How did Australia's housing market get so bad, and is it all negative gearing's fault?

You know what’s cool? Starting a video with a chart to show how cooked the Australian housing market is. I mean, check this out. This is the average Australian’s disposable income, and this is the average price of a detached home. See how they’re hanging out here? True friendship growing together. But then we do get to the turn of the century and house prices are tearing away and now nearly doubling disposable income. There’s a lot of debate about how and why Australia’s housing market became the garbage fire that it is today, and accusations are often hurled at one particular suspect. Negative gearing, Negative gearing. Negative gearing. Negative gearing. Negative gearing. Let’s end negative gearing. Now, I’m not saying negative gearing isn’t a factor, but the hiccup with pinning the blame entirely on negative gearing is that, well, it was around back when things looked like this. So what happened here? And also, what is negative gearing? If you own an investment property and you earn a profit from it, then you’re taxed on that profit, right? If someone made exactly 0 profit, then they’d pay exactly 0 taxes on their investment. This is pretty normal all across the world. What’s weird about Australia is that when it comes to tax deductions, there is no barrier separating the income you earn from investments and the income from your job. Let’s say you’ve lost money on your investment property. Not only would that make your investment tax free, you could also take those losses and deduct them from your regular salaried income, even though the money you spent on your investment property has nothing to do with your job. And that process of often purposefully running an investment property at a loss in order to reduce the overall tax you owe is called, you guessed it, negative gearing. But why would anyone do that? I mean, sure you’re paying less tax, but you’re still losing money on an investment, right? Well, purposefully, negative gearing only really makes sense when house prices are going up and fast. Because think about it. Even if in a particular year you earned less from an investment property than you spent on it, if the housing market is still rising and the value of your property goes up by more than you lost, then you’re still actually making money. But because that profit is tied up inside the property, not actively in your bank account, the tax office doesn’t count it, and you get this sweet little tax break. So then why didn’t absolutely everyone do this? Well, because when they did sell their investment to make all that theoretical profit very, very real, they’d be hit with this thing called capital gains tax. That’s a tax on any money you made from the value of your property increasing, which was taxed at the same rate as your income, and it often ended up cancelling out the tax breaks you would get through negative gearing. But in 1999 the Howard government changed the game forever. They halved the capital gains tax all of a sudden. Not only do you as a landlord get sweet little negative gearing tax breaks every year, you then get an even bigger tax break when you sell. I mean, you may as well buy another investment property at this rate. Remember our cool chart from the beginning of this video? Why don’t we make it even cooler and add another chart? This is the average capital gain. And would you look what happens right around the time capital gains tax was halved? When it comes to the garbage fire that is Australia’s housing market, negative gearing is kind of just the garbage. But that change to capital gains tax? That was the lit match that set the dumpster alight. In fact, investors are now so heavily protected by the tax system that they’re willing to take even bigger risks and spend even more money on the properties they’re buying. Which of course makes house prices rise faster. Which then makes the combination of negative gearing and capital gains tax discount even more profitable. Which means investors are willing to spend even more, which makes house prices rise even faster. And oh, like that. It’s almost like we’re in somewhat of a vicious cycle, but this is one of the good ones. Guys, no one loses here. Well, except for the people looking to buy a home to live in. And renters and the disenfranchised. And I guess the Australian government, because they’re taking in less money via tax income and really the entirety of the Australian economy. But besides that, no one loses.

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