Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Sunday, 26 March 2017

Don't pay the rack rate; nobody pays the rack rate!

Rack rate

It was a bit of a quiet afternoon on Saturday, so thought I'd lob up to stay up on the Sunshine Coast for a couple of nights.

When I looked up the hotel cost on the hotel's website it was nearly $400 per night!

I didn't pay that rate, of course.

After all, who pays the advertised rack rate these days?

Better call Saul: Rental losses are falling

There was an interesting media story this week where Saul Eslake noted that the recent hike in investor mortgage rates could result in a "hit" to the budget totalling hundreds of millions of dollars. 

It was a good yarn, albeit one which stopped somewhat short of telling the full story. 

In fact between the 2008 and 2014 tax years the average net rental loss has cratered by 64 per cent.

Given that mortgage rates have declined substantially since 2014, the budget impact today of negative gearing appears to be heading towards trifling. 

In any case - omitted in Eslake's calculations - higher mortgage rates will simply lead to higher bank profits, and in turn a higher corporation tax take. 

The banks like to argue that they have faced rising funding costs, but in reality funding costs fell in 2015 and fell even further in 2016.

Yeah, I know, the banks are doing it tough out there now. 

Evidence? Check out Commonwealth Bank's outrageous record profit of more than $4.9 billion for the first half, up yet again by another 6 per cent from the prior corresponding period. 

Meanwhile, rents have been rising, so over recent tax years net rental income has been steadily moving towards zero as more property investors record net rental profits on their tax return (remember these numbers need to be tax effected at the relevant marginal rate). 

Indeed, the number of landlords declaring a net rental loss is all but unchanged since the 2008 tax year despite Australia's rising population.

Back to those rack rates...

According to the Reserve Bank of Australia's Statistical Tables the standard variable rate on investor loans was already up to 5.55 per cent by January.

But here's the thing: who is really paying such a high rate of interest today, when investor loan products have been available from around 4 per cent?

Probably not that many people, I reckon.

For evidence? Take a look at the national accounts.

With the population having increased by about 16 per cent from 21 million in 2008 to 24.4 million today, you'd expect to see interest charges rising over time.

Yet the amount of interest payable on dwellings today is lower than it was in 2008.

The total interest payable by households on outstanding mortgage debt implies a considerably lower average mortgage rate than the quoted 'rack rates' (record mortgage buffers and the use of offset accounts have likely played a role here too). 

The wrap

With mortgage rates having declined since the last available full suite of tax data for financial year 2014, the impact of negative gearing on the Federal Budget would now be getting fairly close to zero.

Meanwhile, state government figures show that revenue offices are cleaning up from investor activity, with New South Wales alone swallowing up an outlandish $9.4 billion in stamp and transfer duties over the year to January 2017.

Negative gearing doesn't really represent a 'loss' to the budget as such - rather it is a timing difference, with the 'loss' typically recouped as investment properties become cash flow positive over time, or in capital gains tax at the point of sale.

With relatively few new dwellings being bought or constructed by owner-occupiers, the government also saves further by constructing comparatively little social housing.

The reality is that after accounting for the undoubted disruption to residential construction, the economy, and to housing markets, Federal Budget savings from changing negative gearing rules today would be approximately diddly squat.

Treasurer ScoMo won't be going there.