Is negative gearing the sacred cow or sacrificial lamb? Robert Simeon

Negative gearing is safe for the short-term and definitely gone for the long-term simply because we are witnessing housing dynamics that have never been seen before.

Both federal and state governments know that it’s imperative to drive Australia’s population at rates never seen before because this drives revenue.

Federally, the Abbott government is struggling to get over the mining boom demise, especially when it relates to debt and deficit.

This week I read a comment by Craig James: “Over the last 65 years the federal budget has been in deficit 71% of the time with the average deficit 0.9% of GDP."

Now back to the housing dynamics which is win, win, win for the NSW government and woe, woe, woe for the federal government. Last week I wrote: “Secondly the big property market mover in Sydney especially is the rezoning of high density residential land into new developments. Previously this was a domain dominated by Australian developers who now can’t compete with the Asian developers. Given that it’s legal to buy new off the plan, these developments are then resold exclusively in Asia.”

The NSW government is only too well aware that the booming real estate markets are its “rivers of gold” – these revenues are vital to ensure a budget surplus is maintained and more particularly as the government is about to embark on the greatest infrastructure spend in NSW history.

In order to balance the books and remain the most prosperous state/territory in Australia the NSW government is focussed on two revenue streams – stamp duty and land tax. To make this happen NSW will see a development explosion of apartment developments with the NSW government’s blessing. It knows only too well that Asian developers are all over Sydney developments given they have enormous offshore markets to capitalise on. The business model is quite simple – the government will drive infrastructure predominately from the sale of the wires and poles and the developers will follow Pied Piper-style.

For this to happen the NSW government needs to change the mentality of local councils whom for generations have been anti-development and protective of the suburbs cultural and environmental heritage. So what the NSW government is now doing is trying to entice councils to merge so that it will then be easier to abandon the community mentality and embark on massive highrise developments. It’s all about the revenues from the developers and the ongoing stamp duty and land tax trails.

Now this may be fine for the NSW government which has just been re-elected for another four year term but it spells disaster for the federal government given the concentration is on investors who no doubt will want to remain deeply immersed in negative gearing. It also means that rents will fall although we must not forget that in the background we will see a massive population drive.

Naturally there will be a massive movement from those who were previously employed in the mining sector who will then migrate into the building and construction sector.

By all reports Sydney and surrounding areas are now on the cusp of a massive construction/real estate boom which I might point out is totally different to a property boom. This is a property investor’s boom which is completely different to the household boom which is exactly what we have been witnessing of late. The majority of the investors will come from offshore combined with Australian resident investors who will be all over the high density rezoning that we are currently witnessing.

Now many will be massively against this massive construction boom – although as I see it in the short term there is not much that can be done so we simply have to go with the flow.

In the meantime watch with interest what happens to the local council mergers especially with regard to high density rezoning – which is coming to a suburb near you. If the local councils stymy and delay new construction the government is then likely to step in in typical ‘Big Brother’ style. All I can say is watch these developments with interest given the wheels of motion have started.

Back to the negative gearing debate which I do find somewhat comical given the federal government has advised that there are no intended changes on the horizon. Well that is fair and reasonable given they are working from the 2011/12 tax figures. We all know it’s the 2012/13, 2013/14 and 2014/15 where the property investor boom took off so for some strange reason there has been a delay releasing the 2012/13 and 2013/14 negative gearing results...

Makes one ponder just why that is or possibly just a coincidence? I’m with the former.