Because of the Negative Gearing myths most of us are hearing, we set about sorting the fact from the fiction with the help of Jamie Alcock, Associate Professor of Finance at the university of Sydney.

Michael Yardney tells us about a little known fact that will deal another shock for Australian property markets.

Andrew Mirams answers a question from Jie about affordability and serviceability and the gap that is emerging.

Forget the hot spots.  Today we tell you about Australia’s favourite suburbs, the areas people are flocking to to find a place to live.

Are one of the people who has stopped doing things because we have an election on the way?  Well think again.  This is the time to zig when others zag.  Rich Harvey will explain.

Transcripts:

Kevin:  There is so much misinformation about negative gearing – on both sides; it’s become such a political issue – and just trying to find someone who can give us the facts is really difficult, but we’ve done that. Jamie Alcock, who is Associate Professor of Finance at the University of Sydney joins me.

Associate Professor, thank you very much for your time.

Jamie:  It’s a pleasure, Kevin, thank you.

Kevin:  In your article, you’ve looked at five key myths surrounding negative gearing. I thought we might work through those, then at the end of that, I’d just ask you for a bit of a summary and your points on the issue.

Myth number one: negative gearing is responsible for the recent house price surges in Sydney and Melbourne.

Jamie:  Yes. Most people are aware that Sydney and Melbourne house prices have dramatically increased in the last three years or so, and that hasn’t seemed to have abated. It seems to be slowing down a little bit, but it hasn’t completely stopped.

People have to remember that negative gearing has been around for well over a quarter of a century. It’s extremely unlikely that something that happened 25 years ago is now suddenly kicking in and affecting house prices in only Sydney and Melbourne.

If negative gearing would truly be responsible for these sort of things, then you would have expected, firstly, for it to be nationwide – as the tax laws are nationwide – and secondly, for it to have occurred long ago.

The real driver of these house price increases is, of course, it all comes down to supply and demand. There’s an increased demand for housing in those cities and there’s restricted supply, and at the same time, the cost of getting into housing – i.e. the interest rates – have also dramatically reduced.

Kevin:  Yes, and to believe that myth, you would have to let go of that well-founded theory that it is all based on supply and demand – prices.

Jamie:  Yes, absolutely, and I think that we have to also keep in the back of our mind what is driving the demand. Of course, jobs and income are big sources for demand, and also interest rates. If interest rates are high, then there are fewer people that can afford to get into the market and repay the mortgage, whereas if interest rates are dropping, then that drives demand up.

Kevin:  Myth number two is that negative gearing makes property unduly attractive for investors.

Jamie:  This one I find particularly bizarre. Investors pay tax on this investment. The timing of the tax cash flows are that they get a deduction for the costs initially but when they sell the property, they pay a capital gains tax. In most states, they also pay a significant land tax that owner-occupiers don’t have to pay.

To my mind, if you have the same asset with the same returns, but you have two different investors competing for it, one pays a lot of tax and one pays no tax, who’s going to be driving the market?

Kevin:  Yes, but negative gearing is available for all investments, not just property, isn’t it?

Jamie:  Yes, absolutely. If you borrow money to invest in shares, then you can deduct the cost of the borrowing against the profit made in the shares,