Tuesday, May 10, 2016

Curb negative gearing, increase rents - or not

In awkward news for the Coalition Government, currently seeking re-election on a platform of sensible tax-reform-avoidance, it's been revealed that the Reserve Bank of Australia once suggested curbing negative gearing could be good for financial stability. In awkward news for us, the RBA also wondered whether curbing negative gearing might lead to an increase in rents. Find the RBA's memo on negative gearing here.

It's a common assumption that reforming negative gearing on residential property investments would result in a surge in rents. Indeed, property lobbyists have been dining out on the suggestion for years, hoping to keep the policy in their back pockets. But we've never been captive to such a notion, as we explained back in 2011 with one of our most read blog posts: Negative gearing is not your friend.

Negative gearing does not cause individual landlords to charge less rent, nor does it create additional supply of housing. It has contributed to more higher-income households renting for longer, as they are priced out of buying a home by investors who can afford to borrow just that little bit more. In a competitive market, this pushes lower-income households out of affordable properties, as higher earners tend to be more attractive to landlords regardless of the asking rent. And it has contributed to property investors passing over lower-rent housing stock in favour of properties with potential for higher capital gains, meaning that lower-rent stock has vanished from the rental market.

In short, negative gearing increases demand while reducing supply of rental housing, especially at the affordable end of the market.

Even so, the myth prevails. To be fair, we can easily envisage countless overstretched landlords crying poor if their tax-break rugs were suddenly pulled out from under them. Indeed they might try to put the rent up to compensate. Spend some time talking about tax reform on social media and you'll come across many landlords suggesting they'll do just that.

The problem for these landlords is that their tenants are already maxed out.

For some, putting the rent up might backfire, as tenants leave over-priced properties for more affordable arrangements. Overstretched landlords might then find themselves lacking the cash-flow needed to cover their no longer tax-subsidised debts, while still enjoying all the fine things life has to offer. They might even have to consider selling an investment property or two in order to make ends meet.

We understand such a thing would be completely unAustralian, so we've come up with a few alternative cost-saving measures for your landlord to consider in the event that negative gearing gets a trim.

Here are our top three tips for cash-strapped landlords:

3. Stop using real estate agents. According to the Australian Tax Office, Australian landlords spent more than $2.4billion on property agents fees and commissions in the 2013/14 financial year. Giving agents up might seem hard at first, but as you begin to gain an understanding of what it means to take care of another person's home, you'll find it's not rocket science. Tenants do it all the time.

2. Get your investment properties in good order. Spend up big on repairs and maintenance now, make capital improvements and invest in attractive additions that your tenants will love. The Tax Office says Australian landlords spent over $2.4billion on repairs and maintenance in 2013/14, and claimed over $5billion in deductions for capital works and plant depreciation. Bringing your repairs and maintenance spend forward makes good financial sense - not only could it save you money in future non-subsidised financial years (to a point), it would improve the quality of housing for someone who has been locked out of home-ownership. Just make sure you do everything properly the first time so you won't have to come back and spend the money again...

1. Pay down your debt. The single most useful thing landlords can do to reduce their expenses is to pay down their debt. Tax data shows Australian landlords paid an astonishing $21.1billion to cover interest on loans in 2013/14. This is far and away the most significant cost of being a landlord, so it makes sense to pay down the principal to reduce the interest payments over time. Eventually, you might end up owning the place, so you wont even need to worry so much about capital gains. That would make the housing market more affordable for all, making it an absolute win/win option!

Keep these in mind and remember them the next time you're assured negative gearing is keeping your rent down. The simple fact is that changes to negative gearing won't put your rent up - only your landlord can do that...!

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