Did you know that in Australia you buy residential homes via auction, not through competing back and forth offers via realtors? People stand on the street in front of the house for sale, an auctioneer kicks things off, and people in the crowd call out bids. Just like on Storage Wars.
https://www.abc.net.au/news/2023-07-08/property-prices-auction-sales-australia-melbourne-sydney/102549152 Did you also know that Australia is one of the least affordable places to own a home? Melbourne, a major city of five million people, is similar to Vancouver in terms of the tremendous demand for homes and rentals, but a limited housing supply. There is one major difference between the Canadian and Australian housing markets, though. In Australia, investors can offset negative cash flow on an investment property. If your property’s expenses are greater than your rent, the negative balance can be claimed as a deduction on your personal tax return. This is called negative gearing and is perfectly legal. In fact, it’s a real estate investing strategy. Negative gearing is especially appealing for people with high personal incomes. They can deliberately buy investment properties which lose money, creating negative cash flow from day one, and then make profits on the back end by claiming that loss on their personal tax return. Some investors are losing thousands each month. More than $40,000 per year. And yes, these suburbs are nice places to live. But they're not Bel Air, wealthy, mansion territory. We're talking leafy bungalow- lined streets I’m unsure of the rationale behind this policy, because to me it seems like a surefire way to overheat the property market because prices will be pushed ever higher. There are no consequences for buying a bad asset and overpaying. Negative gearing is not new tax policy, and the Australian government must have it reasons for allowing it, but perhaps it’s also playing a role in the country’s out of control real estate prices because it encourages speculation. The one negative consequence for investors is that they still need to cover their mortgage payments each month which can sometimes be thousands of dollars less than their rental income. But I guess if your personal income is large enough, offsetting such large losses must still work for them . As an example, the chart below shows suburbs in Melbourne where investors are bleeding cash i.e. have seriously negative monthly cash flow, but the owners don’t sell because they must have high personal incomes and the tax offset makes it worthwhile to hang on. In situations like this, the only profits investors can make is through capital gains.
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Cameron MorrellBusiness Educator Archives
November 2024
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