Jim Chalmers’ budget has done the economy a favour by wiping out the policy distortions of negative gearing and CGT discounts, writes Michael Pascoe.
You’d never guess it from the usual suspects’ headlines but Jim Chalmers’ budget does retail investors a big favour by forcing them to reconsider residential real estate’s sacred cow status.
Yes, Virginia, house prices have jumped. No, Virginia, that doesn’t mean becoming a landlord is the smartest or foolproof way to build wealth.
Every headline decrying the budget’s impact on resi speculation, every landlord whinging on television, every Liberal politician declaring the end of aspiration goes a small way towards countering the power of the massive real estate industry and our cultural and media bias that have elevated investment properties beyond their relative worth.
If the love of bricks and mortar is flowing in your veins, strong love of illiquid assets, fat transactions costs, maintenance, rates and land tax, go for it. Nothing has changed as long as you buy new.
But the reality is that a reasonable share portfolio combined with the discipline to reinvest dividends outperforms resi investment properties and does so with much less effort and far greater flexibility.
Great budget hope buried in media hysteria
The great hope of this budget is that it will spark a reassessment of investment options and undo the warping that occurred after Howard and Costello adopted the Ralph Report’s 50 per cent capital gains tax discount recommendation.
Ralph had hoped the CGT gift would drive investment in productive assets bought and sold more frequently but a legion of property spruikers and our property-obsessed media resulted in the lurk of deductions at higher tax rates than on profits doing the opposite.
Amidst the AFR’s overwhelmingly negative coverage of the budget centre piece changes and left to the bottom of a John Kehoe story was:
Analysis released with the budget found that in the 25 years since the discount was introduced, the share of tax filers declaring dividend income had fallen almost 20 per cent, while the proportion earning rental income from investment properties had risen more than 10 per cent.
Shares do better than property
That shows many people shortchanged themselves jumping upon the landlord bandwagon at the expense of better performing equities.
While certainly talking his own book, Sydney stockbroker and financial adviser Mark Gardner put it more bluntly on Livewire:
“The government didn’t just change a tax rate. It pulled the crutch out from under the laziest investment strategy ever invented. Twenty-seven years of asset allocation built on a political accident. Over. For investors willing to think clearly, that’s not a crisis. It’s the first honest market Australia has had since 1999…
“Any approach that only works because of a tax concession isn’t a strategy, it’s a habit.
The financial planning industry built empires on that habit, dressed up as long-termism. “Time in the market beats timing the market,” a half-truth used to justify inertia for decades. Remove the favourable tax clause and the whole thesis needs re-examining.”
Dinner party investment legends
Gardner is pushing more aggressive investment products and thus isn’t much of a fan of passive equities investment but he saves his sharpest shots for resi:
“Residential property investment in Australia has never been about rental yields. Two to three percent gross isn’t income. It’s noise.
“The entire trade has been a leveraged bet on two policy settings remaining intact simultaneously: negative gearing and the CGT discount. Half that equation just got removed. Yes, negative gearing survived. But these two settings worked together. Remove one, and the calculus on yield-free property looks considerably less clever than it did at every dinner party in 2021.
“The people holding five investment properties at 2% yields in suburbs they’ve never visited, telling themselves they’re sophisticated investors, they’re not. They’re policy dependents. The budget just sent them a bill that was always in the mail.”
Treasurer Chalmers lost his way a little on Insiders when trying but failing to explain how the changes would encourage more money going into the stock market, falling back on the idea that “removing the distortion” would reverse the swing to property investment over the past quarter century.
Yet distortions remain
In reality, he has introduced a distortion by wiping out negative gearing of existing housing while continuing to permit it for all other investments. That, as the government declares, is aimed primarily at promoting spending on new housing, but in a rational market it should also promote equities investment.
The educational problem is that it seems a large swathe of the population is happy to borrow big to buy housing but not to buy shares. Our banks are happier to lend for real estate investment – such easy security – and, on the surface, do so more cheaply than the margin loans typically associated with gearing a portfolio.
For those with equity in their own home though, it is possible to negatively gear shares by borrowing specifically to do so at the home loan rate, the cheapest of all.
A typical share portfolio offers a substantially better yield than residential real estate, especially when juiced by franking credits. Headline capital appreciation comparisons swing around but cheaper transaction and maintenance costs make a clear difference, never mind the hassles of property ownership.
As veteran adviser and author Peter Thornhill regularly told conferences, Woolworths has never phoned him in the middle of the night because a roof is leaking.
Treasury makes even bigger claims in favour of shares performing better under CGT indexation than houses, but I take some of that with more than a pinch of salt.
Ditto Treasury’s remarkably pessimistic view of the budget’s impact on housing supply. I suspect the econocrats underestimate the psychological pull of bricks and mortar for Australians and the real estate and banking industries’ interest in promoting investment in new housing using that other distortion Chalmers introduced: the 50 per cent CGT discount option reserved purely for new resi.
That’s on top of the previously reported lived experience in Victoria over the past two-and-a-half years when increased tax on landlords has seen higher housing completions than other states, more FHBs and lower house price and rent increases.
Housing crisis. Will Labor’s ‘great’ housing budget fix housing?
But if you were Treasurer and took your department’s forecasts seriously, they just reinforce the case for increasing the public housing spend as the only way the government will get anywhere near its new homes target.
Victims of policy crimes
And I repeat from earlier efforts, what should be THE budget housing headline is that we are spending $7 billion this financial year and $7.4 billion in the new financial year on Commonwealth Rent Assistance – effectively subsidising landlords for the 1.4 million renters who otherwise couldn’t pay the asking price.
Those victims of various governments’ housing policy crimes are not going to have their lives changed by CGT and negative gearing tweaking.
As for the Opposition’s response, Angus Taylor promises to do even less for people who should not be in the broken private rental market. His pledge to scrap Labor’s Housing Australia Future Fund would further shrink Australia’s inadequate proportion of social housing.
Chalmers’ Budget in search of more productivity and less rent-seeking
Michael Pascoe is an independent journalist and commentator with five decades of experience here and abroad in print, broadcast and online journalism. His book, The Summertime of Our Dreams, is published by Ultimo Press.