Aussie John kicks own goal for Malcolm Turnbull

Aussie John Symond couldn’t help himself from weighing into the debate on negative gearing.

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There are a couple of things he should know

1   If you have a policy that is discredited and indefensible, don’t keep re-emphasising its inherent stupidity and unfairness

2   If you going to talk about an issue, don’t fly in the face of the well-established facts or the opinions of people better informed than you.

But no, Aussie John couldn’t resist the temptation to get onto national television and throw support behind Malcolm by criticising Labor’s negative gearing policy.

Every statement was a classic

“Well, what I’m concerned about is bringing out a sledgehammer and overnight hitting negative gearing on all established housing across Australia.”.

Wrong on two counts:  Firstly, all establish housing in Australia is not subject to negative gearing and secondly it won’t affect negative gearing all over Australia either
“I don’t know whether prices will drop 10 per cent, 20 per cent or more. There’s others out there saying it could drop 30 per cent or 40 per cent. I wouldn’t think it would drop that much, but one thing I am prepared to bet on it will definitely drop the value of homes.”

Gross overstatement and simplification:  Prediction is always difficult, particularly about the future. No one knows where the prices will drop or if they do, by how much. It’s extremely complex because there are numerous feedback  processes in this system and unique complex mathematical modelling to have any chance of a prediction and fairly clear that Aussie John has not done any modelling.

“All I’m saying here is this will hurt everyday Australians. Eighty per cent of property investors are regular mums and dads, with the majority earning less than $80,000 a year.”

Plain wrong: There are ABS statistics that demonstrate this is not true.

“It is frightening and it will frighten others . . . and it creates this stampede. And that’s my concern that there could be a glut of properties come on the market, force the prices down, and then all of a sudden it could be Armageddon with the housing industry that’s propped up the Australian economy the last four years,” he told Seven’s Sunrise program.

Scaremongering: Stampedes are started by people who get on national television, overstate the case that is plain wrong and frighten the gullible.  Armageddon is the end of the world, a decline in house prices in Australia will not be the end of the world. Many  potential first homeowners would see it as the beginning.

The government’s economic modeller of choice on negative gearing, BIS Shrapnel, finds that after 10 years of a policy similar to Labor’s, Sydney home unit prices would be 15 per cent higher. Without a Labor’s policy, they would be 22 per cent higher. The main impact of Labor’s policy would be to slow price rises, something an honest broker trying to get people into houses ought to want.

On Monday, Malcolm Turnbull backed Symonds. He said Labor’s policy would smash the value of properties. At least he didn’t mention mass unemployment.

 

Some advice to Malcolm Turnbull on negative gearing.

On 7.30 last night, Leigh Sales quizzed, rather than grilled, you on negative gearing. You didn’t look too good, not because Sales gave you a particularly hard time, but because your defence of negative gearing is fundamentally flawed, demonstrating that you either doesn’t understand it or you’re deliberately misleading the public.

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The Age reports that:

He offered no modelling, only “common sense” to justify his negative gearing policy, telling the ABC’s 7.30 host Leigh Sales that figures showing top earners had the most to gain were “beside the point”.

Seventy per cent of people who negatively geared in Australia owned just one property, and another 20 per cent owned two, according to the Prime Minister.

“Most of them are on average earnings or less,” he said.

“This is a matter of common sense,” Mr Turnbull answered.

“Around a third of the buyers for residential property currently are investors. What Labor is proposing will take all or almost all of them out of the market.

“If you take a third of the buyers out of the market, prices, values will fall. That’s common sense,” he said.

I don’t know if you’re listening Malcolm, but there are a couple of things you got really badly wrong.

The first is that, if the Labor Party policy on negative gearing were to be implemented, it would only affect new investments on existing properties. What that means is that investments  in existing properties may slow or possibly even (in your book) dry out completely. But it will only affect new investments.

What it doesn’t mean, and what you implied that it did mean, is that people with existing investments in property would leave the market. This is highly unlikely to happen as their   existing negative gearing arrangements will not be subject any change.

This is why your claim that the Labour Party policy will affect 30% of investors and that they will sell their properties driving down house prices, is wrong.

If you don’t know that this is the case, then you are dangerously misinformed. If you do know that this is the case and stated otherwise, you’re telling porkies.

The second problem with what you are saying is the statement “Most of them are on average earnings or less” and  “There are well over a million Australians, most of whom are on average earnings, who have an investment property and they are negative gearing”.

In part, this is because higher income earners are able to reduce their taxable income through negative gearing. If you take that factor out, you get a better picture which is: The top 10 per cent of earners collect almost half the negative gearing tax deductions and three-quarters of the concessionally taxed capital gains.

This equates to $13 billion per annum which is handed to the 1.26  million people who have negatively geared property. If you do the sums, that’s 10% of the population of taxpayers (around 12 million). I presume you realise that $13b billion is about one third of the current deficit.

