition. A property can become positively geared over time, but not from day one if you pump it up with cash.... I can't even get my own head around that

Are we all getting closer to communism in the purest form ever? Here how it may works. With everybody indebted into mortgage repayments it becomes impossible to repay once rates start rising. Then banks will take ownership of failed loans securities, but they will not be able to sell those properties. The only way will be nationalised such debt and now government could take care of loans and properties. Then government could in return rent and lease those properties back to citizens.We have now situation where loans on homes are much higher the real value- so we could never back to low and realistic prices. On another hand any significant interest rate also means certain suicide for economy. The only reasonable solution seems to be near zero interest for long time to go or switch over to completely new global currency.Like a Cyber Yuan or BitCoin.

Of course it depends on the opportunity cost FN, but I'm saying that the opportunity cost is very low these days simply because of low mortgage rates (if you already have existing debt and can use the cash to offset that debt) and low interest rates or returns on suitably low risk investments (fixed term deposits are between 1.5 and 2% and the risk free rate of return is now well under 1%). If you look at the fixed term deposit rates offered by some big Australian banks, the rate actually goes down for terms greater than 6 months so they're betting on rates to drop even further.

I reckon you've described a very possible scenario with respect to the government maybe having to underwrite some housing debt for owner occupiers Macro ............. and I hadn't considered enough "degrees of seperation" to think it up myself

The imported inflation spike coming will be ignored by rba as "transitory" paddles. Rates are on a one way trip because global debt is simply unsustainable at anything above inflation. Australia unlike in the gfc is leading the charge this time which is pretty concerning.

The opportunity cost of your capital is conservatively 6% like I said - 1% risk free rate 2% inflation plus at least 3% to 5% currency devaluation.

Yes macro you paint a possible endgame. I've said it before - out of the eventual financial ashes of this fiasco will come radical political change.

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FormulaNova said..

Paddles B'mere said..
The cash is worth very little FN, what's a good/ low risk liquid investment that will give you a return? There aren't many out there. When we consider the 10 year bond yield (considered to be the risk free rate of return) is now down around 0.78% the market thinks that the next best thing is simply putting it under your mattress.

Hey Bara, if China cannot supply the goods we used to buy from them and there are either shortages; or we buy from different (more expensive) suppliers; then the result will be inflation. I wonder how the central bank will react if it gets to a point where monetary policy dictates they must raise interest rates ..................... and unleash the armageddon you speak of

The cash has some opportunity cost. Granted, at the moment in a savings account it is worth very little, but there is still a cost to it. In a normal world where rates are not skewed so much by the banks, it would be closer in rates.

But calling an investment positively geared is hiding the true nature of the investment. If something cost $1M and you pumped in $990k, and returned $10.1K a year, would you still call it a positively geared property? Mehh, not me.

Now I am even re-thinking the idea of the definition. A property can become positively geared over time, but not from day one if you pump it up with cash.... I can't even get my own head around that

WACC = Weighted Average Cost of Capital

In other words what is the alternative return your money could be getting in a safe investment like bonds.

When an institutional buyer assesses a property investment they would do a discounted cashflow of which one of the variable inputs would be a WACC % of around 1 or 2%. This WACC is discounted from the cashflow to give a true return on equity invested.

House or apartment investment is best treated as a long term passive investment where the tenant pays the mortgage and you look at it every ten years to see how its going. Every 10-15 years it hopefully doubles in value.....

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Bara said..

evlPanda said..
We got the rate cut yet?

yep and the last line in the statement all but confirms another one soon after. We will be at 0.25% within months. Cant see how on earth we will ever raise them back to normal without unleashing armageddon.

evlPanda said..

(personally I positive gear because cash flow)

Not sure how you positive gear a resi property at current prices (even if investor loans drop to 3.25% shortly) Sydbourne yields are around 2% GROSS and around 0.8% NET....

Care to elaborate?

It is amazing how many can't see this. Not calling you out or anything by the way. In about 5 seconds you'll say "D'oh!"

You could, for example, pay for it with 100% cash. Failing that you adjust the percentage of your deposit that it is positively geared.

D'oh? : D

Also the investors that are afraid to positive gear surprise me. They don't want to make a profit. If you are paying tax it is only because you are making a profit. You want a profit. Cash flow is good.

(yes i get the subtleties of negative gearing; it can work)

Select to expand quote

Macroscien said..
Are we all getting closer to communism in the purest form ever? Here how it may works. With everybody indebted into mortgage repayments it becomes impossible to repay once rates start rising. Then banks will take ownership of failed loans securities, but they will not be able to sell those properties. The only way will be nationalised such debt and now government could take care of loans and properties. Then government could in return rent and lease those properties back to citizens.We have now situation where loans on homes are much higher the real value- so we could never back to low and realistic prices. On another hand any significant interest rate also means certain suicide for economy. The only reasonable solution seems to be near zero interest for long time to go or switch over to completely new global currency.Like a Cyber Yuan or BitCoin.

Or, hyper inflation. We could inflate our way out of debt, like we already do, just faster.

I've no clue how we could do that, exactly. One bad way would be to just give everyone a lot of newly printed money.

evlP, obviously positive gearing is good but it's not about not wanting to positive gear, most people who negative gear simply don't have the capital to positive gear and negative gearing lets more speculators into the market that otherwise couldn't afford to wait till disposal to recognise the losses. The original intention of NG was to let young first home buyers get into a rapidly rising property market sooner rather than later, they live with their mates or mum and dad for a few years to get their krap together and then move in when they settle down, but they got their foot in the door at a much lower price.

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Paddles B'mere said..
evlP, obviously positive gearing is good but it's not about not wanting to positive gear, most people who negative gear simply don't have the capital to positive gear and negative gearing lets more speculators into the market that otherwise couldn't afford to wait till disposal to recognise the losses. The original intention of NG was to let young first home buyers get into a rapidly rising property market sooner rather than later, they live with their mates or mum and dad for a few years to get their krap together and then move in when they settle down, but they got their foot in the door at a much lower price.

Are you sure about the original intent of NG? I am not sure myself, but it was around before the crazy recent rises in property prices.

If anything, NG created the rapidly rising prices, so I am not sure I agree it was intended to let first home buyers get in.

How long has NG been in, apart from the short term removal by the Keating government?

Good question FN, I'll do some research.

neg gearing has been "in" as long as the income tax assessment act has been around (1936) ie the idea that you can offset losses from one part of your income generating activities with gains from another.

whats changed has been the introduction of capital gains tax in 1985 that meant gains and losses on long term held assets were treated differently to other income. You could quarantine your gains into the distant future and get a tax break for your losses now.

It was an attempt by keating to tax the assets of the rich. In the end it has become a preferred tax shelter of the rich. oh the irony.

Of course various tweaks have made it more advantageous over time like the 50% discount applied to capital gains before they are taxed.

The fact that it came along at the same time as we went through massive financial deregulation in the 80s where we were all allowed/encouraged to borrow more and more (biggest 1 was using 2 incomes instead of one for debt service calcs) is just a happy coincidence

neg gearing didnt cause the bubbles but it did add some juice as it added a bit more to already massively increased borrowing capacities.

no plan just a series of unforeseen consequences like pretty much everything that gets tinkered with by well meaning govts.

Well there you go, I thought it was introduced a bit more recently than that Bara. I knew that the way of taxing capital gains changed in the '80s, but had no idea about when the ability to deduct interest expenses for individuals and not businesses kicked off.