Sydney Morining Herald | 24 November 2010
http://smh.domain.com.au/home-investor-centre/blogs/domain-investor-centre-blog/investors-cop-flak-as-parasites/20101123-184uy.html

Rising property prices and worsening housing affordability isn’t just fuelling talk of a bubble. Investors are increasingly coming under fire as “parasites” who are destroying the Great Australian dream.

Talking property really brings out the nasty in some people.

About a fortnight ago, I wrote a blog post on some of the potential benefits of investing in cheaper properties (particularly in regional areas), rather than chasing pricier stock in the capital cities.

Advertisement: Story continues below The story attracted about a dozen comments.

Some took issue with the real-life applicability of the yield and capital growth data; others the apparent hazards of a renting in low socio-economic areas.

There was even a little ditty foretelling Australia’s impending property collapse, set to the tune of Dolly Parton’s “9 to 5” (or is it Sheena Easton?).

But what really caught my attention was this:

Oh great! So now that parasitic investors have eroded affordability in inner city areas, its time to export this cancer to more affordable regions?

Investors as parasites. Investors as cancer. Bombastic stuff.

But it’s only one comment, right? Wrong.

This notion of investors as some kind of parasite/disease on Australian society appears again and again in comments on stories about the property market.

Run a few Google searches to check out just how often these kinds of statements come up.

But here are a few samples from some recent stories run by Fairfax (edited for space):

The tax subsidised negative gearer parasites are close to the worst form of humanity - gaining from others disadvantage and then compounding their won position at the ever increasing expense of others. ….The parasites in removing the option of a home to the genuine home owner then has the vile cheek to offer that same person a rental proposition. Apparently by bludging off the tax system and being supported by everyone else and by being allowed to create scarcity these egregious greedy twits then play Father Christmas (or at least thats what they believe)

The amount of damage that this bubble has already caused to young people deserves jail sentences and massive compensation. This bubble pricking will only hurt idiots who borrowed too much and parasitic scum who are sucking the life out of the workers.

Why do property owners think that the sole motivator for the RBA is to protect them from interest rate increases? Dream on and suffer the consequences. You are not financial geniuses. The bulk of you are sociopathic parasitic leeches.

It’s often said that discussions about religion and politics inevitably get viciously personal, downright nasty and bring out the worst in people.

After roughly four years covering the property market (overwhelmingly in Melbourne), I suggest we add ‘property’ to this list.

As a topic of never-ending controversy, and a magnet for wholesale bluster, it certainly fits the bill.

Few things are more emotively personal than the ability  -- or the struggle --- to get and keep a roof over your head. Or the rage that builds when it appears someone is doing it at your expense.

That being said, I don’t subscribe to this labelling of investors as parasites/diseases. (***Disclosure: I don’t own an investment property; I loathe debt, so my money goes to paying down my own mortgage)

The comparison, I think, is highly offensive and guaranteed to ruffle feathers -- and that’s precisely why it gets used so often. And anonymously, it should be pointed out.

Describing one’s opponents as parasites/insects/diseases/infections -- and implying their  ‘removal’ in one form or another – has a long and vile tradition amongst ideologues, fundamentalists, totalitarians, racists, and self-proclaimed ‘revolutionaries’. And better left in the dustbin of history.

But, after stripping away the despicable terminology, there does appear to be something profoundly unfair, inefficient and downright counterproductive about the way the current property investment structure works.

Just take a look at the numbers.

The amount of money the federal government disperses to investors is staggering:

About $32.7 billion worth of rental-related tax deductions were claimed in financial year 2007-08 – amounting to a net rental income loss of $8.6 billion nationwide -- according to the Australian Taxation Office.

The total number of investors in Australia rose to 1.72 million that year, while the number of investors claiming a loss came in at 1.2 million or nearly 70 per cent.

In fact, the gap between rental income and deductions grew by 35.4 per cent that year.

Negative gearing, far and away the most controversial of the deductions available to investors, accounted for some $12.75 billion of claims.

That means about one in ten taxpayers was operating as a negatively geared property investor.

And it’s a growth industry. About 80.1 per cent claimed rental interest deductions in 2007-08, which was  25.6 per cent —or $4.1 billion – higher than the year before.

(To be fair, it’s also worth pointing out here that investors do pay higher stamp duty than owner occupiers in many states and are subject to different capital gains tax rates)

But, by any measure available, this level of public subsidy sits poorly with the ongoing and worsening housing affordability crisis both in the rental and owner occupier market.

In fact, government contributions to first home buyers is a drop in the bucket by comparison.

Over the same period, about 129,000 first home buyers received a $7000 grant subsidy from the federal government that came to total cost of about $900 million (Not including state-based contributions).

Even when looking at the period of the full “boost” offered during the global financial crisis (Oct 08-Sep 09), the direct subsidy amounted to about $2.6 billion as tens of thousands more buyers rushed into the market.*

Even so, the multibillion dollar tax incentives offered to investors arguably could be considered beneficial if they ultimately created scores of new homes for renters to occupy.

As it stands, investors accounted for about 40 per cent of all housing finance commitments in September, but only just over 7 per cent of that was dedicated to new construction.

From the investors’ perspective, why buy a house and land package and have to wait for construction to finish when they can buy an existing property and rent it out 30, 60 or 90 days after purchase?

Effectively, this means investors end up chasing existing stock, which puts them in direct competition with first home buyers and other owner occupiers.

Just how much investors are responsible for driving up house prices is subject of intense debate, but considering their share of loan activity, it isn’t going to be minor.

And as entry prices go up, rent goes up too and that leads to one final twist in the tail.

About a quarter of  Australians rent their homes through the private rental market --- and nearly half of these (45%) are helped to make the rent through subsidies from Commonwealth Rent Assistance (CRA) program.

That means, in effect, the government is paying many investors twice. Ownership of the property is subsidized by tax credits, while extra cash is simultaneously put in their pocket by way of the CRA (which, by the way, hasn’t seen a real increase in value since the mid-1990s).

Vile hyperbole aside, something clearly isn’t right.

The question is who is responsible?

Investors, whether fairly or unfairly, are using the taxation system as it was designed by successive elected governments.

And they have little incentive to change. After all, running a private rental property is a business not a charity.

I’d wager that not too many first home buyers knock back the grants given to them, nor owner occupiers insist on paying capital gains when they sell their houses.

Or, for that matter, do small businesses decline tax credits, individuals send back stimulus payments, or families opt out of using family tax benefits. What your position is on all this government largesse probably comes down to your individual political orientation.

Are there despicable rent-gouging landlords out there? Of course. Are investors knocking other buyers out of the market? Definitely.

Is the taxation system structured to benefit investors above owner occupiers and renter? It certainly appears so.

It really shows how entrenched the investor-oriented tax system has become over the last 20-odd years that no government – Labor or Coalition – has halted the negative gearing juggernaut.

With more than a million adult voters materially benefiting from it every single year – and growing – changing it is a guaranteed vote-loser.

Still, that’s doesn’t mean it can’t and shouldn’t change.