The Mignaccas’ pointless 15 minutes of fame

Politicians may have missed the boat: the real estate investment boom is now all but over.

Yesterday the Prime Minister Malcolm Turnbull and Treasurer Scott Morrison, with entourage and media pack, descended upon the Mignacca family home in Stephen Street Penshurst to announce that negative gearing would be retained in the Budget and that Labor’s policy of restricting it to new houses was reckless.

Finding Julian and Kim Mignacca in Sydney’s south was a triumph in case-study hunting by some Government staffer. The couple had done well from property investing during the boom and been able to buy a place to actually live in. They had, in short, got ahead.

But politicians vying to scare and tempt may have missed the boat: the real estate investment boom is now all but over.

In fact, the politics of negative gearing is devoid of reality. It’s a jolly good argument and all that, but negative gearing is out now. It doesn’t really work.

The Reserve Bank’s recent Financial Stability Review said the share of investor loans with loan to value ratios (LVRs) of more than 90 per cent have “declined markedly”. APRA’s hypothetical borrower exercise in September last year found that the maximum loan size fell by around 12 per cent for investors and 6 per cent for owner-occupiers.

“As a consequence, the composition of housing credit growth has shifted away from investors towards owner-occupiers…”

Buying an investment property for the purpose of negative gearing with an LVR of less than 90 per cent is pointless.

The average rental yield on apartments is about 4 per cent. The average interest rate is about 5 per cent. To make a deductible loss on an investment with that yield and interest rate, the LVR would need to be at least 80 per cent, preferably 90 or 100 per cent for the deduction to be worth the risk.

The reason property investment lending has collapsed is that banks are no longer lending 90 or 100 per cent of value, plus conveyancing costs, as they were during the boom, and with interest rates as low as they are, the tax deduction is too small to be worthwhile.

Labor’s policy of restricting negative gearing to new houses would apply from July 1, 2017, giving investors plenty of time to get set in the market if they won the 2016 election (although prices would probably spike in the first half of 2017 as a result).

Investments made before July 1 2017 would not be affected and would be “fully grandfathered”.

That means there would not be a flood of stock onto the market driving prices down because deductions on existing investment properties would continue. The only impact on rents would be to reduce them, since negative gearing on new investment houses would continue, increasing supply.

But in any case since there is less highly-leveraged real estate investment going on, Labor’s proposed change would have little effect on anything until the next boom. Nor will the Coalition’s preservation of the status quo.

Meanwhile, back in Stephen Street Penshurst, the doorstop was sternly conducted and photo ops duly achieved, after which Australia’s Prime Minister and his new friends, Julian and Kim Mignacca, hit social media to explain the benefits of negative gearing and how it had enabled this battling plumber and social worker to “get ahead”.

Malcolm Turnbull’s Facebook post on the subject declared: “The enterprising spirit of Australians like the Mignaccis (sic) is what secures our economic future and the jobs of our children and grandchildren in the years ahead.”

Yes, the enterprising spirit of getting a tax deduction by buying a house you don’t live in.

This morning there were 767 comments on this post. I can’t say that I read them all, but from a quick scan it seemed most were furiously against it, or complaining about something else, which is the nature of Facebook of course and not really useful as a research focus group.

But some of the comments were quite rational. For example:

“Take away negative gearing from homes and most people in the country will be able to get the great Aust dream of home ownership. Negative gearing puts home ownership out of reach by creating a demand that is created by Gov policy that ends up increasing the price out of reach by more and more people. Lots of other better ways to invest in Aust.”

And …

“The financial system inquiry, led by David Murray, and the Henry tax review argued that negative gearing was expensive, distorting, and a risk to financial stability. The Business Council of Australia recently suggested ending negative gearing.”

There were a few comments vehemently in favour of negative gearing but not many.

What are we to conclude from all this and from yesterday’s 15 minutes of fame for Julian and Kim Mignacca?

Nothing really. Just that the long election campaign has begun, and it will seem much longer than it is.