Negatively geared property investors have exposed themselves, our banks and the broader Australian economy to widespread capital destruction, says Prosper Australia campaign manager David Collyer.
“The Great Australian Land Bubble has just burst. ‘Gearers will not be able to sell their holdings into the market fast enough to protect their equity. This group faces financial ruin; their mortgages are full recourse to all their assets,” Collyer said.
“The reliance on heavy borrowings and deliberate thin equity means their financial position can turn around with surprising speed and force. Negative gearing accelerates gains in a rising market. It erases equity in a falling one. Worse, the assets they bought with borrowed money are both illiquid and lumpy.
Prosper called the bursting of the property bubble April 12. Our call is confirmed by:
• The HIA-RP Data Residential Land Report April 18 showing residential land sales slumping to their lowest level in a decade, with land sales on the city’s fringes down 50.1 per cent in the December quarter compared with the same quarter in 2009.
• The REIV revealing April 15 property prices are falling, by an initial six percent in the quarter to March.
• Housing finance statistics from the ABS on April 6 announcing commitments for new dwellings had fallen at the fastest rate in 32 years, ever since the series has been collected.
Warren Buffett famously observed in his 2001 chairman’s letter: ‘You only find out who is swimming naked when the tide goes out’. In the US, a key driver of their property price collapse – now nearly five years old and counting – was sub-prime loans.
“In Australia, the ‘gearers are the most exposed as property prices recede,” Collyer said. “They are the unbridgeable chasm in our economic landscape.”
The ATO says 1.7 million taxpayers have rental income. Of these, around 1.25 million are negatively geared and are claiming a loss against their taxes. Most are middle income earners trying to escape Australia’s punitive PAYE tax system. Middle income earners typically do not have a large enough asset base to promptly top up their equity – as the banks will now require.
“Skilled investors do not indulge in negative gearing or residential property portfolios,” Collyer said. “They would never willingly expose themselves to these terrible risks. The maximum borrowing they would tolerate would be where rents are 120 per cent of interest costs. Skilled investors regard residential property as a highly unattractive asset class characterized by poor returns, high maintenance charges and significant vacancy risk.
“The ‘gearers will have been warned by their accountants of the serious risks they face. But many were seduced by property spruikers and the siren song of owning a ‘rent roll’”.
“I warn against blaming the ‘gearers for the economic damage we are beginning to see. They were reacting to the serious flaws in our tax system – to minimize their PAYE obligations and maximize capital gains which are concessionally taxed.
“Australia’s tax base relies heavily on wage and business imposts. The Henry Review recommended removing 125 stupid, behavior-altering, hard to administer and easily evaded taxes and relying on a few, including Land Value Tax and the Resources Super Profits Tax.
“The blame-merchants pointing the finger at ‘gearers need to be cautious,” Collyer concluded. “I say, the tax system made them do it,”
About Prosper: Prosper Australia is a tax reform lobby group and think tank that is now 120 years old. It seeks to move the base of government revenues from taxing individuals and enterprise to capturing the economic rents of the natural endowment, notably through Land Value Tax and Mining Tax.