Image above by DoodleDeMoon.

From the About Us page at SmartCompany:

SmartCompany is a completely free news, information and resource site for Australia’s entrepreneurs, small and medium business owners and business managers to help keep them ahead of their competition.

A great way to help Australian entrepreneurs and business owners is to abolish negative gearing. Since SmartCompany believes otherwise, let’s rumble.

Mr Yardney:

“Opponents of negative gearing appeal to the frustration of would-be home owners, suggesting they have been locked out of the market by greedy, tax-driven property investors who receive billions of dollars of tax breaks which push up property prices.”

I am not aware of any anti-negative gearing arguments/articles that play on the idea that property investors are greedy. Maybe in the comments, but not in the content. While it can be tempting to discredit an argument simply because you do not trust the motivation of the writer/speaker (eg playing on first home buyer frustrations), one still needs to look at the reasoning. So even though the  author of the Smartcompany negative gearing article runs a business that helps people locate and finance investment properties, I will listen to his reasoning with an open mind.

“I would argue that property investors provide an essential service to millions of Australians who chose to, or have to, rent their accommodation and as such these investors should be treated like all other business people”

Australian property investors are not the same as all other business people. To be clearer, investing in Australian residential property is fundamentally different from carrying out any other normal business activity in Australia, such as operating a cartridge refill shop, running a real estate business or even investing ones money on the Australian stock exchange.

Before continuing, I will define residential property investment as purchasing an existing property to rent to a tenant.

Residential property investment is fundamentally different to any normal business / investment activity.

Reason One: A property investor adds no value.

Imagine an auction in full swing for a 10 year old house somewhere in Melbourne. There are only two categories of bidders; investors and home-owners (either first home buyers or home owners upgrading/downgrading). Since investors have a tax advantage (they can claim the interest on their loan as a deduction against the rent) they have an upper hand over the home owners.

If the investor outbids the homeowner, he or she then rents the house to a tenant.

Let’s return to the above quote: “property investors provide an essential service to millions of Australians who chose to, or have to, rent their accommodation”.

If property investors weren’t subsidised by the government with tax incentives such as negative gearing and therefore were less likely to outbid a home owner at the above auction, what would happen?

Either a first home buyer would purchase their very first home, or an existing home owner would fulfil his or her desire to upgrade/downgrade to a more appropriate home.

What happens to the first home buyer if the investor outbids him/her? He/she has to keep renting, or living with parents, or continue using taxpayer subsidized housing, or continue receiving rent assistance from taxpayers via Centrelink.

By continuing to allow negative gearing, we are simply continuing to allow property investors to outbid would-be homeowners which then forces them to continue renting, from a landlord.

The essential service is the house, which is taken away from the would be home owner by a property investor, not because the property investor is evil or greedy, but because they are simply maximizing their utility given the current tax rules.

Reason Two: Residential property investment reduces the supply of existing homes and therefore has an upward pressure on prices.

If you have money to invest and you set up your own cartridge refill shop, real estate business or invest in Qantas will your actions have any upward or downward affect on the price of catridge refills, home sale listing fees or flights from Melbourne to Sydney?

No.

If anything, your cartridge refill shop/real estate business may cause a little more competition for those services which could have a small impact on lowering prices in your area. If you buy shares in Qantas it will have absolutely no affect on the price of flights within Australia.

What happens when you buy a house or an apartment in Australia that has already been built and rent it out to a tenant?

By buying the property you have made it impossible for a home owner or first home buyer to purchase the property. Because we don’t have an elastic supply of housing, your purchase adds to demand which helps to increase prices.

Because of this, property investment in Australia is fundamentally different from any other normal business activity.

So no, property investors who purchase residential houses and apartments that have already been built should not be treated like normal business people.

The exception to this is where a property investor actually adds some value and builds a new house and rents it out. In this case he or she has physically done something to increase the supply of housing.

 “…there is not as much loss of revenue to the authorities as some critics believe because for every dollar of interest claimed as a tax deduction by a borrower there is a corresponding dollar of interest assessable to a lender.”

Incorrect.

The interest on the loan issued by the lender would be classed as assessable income irrespective of whether the borrower is an investor or a home owner.

“To deny the person making commercial a loss like this a tax deduction would be to inflict a double whammy on them and increase their hardship unduly.”

I believe it would be a little immoral to change the tax system tomorrow so that property investors cannot claim their loss as a tax deduction. Investors would need to be given appropriate forewarning that negative gearing will be wound back to zero over a number of years for properties that already exist.

What does negative gearing have to do with business?

Two things.

Firstly, imagine you own a business in Australia.

Is it in your best interest for your customers to be paying 30+ % of their weekly wages on housing costs, such as a mortgage or rent? Or is it in your best interest for your customers to all be paying 15% of their wages on housing costs?

I am making the numbers up, but you get the idea. By removing negative gearing you increase the likelihood that Australian consumers could spend less on their housing costs as a proportion of their total spending.

Second, imagine you’re trying to get a start-up off the ground. You believe in your product, you have validated your market and confirmed your target customers are willing to pay you for the product at the price you want.

Unfortunately for you, every accountant across this big brown land is going to tell their clients who have spare money to invest to buy a house that has already been built, because negative gearing makes it attractive, instead of telling them to consider putting 5-10% of their money into angel funding a start up like yours.

By supporting negative gearing and not calling for its removal, no media outlet can claim to represent the interests of Australian entrepreneurs and business owners.

@TaxpayersParty