In the money advice section of the Adelaide Sunday Mail home lift-out today, is the following letter :
I have four investment properties which have grown in value considerably over the last five years. I brought one prior to 1985 so there is no capital gains tax problem but the other three have a significant capital gain. With interest rates getting very high I don’t expect they will gain much value in the next few years and as I am 58 and intend to retire from any job in a few years, I am thinking of selling them and setting up an allocated pension for when I do retire. Should I sell them all at once or will I pay less tax if I sold one each year for three years?
Investors around the country is echoing the same concerns as house price appreciation slams into reverse gear. Everyone is heading for the exits and all at the same time.
The Brisbane Times yesterday reported a surge of 10,000 more homes on the market now, than in the same period last year. In percentage terms, there is 52.9 percent more listings than a year ago. The Sunday Mail in Adelaide reported today that the number of homes for sale in Adelaide over the last four weeks is 14,440 up 20 percent over the same period last year. Four more, when the author of the letter above, places his properties on the market.
But why is there an urgency to sell? Could the answer lie with negative gearing?
Australia is one of few countries to have negative gearing. Figures from the Australian Taxation Office earlier this year showed Australia had 1.2 million loss making property investors in 2008, losing collectively $12.75 billion. The average property punter in Australia claimed losses of $10,640 last tax year. Six out of ten investment properties lose money every year.
The growth in losses over the past decade has been staggering. In 2001, there was only 650,000 property investors claiming $2.5 billion in losses. By 2006 it was $5 billion and in 2008, $12.75 billion.
In the mugs game (dictionary definition: a foolish, useless, or ill-advised venture) of property investment in Australia, investors didn’t care about investment yields. As long as they were reaping huge speculative capital gains, the good times rolled on. Tax deductible losses could be sustained on the expectation of prices rising in the future.
But now the tide has turned.
With prices dormant or falling in many states, it makes no sense to hold a loss making investment property where the “investor” has to fork out money for the privilege of subsiding your tenants living expenses. What more, with the size of the bubble in Australia, the falls in property values could be quite substantial should the government decide not to interfere and let the bubble deflate this time round.
It was only last month when Luci Ellis, head of financial stability at the Reserve Bank of Australia was warning us on this exact problem. “If rental yields are very low, investors are buying properties without really thinking abut the rental yield,” Dr Ellis said. “Buying an asset just because you are expecting the price to rise in the future, well that is actually the academic definition of a bubble.”
ยป Brisbane property sales in limbo – Brisbane Times, 14th November 2010.
I’d say that was Wayne ‘Never Ever’ Swan’s plan all along.
Still I stand by my opinion that NG tax benefits are going to continue distorting the market and robbing home ownership from working australians.
@ Average Bloke – I don’t think you realise how this impacts investors – with no / negative return on their investments, they will need to work harder and longer hours to keep their investment afloat. They can only do this for so long, then they will have to sell if the market continues to decline. If they don’t sell, the bank will have it and the other 5 properties used as security pre GFC.
Last time I checked, interest rates were up and so was unemployment, so things are not looking peachy for those that have maxed themselves with debt and taken the ‘easy route to wealth and prosperity’ through property.
Negative gearing is Australia’s ‘Black Swan’ and will ultimately bring the ponzi down unless government intervene with some creative new law. Watch this space.
I know what you are saying FHB. But the sad truth is that both Lab and Lib governments have rewarded income earners using NG with tax breaks and punished those that work and save.
Even with the upheaval going on at the moment established Property Investors and High Income Earbers will continue on the same path.
AverageBloke,
I just have to make the general comment, an investment should pay for its self and not require some form of financial witchcraft to keep it alive, I know its the same old whine about what an investment is versus what a liability is, but this is the fundamental problem at the root of the entire real estate lie. When I put my cash into something I expect a positive return.
I am in agreement with FHB, that negative gearing is damaging the Australian economy and distorting the value of commodities like real estate. The only way things can ever be fixed is if negative gearing is either substantially reduced or better eliminated and the market crashed, it needs to be done, the longer it is propped up the more bitter the cure.
Things are really slowing down right across the country. The powers that be must be watching nervously from the sidelines with their fingers hovering over the big red ‘Stimulus!’ button. Will they behave responsibly this time, or will they flood the market with more free cash?
Alex Barton
Australian Property Forum
Wayne (Black) Swan.
@AverageBloke – No High Income Earners or established Property Investors as you call them will sell and park the money into fixed cash until the Market has bottomed then buy back in after all the mugs that hang on for the next 2 or 3 years go backwards. Some times its better to pay tax than take a big loss!
All the things that helped inflate this bubble on the way up are now about to go into reverse and accelerate the downturn. It’s a law of nature folks – seen over and over again throughout history. Another tribute to our greed, short-sightedness and utter lack of learning from the mistakes of past generations.
So today I read in the AGE that the RBA states that :
“
@Romsey,
Here comes the intervention.
http://delusionaleconomics.blogspot.com/2010/11/here-comes-intervention.html
They’re calling such a proposition, Cover Bonds.
You hear of people that rip the system off, now the system is about to rip you (, me, us) off. Try to go through life’s journey working smart and hard, being prudent as not to dig your own hole so big you’ll never get out of, and see you neighbour with a mortgage like a galactic black hole, 6 credit cards, two cars they’ll never pay off, 3 drive in cinema size TVs, 8 laptops, 4 iPhones, Fox TV all channels, 2 PS3, a boat (Yes! I kid you not), etc.
I think we should identify such housholds, and burn their houses and items down, and let the insurance industry bail the economy out of this mess. Or you could just invent a hollow, bomb proof mattress and cry poor always.
I just want to say what a brilliant site this is Chris! We have been following it for years now and it’s been our sanity as we are the only people we know who share the sentiment of this site. We have our money sitting in the bank and like so many others that comment here, we have been expecting the greed driven property bubble to burst – not expecting the government to be stupid enough to create all the artificial stimulus … and certainly not expecting the public to be stupid enough to fall for it – especially considering what’s happened overseas.
What continues to confuse me is the fact that people we know don’t seem to see the massive tsunami that clearly awaits us. My brother-in-law, who owns several investment properties (and thus is a big part of the crisis), still believes the market is stable. In fact, he’s so far ahead that even a 40% drop wouldn’t affect him – he made those sorts of gains over the last two years alone. Lots of my investment friends think the same way. Then there’s our developer mate who has already pre-sold his development… and so the list goes on.
If a property market is all about psychology, we could be floating down deNile indefinitely!
Sorry Craig! Didn’t mean to type Chris!