No point in property negativity

Negative gearing is under the microscope

THE following words are not going to be pleasant reading for the 1.7 million Aussie landlords who own negatively-geared investment properties.

You're trying to build your wealth on dubious foundations. Negative gearing is not your friend. Negative gearing should be banned.

But wait. Don't shoot the messenger these are not my words (actually, I'm one of you).

They come from a growing band of critics - ranging from economists and newspaper columnists to property experts and bank bosses - who are questioning negative gearing, where investors claim a tax deduction when their expenses exceed income.

Smart Property Adviser director Kevin Lee says property investors need to change their thinking.

"Many investors have the mindset that the only way to become a property investor is to lose money on a weekly basis, for years on end, through the outdated strategy of negative gearing," Lee says.

"They do this in the hope that the God of Capital Growth will visit upon them.

"Investing for capital growth is gambling and, like any form of gambling, it's rarely a long-term strategy for success."

Ouch! With property prices falling over the past year, many investors are already questioning their strategy and comments such as these don't exactly stoke the ego.

Lee and other financial experts suggest finding properties that can be neutrally or positively geared where income exceeds the costs of holding the asset.

However, the issue for the majority of investors is that such properties are increasingly hard to find, and are most likely found in areas where many investors fear to tread because of worries about tenants from hell.

But there is some good news for investors with a long-term focus.

Negative gearing looks unlikely to be banned no government would risk 1.7 million votes by destroying the plans of an army of property investors.

Secondly, rents are rising nationally, and pretty strongly in most states. This means that investors who hold their properties long enough will eventually be positively geared.

Don't ignore all the negatives about negative gearing, but remember that over time it can still deliver positive results.

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Eslake urges rein on negative gearing

ECONOMIST Saul Eslake has escalated pressure on the government to tighten negative gearing, warning that no other nation offers such generous tax breaks for property investors and that it is tipping $4.5 billion a year into the hands of the wealthy.

Mr Eslake said there was no legitimate public policy goal served by allowing negative gearing, under which investors are given favourable tax treatment for the cost of owning a property (including paying interest) if this is higher than the income they get from renting it out.

"There are now 1.7 million of them and they vote, which is why that subject is off the agenda for both major political parties, but there is no legitimate policy objective served by allowing people to do that," Mr Eslake said.

The comments came as unions and welfare groups clashed with property investors over whether negative gearing and capital gains tax breaks should be overhauled.

The government rejected the proposal in the Henry review to apply a standard 40 per cent discount to capital gains and individual savings income.

Yesterday, academic Julian Disney said that negative gearing on property was undermining the government's tax collections.

"There is a very big loss of money in negative gearing," Professor Disney said. "It also is a major reason why so many people now are caught up in a culture of tax avoidance. It is now called 'tax effective behaviour'. "

Property developer Central Equity's executive chairman Eddie Kutner, defended negative gearing, saying it was designed to encourage investing -- not speculating -- by people who otherwise could not afford it.

"You would find that developments would not proceed, shortages would be increased, be aggravated, and so rents would be increased," Mr Kutner said.

"The other thing is, if governments were asked to replace the funds that investors mobilise into rental properties I think the burden on government would be far greater than it currently is in terms of the tax incentive."

He said only the provision of new housing would fix existing shortages or housing affordability. "The last thing we need to do now is discourage investors," he said.

Mr Eslake said the US had never had negative gearing and yet its vacancy rate was never less than 5 per cent.

The Australian