International Family Business Blog

What is the true cause of low consumer confidence in Australia?

A number of commentators have ascribed the apparently subdued level of consumer confidence in Australia to the recent Abbott/Hockey Federal Budget. 

However, given that the Labour/Green Coalition has promised to block a majority of the Budget measures, is it not more likely the business and consumer gloom is actually caused by the prospect of a continuation of the Labour/Green deficit blowout?

Certainly, businesses are less likely to plan expansion or add staff in the face of the uncertainty caused by the likelihood of the Government’s restorative economic policy being stymied.

The truth about tax and "negative gearing"

There is much rubbish said a written about “negative gearing”.

First, let’s debunk the myth that it is purely an pernicious tax strategy. It is foremost an investment strategy, albeit that as with any investment strategy, taxation implications do arise. 

Basically, it is all about leverage, risk and reward.

 Leveraged investors risk their capital, whilst sensible lenders to them minimise risk by taking an appropriate security interest.

One of the primary reasons for using negative gearing strategies is to exploit arbitrage opportunities that might result in the imminent or ultimate realisation of an economic advantage. The strategy is equally as likely to be adopted by hedge or vulture funds seeking a short-term turnaround, as by medium to long-term investors seeking capital gains from residential property.

Detractors of "negative gearing” in Australia seem to have an unhealthy focus on the alleged impact upon the residential real estate market. Many of the same detractors also conflate negative gearing with Chinese buyers of residential real estate to create a “double bogey”. 

The “ egative gearing”  strategy is equally as likely to be adopted by hedge or vulture funds seeking a short-term turnaround, as by medium to long-term investors seeking capital gains from residential property.

Let’s be clear, the Australian real estate market is and always has been, primarily driven by the basic economics of supply versus demand. In this recent market, I believe that increases in demand have been driven by the “confidence dividend” of a new government. This released pent-up demand that had been withheld from the market by uncertainty about the Australian economic outlook. 

In Australia, negative gearing arguably provides a cap mechanism on residential rents. For example, the rental yield in most of the areas around Campbelltown in NSW is only about 4.4% (realestate.com.au). Even at today’s low interest rates, that low yield rental pool is most probably provided primarily by negatively geared investors.

Some will recall that when then Treasurer Paul Keating attempted to introduce a prohibition on “negative gearing” for residential property investment some 30 years ago, the market reacted. New housing starts fell, rents increased and rental stock shrank.

There is no overwhelming evidence to justify a prohibition on “negative gearing” exclusively in the residential property market. If it were to be probibited across all market sectors, it would impact all leveraged investments.

The true tax impact of “negative gearing” results from the differing tax treatment of revenue and capital gains in Australia. Many investors will prefer deferred gains (at lower tax rates) to current income taxed at high marginal rates. Residential real estate is only one of many types of investment that can be leveraged.

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