Net rental losses declining
The most timely available ATO statistics showed that owning a rental property remains a popular choice with Aussies.
Given the increasingly fluid nature of the workforce - and that the public sector is now providing close to zero net additions to the rental supply - it's hard to imagine this changing much any time soon.
Most investors owned a solitary rental property, with relatively few landlords owning significant portfolios (contrary to Labor's election spiel which contorted the data like Uri Geller bends spoons).
Since the interest rate easing cycle began in earnest in late 2011 the number of individuals claiming paper net rental losses after capital works and depreciation deductions - which is not necessarily the same thing as those with a negative carry - has declined, in spite of a huge surge in the Aussie population over that time.
In fact, according to the ATO data there has been little change in the number of negatively geared claimants since the 2007-8 income year.
Up until the 2012 income year negative gearing claims were punching quite a hole in the Federal Budget, with net rental losses totalling close to $8 billion, although of course any objective analysis would additionally take into account all taxes paid by and levied from private landlords.
As mortgage rates have declined so too have total net rental losses, down towards about $3½ billion by the 2017 income year, despite half a decade of only limp growth in rents.
Tax changes pushed through
Although not always taken into account in commentary, the Coalition made significant inroads into future negative gearing claims by making sweeping changes to the ability of investors to claim second-hand plant and equipment depreciation under Division 40, and by disallowing travel expenses for landlords.
This effectively removed the potential for double-counting of depreciation by successive landlords, as well as the spurious practice of property investors claiming deductions for flights to coastal south-east Queensland, ostensibly to inspect rentals.
I discussed what all this might mean for the housing market and the Federal Budget going forward with quantity surveying supremo Mike Mortlock of MCG Depreciation.
Mortlock noted that not all investors have been impacted by the Coalition's changes, since some about 40 per cent of depreciation schedules prepared in their business sample were for new-build properties (compare this figure with Labor's bungled modelling during the election campaign, which was 'so far from the truth it's not even funny').
Moreover due to grandfathering the full impact of the the changes won't flow through for some time, although a significant chunk has already taken effect according to Mortlock.
The average depreciation lost by investors for the first year of claim has been a punchy $6,870 under the diminishing value method (or $16,866 lost under the diminishing value method over the first five years) for MCG's clients.
As a side note, a subsequent legislative change TR2019/5 became effective 1 July and is further reducing benefits for investors in established properties, but since investors in new properties have often been able to increase claims the net impact on the Budget here is likely to be minimal.
Interest deductions plunging
Following the credit squeeze, and after accounting for these changes to depreciation and travel expenses, it's still likely that there will only be modest ongoing declines in net rental losses in the 2018 and 2019 income years.
However, my stylised projections show that with the interest rate differential for interest-only loans now snapping shut - and with record low mortgage rates now on offer from '2 point something' - assuming market pricing we could see net rental losses dropping sharply in the current financial year 2020 (and possibly even all but eliminated in the years thereafter).
Labor had dubiously claimed that its negative gearing and capital gains tax reforms would save the Budget an outlandish $32 billion over the course of the coming decade.
Yet with mortgage rates now so low - even casting to one side any shortcomings in the ALP's modelling - by the end of the current financial year the Budget impact of negative gearing reform will likely be fairly immaterial.
