Today we’ll have a little crack at the National Broadband Network (NBN). But before we do, let’s have a quick follow up to Wednesday’s Money Morning.
It never ceases to amaze us the wonderful job the property spruikers have done to convince investors that making a loss on an investment is a gain.
As we mentioned yesterday, as a fully qualified adviser we’re dumbfounded that such backwardness could make seemingly sane people believe that consistently losing money is a great way to become rich.
The mistake that every single property investor makes is to believe that the massive capital growth in house prices will continue.
You see, we agree wholeheartedly that while house prices go up, taking a loss on the income side is fine. But when house prices stay flat and then fall, we’d like to hear how making an income loss on top of the capital loss can possibly lead to greater wealth.
It can’t.
But diehard property investors and spruikers just can’t see it. A property investor can use tax deductions as much as they like, but they’re still forking out more money than they’ve got coming in.
To be honest, we’re convinced that most people don’t actually understand how tax deductions work. Not just in property investing but in general. We’ve lost count the number of times people say, “I spent $100 on this but I’ll get it back in my tax return.”
No they won’t. They just don’t pay tax on the $100 spent. But they’ve still spent $100. Sure they’re getting the item at a discount, but it’s not the free ride that many taxpayers believe they’re getting. And likewise we’re convinced many property investors are under the same delusion.
The chart we showed yesterday from Gerard Minack and which I’ve copied again below shows you the extent of the losses:
While property prices were rising, investors would have been happy to breakeven on the rental side. We’ve no argument there. But look again at the net rental deficit.
If you’re losing on the income and the property price isn’t increasing then it’s a fact that they’re losing money.
So, why would you continue to hold on to an asset that was a net cost to you? Buy and hold share investors used to do that. And some foolishly still do.
But as for housing, don’t forget, we’re not talking about the minority of property investors taking a loss, we’re talking 70% of them:
As usual we unashamedly and proudly rely on our pals at Wikipedia for an excellent definition of negative gearing:
“A negative gearing strategy can only make a profit if the asset rises in value (capital gains) by enough to cover the shortfall between the income and interest which the investor suffers. The investor must also be able to fund that shortfall until the asset is sold.”
So again, we’re really keen to hear from property spruikers and investors about how they plan becoming wealthy when the income is less than the expense, and the capital growth is non-existent.
We’re all ears. Send us an email to moneymorning@moneymorning.com.au or post a message to the Money Morning website later today. We’ll publish a selection of the responses next week…
But anyway back to the NBN
Tomorrow you’ll be off to the polls. Enjoy that won’t you.
Just remember one thing, whoever you vote for it’s not likely to make any difference to the amount of tax you pay and the amount of money the bureaucrats will end up spending.
As we mentioned earlier this week, we prefer to advocate Mark Latham’s donkey vote strategy. But anyway, we’ll leave that one up to you…
One of the items on the political agenda is internet access. The internet of course has become the new plaything for bureaucrats the world over.
Unsettled by the amount of freedom the masses have gained through the ability to express views and access non-mainstream views, the political power-trippers are getting scared. Having allowed the internet to grow without too much interference, governments have finally had enough.
Hence in Australia we’ve got the freedom-killing prospect of a government controlled internet filter. Plus the double-freedom-killing prospect of a government controlled internet backbone that will most certainly permit the government to easily implement its diabolical filtering plan.
But, it’s not the filtering we’ll look at today. Instead it’s the NBN we’ll concentrate on. Let me ask you, would you like a super high speed broadband connection?
If you’re like me, you’re probably not bothered whether your internet speed is fast, very fast or super high speed.
As long as you can get onto a web page within a couple of seconds, chances are you’ll be happy.
But whether you want super fast broadband or not there’s a good chance you’ll end up getting it anyway. At a cost of around $4,300 per household.
According to those reliable and completely impartial boffins at McKinsey and KPMG, the report they compiled – in return for a fee – for the government shows that the National Broadband Network should only cost around $43 billion.
“Only”…
That’s today’s estimates of course. But you know how good the coercive sector is at meeting budget targets. That’s right, it’s not very good at it at all.
Although the total cost is predicted to be $43 billion, the number crunchers at McKinsey and KPMG reckon the maximum amount the taxpayer will be up for is $26 billion. Bull dust we say.
If that were true this would be the first project in a long time – whether public or private – that will have been completed within the initial budget.
Our guess is that you can take that number and at least double it.
You don’t have to look far for examples of how inefficient and reckless the coercive sector is with taxpayer dollars – look at the election campaign for starters, money being thrown at special interest groups left, right and centre.
But then also think about the school building programme, or the housing insulation scheme. What a debacle those have been.
Then also look at the latest news from Victoria where new train stations that were forecast to cost $20 million each are now being budgeted for $55 million each.
Do you still think the NBN will come in on budget? Will it my foot.
Even if we’re conservative with our estimates and say that the cost to the taxpayer will “only” double then you’re still looking at more than $50 billion. But let’s be kind and say the taxpayer expense only increases to $43 billion.