There is a wider issue in this debate which should also be considered.

Who will buy the properties that investors put on the market as a result of changes to negative gearing? There’s a good chance it will be first-time buyers, many of whom are currently locked out of the market.

And this is where you’ve got the politics are wrong.

Most Australians would probably understand that negative gearing benefits a small group of wealthy people. Many of us have children who cannot get into the housing market and maybe still living at home well into their 20s and 30s. For these people, housing affordability (and its feral little brother, negative gearing) is the major problem.

Informed opinion is lining up against you.

The Guardian’s Catherine Murphy writes Negative gearing changes won’t drive all investors from the housing market – here’s why

Former Commonwealth Bank boss David Murray’s sweeping review of Australia’s financial system singled out negative gearing as one of a number of tax arrangements that “distort the allocation of funding and risk in the economy” and may “adversely affect outcomes in the financial system”.

And John Daley, Chief Executive Officer of the Grattan Institute is no great fan.

Politically, negative gearing is an issue that is racing on three legs and you keep backing it.  It’s a loser and everybody else realises this. The only other group that is backing it is the real estate industry. Shouldn’t that tell you something.

Malcolm Turnbull: Negative gearing is off the table and blancmange is on (again)

The Age reports that “The Coalition will make no changes to capital gains tax and negative gearing arrangements, as Prime Minister Malcolm Turnbull signalled an election campaign focused on property values and household wealth.

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 Malcolm Turnbull is short of budget options

After weeks of suggesting the government might make some changes to negative gearing at the higher end of the income scale, Mr Turnbull said it was “common sense” to make no adjustments to existing arrangements.

Mr Turnbull faced opposition to any changes to negative gearing from within his own party room, including from former prime minister Tony Abbott.”

Well, opposition from within the party is something he could have expected but then again, he could have expected support from within the Labor Party because a goodly proportion of parliamentarians own negatively geared properties.

Turnbull has done a remarkable job of ruling out  options for the budget and has effectively left himself and Treasurer Scott Morrison no political or economic wriggle room.

If he goes to a double dissolution, he must be hoping that his budget is going to earn a lot of political brownie points. So it’s going to need to be a political masterpiece, given that he has decided not to address the issue of bracket creep or of the debt and deficit crisis so actively touted by Abbott and Hockey when they were around.

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The days of shock/horror debt and deficit crisis are over

His decision to focus on property values and household wealth is going to be a difficult one to pursue because the only option has a scare campaign about Labor destroying capital value of family homes with its policy of restricting negative gearing to new properties.

Particularly in the light of the report published by the Grattan Institute and published in The Age today which shows that:

Surgeons, anaesthetists, finance managers and lawyers will be the overwhelming beneficiaries of the Turnbull government’s decision not to touch negative gearing in the budget, research shows.

The report also finds that teachers, nurses, hairdressers and sales assistants are among those least likely to negatively gear. The top 10 per cent of earners collect almost half the negative gearing tax deductions and three-quarters of the concessionally taxed capital gains.

What is not mentioned is the huge number of people who don’t,And can’t afford to, negatively gear at all, hairdressers, builders labourers, waiters and waitresses, all the low income earners who subsidise the top 10%.

One of the profound ironies of the situation is that Malcolm Turnbull’s wife, Lucy, is a director of the Grattan Institute. She is also the head of New South Wales Government’s new Greater Sydney Commission tasked with tackling Sydney’s housing affordability crisis.

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Is Malcolm Turnbull losing the plot?

The Age reports that Malcolm Turnbull said Labor’s negative gearing policy: “…is an assault on private enterprise, it’s an assault on economic freedom,” Mr Turnbull said. He said the totality of Labor’s proposal was “so much more extreme” than that modelled by (the now discredited) BIS Shrapnel report.

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 Limit negative gearing, you’ve got to be joking

Deputy prime minister Barnaby Joyce went further, accusing Mr Bowen of practising “Zoolander economics” and orchestrating a “complete re-engineering of the Australian economy”.

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 You would have to be worried with a man like this watching your back

 Well Barnaby, if Chris Bowen can completely re-engineer the Australian economy, he should almost certainly be Treasurer.  The current bloke doesn’t seem to be able to do much.

The problem for Malcolm Turnbull in defending negative gearing is that anyone who understands how it works, knows he’s wrong and those who don’t understand it, may not care.

Turnbull’s political gamble is that he hopes the people who don’t understand it will respond to his scare campaign. It worked for Tony Abbott with the mining tax and with the carbon tax. Unfortunately, the Australian taxpayer will pay a high price for these two disastrous decisions. The Australian taxpayer will continue to pay a high price for the tax benefits of negative gearing for high income earners

It’s interesting that Turnbull completely ignores the benefits of reducing negative gearing: increased revenue flow for the Federal government.

