Housing policy dissected

Here are three truths;

1.     If you own a house, then you hope prices go up.

2.     If you are in the market to buy a house, then you want prices to come down.

3.     5 minutes after you buy that house, you hope prices go up.

Hence – everyone who owns or hopes to own a house hopes that prices go up.

Before I start – let’s make sure we acknowledge the needs of the five main age groups in Australia;

• Gen Z – aged 0 -17
• Millenials or Gen Y – aged 17 – 37
• Gen X – aged 37 – 57
• Baby Boomers – aged 57 – 77
• The War Generation – aged 77+

• Our elderly are not investing – they need to be cared for with integrity and compassion.
• Gen Z are still enjoying their childhood.
• Millenials or Gen Y are not investing – but they do want a fair go to get into their own home.
• Baby Boomers are still investing and planning to find a way to retire with dignity.
• Gen X are fair and square the investing generation and will be most affected by policy changes.

This election very dishonestly presents generations at war with each other – especially the quote repeatedly used by the Opposition Leader: “its not fair for someone buying their second or third home competing unfairly with someone buying their first”.

The Australia I know does not pit one generation against another. The Australia I love works together. Different generations have a collective name – it is called your family.

I want to talk about investing but I want at the outset to explain how Millenials can be helped into their first home without affecting others who simply want to provide for their own self sufficiency in retirement.

Millenials / Gen Y and their first home … I have been mortgage broking for 21 years. Millenials and Gen Y DO NOT complain to me about the price of a house. They complain about the SIZE OF THE DEPOSIT as being the barrier to getting a home. This can be addressed incredibly simply.

At the moment a First Home Buyer needs a 5% deposit, Stamp Duty (in many states) and Mortgage Insurance. On a $500k home this means around $52k. If all State Governments abolished stamp duty for First Home Buyers and if APRA allowed all banks to add the Mortgage Insurance to the loan (so it can be paid over time) then the entry point into a First Home has been significantly eased.

None of these things would be available to anyone else. It simply means that State Governments go without some money.

For an alternative government to set children against their parents as the reason they can’t buy a home is disingenuous.

The alternative government believes there are enough Millenials and Gen Ys now to swing the election and are dividing us all to achieve their aim.

Now let’s get back to investing.

The main focus so far has been the abolition of negative gearing – but that is not in fact the main story – the most important story has not been widely discussed.

>The most important story is the proposed change to Capital Gains Tax (CGT).

A gain in price is called a Capital Gain – let’s dissect that.

In 1985 the Hawke Labor Govt introduced a Capital Gains Tax. It went like this;

If you buy for $100 and 5 years later sell for $200 then the Capital Gain is $100.

To make the tax “fair” Canberra published an annual inflation figure called CPI (Consumer Price Index). Accountants had to keep track of this annual number and factor it in. Inflation back then was running at around 8%. So after 5 years the “Base Price” of $100 might have adjusted up to $140 ($100 , $108, $116, $124, $132, $140).

The “real” Capital Gain would be $200 – $140 = $60 and tax would be paid at your marginal tax rate on that real gain of $60.

By 1999 it was obvious that it was too expensive and too complicated to calculate the “real” Capital Gain. Accountants were making too much money! So the Howard Liberal Govt simplified.

As long as the asset was held for more than a year then a simple rule was brought in. You paid tax on 50% of the Capital Gain.

So .. buy for a $100, sell for $200, the gain is $100 and you pay tax on 50% of that – or $50.

Now that was pretty close to the status quo and required no accountants.

This is referred to as the 50% discount on CGT. It was not and is not a “gift” nor a “loop hole” – it was a simple way to ensure that tax was only paid on the real gain. It was and is “fair”.

The Opposition proposes that the 50% discount be reduced to 25%.

What does this mean?

Buy for $100 , sell for $200 – the gain is $100 – but the tax will now be paid on $75.

Hang on … do you remember that the real gain was only $60? The tax now applies to far more than that.

Let me do some more maths – the top marginal rate is 47c – so under old rules CGT was .47 x 50% = 23.5%. The new proposal is now 47c x 75% = 37.5%.

Australia moves from being “middle of the pack” in CGT to the second highest CGT in the world!! – behind only Denmark.

Investors choose where they wish to invest. This new CGT that will apply to ALL investments is highly likely to lead to an investor strike. There will be LESS investing.

Announced in the shadows of the election The Labor Party also announced a new Tax rate for large Investment Trusts to invest in housing from 30c down to 15c.

The Labor Party assumes that mum and dad investing will dry up – so at the very same time they are imposing higher taxes on small investors they are giving massive tax discounts to the Top End of Town … This is what the policy is all about.

Now let me return to the final piece of the puzzle – negative gearing.

Someone decides to invest in property – they buy a house and find a tenant. The rent is income. Expenses come in the form of letting fees, interest, repairs, rates, repairs, body corporate.

In the early years the expenses outweigh the income and that’s a rental loss.

Currently this loss can be deducted against other income – this is the “negative” in negative gearing.

The Labor policy proposes that this loss be carried forwards and deducted from the eventual capital gain.

In actual fact I don’t have an issue with that BUT only if CGT was left as it currently is. As it stands – carrying the losses forwards (which means the investor really pays for them now) to a CGT that taxes virtually the entire gain is a very poor deal for the investor.

There will be direct consequences;

• There will be less investors – that means less investment properties to rent.
• Landlords will naturally wish to minimise the losses in the current year.
• The direct consequence is that landlords will want to increase the rent, and lack of supply will mean they will probably be able to.
• This is a VERY bad policy for people renting.

As an investor – if this policy ever comes in then I believe the smart property investor will move to a type of property where no CGT is paid.

Yes this is possible – I believe that an astute strategy, should this new regime come into being, would be to buy the most expensive home you can afford in the best suburb you can afford and manage that mortgage over time.

Desirable suburbs will continue to rise in price and when you eventually sell and retire by downsizing then the ENTIRE Capital Gain is Tax FREE.

Conclusions?

The lesser of two evils is to remove negative gearing but leave Capital Gains tax untouched.

In my opinion the better policy is to leave well enough alone. Why should the ability to use property to plan for their future to be removed from Gen Y and Gen X?

Why should this opportunity be now left to, dare I say it, “The Top End of Town”?

As always I’m here to discuss your own personal circumstances should you wish to know more about how this could affect you and your future financial stability.

Ask Alan – Your online mortgage broker.