Based on roughly 10 million Australian homes that’s equal to a cost of $4,300 per home.
Now let me ask you. Would you ever consider handing over $4,300 in cash to pay for an internet connection? Thought not. But that’s what you’ll be doing with the NBN rollout.
Except that rather than you paying for it in cash, you’ll be paying for it through your tax dollars.
But most people haven’t figured that out yet. The Australian quotes Damian Rodman from Taxmania, sorry, Tasmania, where the NBN is already up and running:
“We love it… It takes less than 30 seconds to download a song and about 10 minutes to download a one gigabite movie.”
Again, would you really consider it value for money to pay $4,300 just so you can download a song in 30 seconds? Is listening to a new song so important to anyone that it has to arrive in 30 seconds rather than, say 90 seconds or even 3 minutes?
And don’t forget there’s the monthly access costs on top of that of around $75.
If you really want fast internet, give Telstra or iPrimus or Optus a call and you can get it. And it won’t cost you $4,300 up front.
We’ve had a quick look at the Bigpond website and you can get free installation if you sign up for one of their bundled packages. Or up to $228 if you don’t.
Of course doing that would mean spending $228 out of your pocket today rather than $4,300 out of your future tax dollars.
The idea that the government needs to get involved to provide a fast internet access is not only a joke but it’s a fallacy. It’s got nothing to do with providing the internet for all Australians or some bizarre idea about broadband healthcare for the bush!
It’s ultimately about control. It’s about the government gaining immediate access to every email you send or receive and every web page you visit. It’s nothing more, nothing less.
Just like the tax system and welfare payments system is about control. It doesn’t matter which party is in power the outcome is the same. More control over your life by the bureaucrats.
It’s one more incursion on the road to totalitarianism.
The fact is, if consumers value something enough they will pay for it without the aid of taxpayer dollars. If they weren’t prepared to pay for it without the subsidy then it’s clearly something they don’t value enough.
And we’ll guess that 99% of the population don’t value super fast broadband speeds if it’s going to cost them $4,300. That’s why the government has to take control and spend the money anyway – your money.
It’s the prospect of that happening which stops consumers and businesses from investing in broadband technology. Because they know the government will interfere they stop to see what manipulative impact the government will take and then they move to exploit it.
I mean think about it this way. Who really benefits from the NBN? And I mean really. We’re not counting the benefit of downloading a song in 30 seconds rather than 90 seconds. To our way of thinking that isn’t a genuine benefit.
No, the biggest beneficiaries of the NBN are the likes of Apple and others that provide bandwidth hungry content over the internet. And the losers are those firms that don’t or can’t provide content over the internet.
So, for example you could say that the NBN is providing a subsidy to Apple Inc., so consumers can download music, at the expense of say JB Hi-Fi which can’t sell CDs or DVDs to consumers over the internet for immediate use.
Again, the government decides who wins and who loses rather than allowing the consumer to decide without influence.
Our guess is that if you ask most people in Australia whether they would be happy to pay $4,300 for an internet connection the overwhelming response would be no.
Unfortunately, the odds are that whether you like it or not you’re about to get yourself a bill for that amount payable through your taxes.
Cheers.
Kris Sayce
For Money Morning Australia
{ 68 comments }
← Previous Comments
Next Comments →
And, Nick, the Greens only control the Senate at this point. The Reps can rely on the Independents for passing legislation. But, I suppose, the Greens can extort all sorts of things from the Reps in exchange for passing things in the Senate. Hmmm….
cb..50..yes agreed, however, it is still a precarious state of affairs and not quite the favoured outcome.
cb..@41.. Half way through watching this. Many may think that “drugging ” through the TV is fanciful. No it isn’t!!
Watch and learn.
http://www.brisbanetimes.com.au/technology/technology-news/digital-drug-peddlers-target-teens-with-idoses-20100813-12231.html
cb @ 9,
You had a go at the editor for suggesting that people don’t understand how tax deductions work:
“How can a qualified financial adviser make such a dumb claim about property investors.”
But I think Kris is dead right. In fact, it would appear that you are a classic example! Just a few posts ago, you said:
“the loss you are taking on your property investment is something that you would lose anyhow”
and
“I can borrow some money to buy a real asset, and write off those inevitable losses to taxes”
and
“As for the losses I am going to make on poor rental returns relative to the expenses I will have on the property, these will be largely cancelled out by the taxes I would have to pay anyhow”
Each of those quotes suggest that the losses can be entirely, or almost entirely, recovered through tax deductions. Whereas, it reality, you can recover less than half (the loss times your marginal tax rate).
Of course, you may have just been exaggerating the benefit of the tax deduction. But I agree with Kris that many people actually believe what you said in the quotes above.
Drew – my dear fellow, you are as sharp as a knife. I do, as you suggest, exaggerate, but you will be surprised how much else, besides interest, you can write off against your taxable income because of loss making investment properties. I will list a few:
- Interest paid on loans, of course.
- Bank fees and charges.
- Capitalised statutory charges, including stamp duty.
- Travel expenses.