But the fundamental question about negative gearing is whether the Australian taxpayers should subsidise the investment decisions of a small group of wealthy investors.

The answer that question would be very simple if the option were to be “Abolish negative gearing for the few, and have tax cuts for all.”

Tax: Turnbull to “consider all of the considerations”

That is other than changing negative gearing, abolishing tax breaks for superannuation, increases in the GST, income tax cuts, increasing capital gains tax and probate duties.

The question is: “What else is on the table?’ It’s beginning to look a bit like Old Mother Hubbard’s cupboard.

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The Prime Minister and the Treaurer search for ideas on tax reform

 Mr Turnbull went on to tell Labor’s Chris Bowen directly that the shadow treasurer’s place in Parliament would be at risk under the opposition’s changes. “I will leave the Member for McMahon with this sobering thought,” he said across the dispatch box. “There are nearly twice as many people in his electorate that are negatively geared as votes needed to change hands for him to lose his seat.

What Turnbull didn’t mention was how many people there are in the seat of McMahon who are potential first-time buyers. This group of people will benefit immensely by the removal of negative gearing and will probably vote for Labor.

Turnbull appears to be getting increasingly strident (and desperate) in recent weeks. His comment about the number of people who are negatively geared in Chris Bowen’s seat is a simplification that insults the intelligence of the Australian voter, something he promised he would not do when he was elected as party leader.

Turnbull also maintained that house prices will collapse if negative gearing is limited. This is probably nonsense.  But it begs the question of whether we need to have house prices as high as they are and housing unaffordable for most  first home buyers.

The only time that the value of your house is important to you is when you sell it. However, most people who sell their houses normally do so to buy another one. In this situation, the house you sell and the house you buy will both have increased in price. A more expensive house will have increased more in absolute dollar terms.

The other time when the value of the house is important is when you die and leave it to the kids.  Chances are, that they would use the money to buy a new/another house.

The cheaper that houses are, the more money people will have to spend other things: the children’s education for instance, investment in a business or consumer spending. All of which stimulate the economy. The more money that is tied up in the housing market, the less money there is for economic stimulus (except when people invest in building new houses).

Tony Abbott gets it wrong on negative gearing.

In his desire to score political points and to keep the scaremongering about Labor policies simmering, the Prime Minister has claimed that abolishing or restricting negative gearing will force rents up.

Changes to negative gearing being considered by Labor could force rents up, Prime Minister Tony Abbott has warned.  “If you muck around with negative gearing effectively you have put rents up,” he said.

The housing market is an extremely complex system and simplistic statements such as this one by Tony Abbott makes rational discussion of the problem or difficult.When you think of it, it’s something he’s lifted to an art form.

There are two important elements of the rental investment market to understand. The first is that investment in new dwellings increases the stock of housing available for rental. This was the original aim of the policy.  The second is that investment in existing houses does not increase the amount of housing available for rental but decreases the amount of housing available for purchase for owner occupiers.

This discussion is about the investment in existing properties.

This causal loop diagram shows how the dynamics work.  Click here to understand how to read a causal loop diagram.

 The causal dynamics of negative gearing

The causal dynamics of negative gearing

There are two drivers of the system: Negative gearing tax concessions and people entering the rental market.  Negative gearing encourages people to purchase rental properties. Young people leaving home and looking for somewhere to live provide the demand for those properties.

With investors competing with home-buyers for properties, prices rise faster than they would without that particular form of competition because investors generally bring more money to the market then the first-time buyer.  With investment pushing the prices up by competing for properties, sales to first-time buyers decline.

When these people are kept out of the market they become renters and this pushes the rents up.

Let’s summarise the logic: the more people invest (rather than buy) in the housing market the more young people cannot afford a house and are forced to rent.

Negative gearing actually pushes rents up. Exactly the opposite of what Tony Abbott was suggesting.

The logic works in reverse. If negative gearing is reduced (or, heaven forbid completely abolished), the amount of housing available first homebuyers would go up and the number of people chasing rental properties would decline. This would lead to a reduction in rents. Exactly the opposite of what Tony Abbott was suggesting.

Farmer Abbott’s barnyard animals (2): Floppy the negatively geared rabbit

Floppy, the negatively geared rabbit, is another one of those animals that has been around for so long that everyone accepts him as  part of the barnyard furniture. No one quite knows how he came to the barnyard but everyone admits that he doesn’t do much except consume a lot of the typical rabbit diet of eats roots shoots and leaves.

Over the years, Floppy and his greatly extended family  have become increasingly expensive to maintain.  Getting rid of Floppy  and his offspring is going to be extremely difficult, as everyone has grown up with a pet rabbit and is extremely attached to it.

However, taking the knife to Floppy would be a boon to the dog food industry and take pressure off barnyard resources.