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Sunday, 14 June 2015

Most talk about negative gearing misses the point

I've been watching the commentariat - especially the people on the Left - get worked up over the past few days about negative gearing and it seems to me that the majority of them are working from incomplete data or misguided assumptions. Apart from anything else there seems to be a huge quantity of envy involved right now. As though accruing more than one property were somehow reprehensible when in fact it's just an effective way - tried and true, in the Australian context - to save for your retirement.

As in the case of the superannuation debate, this aspect of the case seems to have slipped people's minds. People don't want to retire on the public purse. And why would you want to? The money is bad, you are relying on someone else to provide it, and there's no guarantee it won't be tinkered with by some parsimonious government or another at some point down the track. It's much more reliable to have your own nest egg to use when you stop working for a wage.

The other thing people seem to have forgotten is that, in by far the majority of cases, the people now with multiple properties were all first home buyers at one point in time. Because please don't think that just because your parents have a home and an investment property that you're going to inherit them. They will in all likelihood be liquidated and the proceeds used to live off, or for some other purpose such as residential aged care. That's right, the government has just changed the rules for residential aged care. In the past, they based the residential fees on your income but now they - both Liberal and Labor - are calculating fees based on income and assets, which means that you have to declare all your assets to Centrelink, and you will be left with whatever the government sees fit to leave you. Or your children.

Apart from anything else the fact remains that if we remove negative gearing the cost of renting properties will just go up. They tried it before in the 80s and that's what happened. In any case, the tax that you save during the life of the mortgage through negative gearing is anyway going to be repaid at the end, when you calculate capital gain. At that point, the government will step in and take away a slice of your property just because they can. And remember, taxation is not divinely orchestrated, it's just the level of punishment the government convinces us we should tolerate in order to live better lives. It's a kind of ethical calculus. For the sake of safe streets, good government, clean air and water we pay tax. But that doesn't mean that the government should be allowed to tax everything under the sun as they see fit.

And if people want to complain about property gaining capital value, they should try living in a country where there is actual depreciation, like in Japan. There, a property you bought in the 1990s for $300,000 is probably worth about $200,000 now. How is that particular circumstance going to work when it comes to a person's retirement? Oh and they also have interest rates at zero, so you can't live off the proceeds from term deposits either.

Negative gearing has served Australia well. There are about a million Australians directly using it, which means that a very large slice of the population is involved in it in some way or other. It keeps properties coming through the development pipeline in a way that benefits many people in different ways, not least the battler who struggles to buy their first home and then, 15 years down the track, forks out another slice of hard-earned to buy an investment property. Because who wants to live off the public purse when they retire? The age pension is the largest single line item in the government's expenses ledger anyway. Buying a second property can therefore easily be seen as a patriotic gesture.

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