- Repairs and maintenance.
- Bookkeeping and accountancy services.
- Agent fees, legal fees and insurance.
- Depreciation on hotwater system, curtains/blinds and contents.
- Depreciation of building .
To be sure, even after all these allowances and deductions, you are probably still behind, relative to where you would be in nominal terms by simply paying taxes on your regular salary.
But then you must also consider, in addition, that we have been and probably are going to continue living in an inflationary environment. A bar of chocolate that used to cost 5-10 cents some 40 odd years ago will probably cost $1.50 today. Inflation and the gutting of the currency’s purchasing power over time means that you have to save in real assets, be it silver, copper, gold, or property. Otherwise, the bankers and the government are skinning you year in, year out, first through inflation, and second, by taxing the interest you earn on your cash deposits.
In short, when you consider the rationality of an investment, such as a negatively geared property, you always have to consider it in juxtaposition with the available alternatives. Staying in cash, after you paid high taxes on it, also comes with losses. The system is so perverse and so screwed, that you cannot avoid the stealing from you by standing still.
Unless, of course, you save in real money, such as gold or silver, but even there you are going to fork out a bundle to the dealer, both when buying and when selling, plus capital gains on the inflation, so the bastards still get you, only not by as much as they would with cash in a bank account. You see the dilemma?
So, returning again to property, as long as your salary allows you to absorb the losses in the short- to medium-term, you are going to come out ahead. Why? Because while you are holding a real asset, and have embarked on a self-imposed program of saving and sacrificing today for the delayed gratification of being better off tomorrow. Slowly, but surely, just so long as you are not caught short with cashflow problems, as you pay down more and more of the debt, your asset will start generating more and more surplus income for you.
It might take 7 – 10 years for you to get there, but that is just par for the course. This is the long term nature of property investment. Or at least this is how it has been for decades. Many are certain that this time will be different. I personally don not know whether that is correct or not, but until things actually change, and there is a clear paradigm shift, the conservative approach remains to stick with the tried and tested.
At some point it will change. Nick, for example, is quite sure, too, that this really is the turning of the tide, and I am not one to argue against that view. I was merely trying to show that there is far more to property investment than the back of the envelope calculations that Sayce is making about property investment in conjunction with a totally lousy conceptual framework he relies on from short term share trading.
But before leaving this topic, let me go back again to the problem of inflation, and make mention of the fact that with negative gearing you exploit this ploy that robs the savers of their money. For, even apart from any capital gains that you might pick up by holding a real asset because of persistent inflation, the real rocket fuel for your investment comes from the fact that inflation chews up the purchasing power of the DEBT you owe on your investment. So, even if house prices do not go up in the next 20 years at all, the burden of a 300K loan can be expected to be the equivalent of a 100K loan today.
Where is Sayce’s so-called analysis dealing with all this detail, which any decent financial adviser should surely have to take into account before advising for, or against, some asset category? In light of all this, I don’t think I have been too harsh in my judgement of his handiwork. Would you still disagree?
Hi cb, thanks for the reply.
That is a long list of tax deductions. And I’m glad you added “To be sure, even after all these allowances and deductions, you are probably still behind”. Although, once again, that’s not strong enough. You are definitely (not probably) behind, because you can only get less than half of any expense back.
But you do raise some good points in favour of property. Another that has worked well for property investors is the power of leverage. But as we know, that is a double-edged sword.
One issue I have with your post is where you say:”
“Many are certain that this time will be different. I personally do not know whether that is correct or not, but until things actually change, and there is a clear paradigm shift, the conservative approach remains to stick with the tried and tested.”
On this point, I would say that things are already different. Since 1990, we’ve had an unprecedented property boom – prices have dramatically escaped broader inflation, wages and rental yields. The last 20 years haven’t been normal, so to assume that things will continue on as they have been, is pretty risky in my mind.
But back to the editor’s original point that many investors don’t understand what a tax deduction actually means (a point I also made a few topics ago), you haven’t convinced me otherwise, so yes I think you were too harsh in your judgement of the editor’s handiwork.
And on the broad topic of property investing, true, he does simplify things but I think we tend to overcomplicate things which can sometimes onfuse, rather than clarify, our thinking.
An excellent interview on KWN:
http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2010/8/18_Bill_Fleckenstein.html
Thanks, Drew. Well, we are on the same page with most of those things. I guess, I judge the editor’s handiwork, not in terms of how well or poorly property is likely to do going forward, but in terms of how well, he, as a qualified financial advisor, is presenting the case of a very important investment class.
It is important to distinguish between these two sets of criteria. A good marker is going to give a student a high mark for a well argued essay, even if the student arrived for a different conclusion from that held by the marker. Conversely, a student’s poor essay can, and should, get a FAIL, even if the essay’s conclusion accords with the marker’t on the given topic. Any lecturer or marker who is unable to keep this important principle firmly in mind when evaluating someone’s work should be sacked on the spot.
And, to reiterate, going by that principle, I could not, in good conscience, accord a PASS to the editor’s hatchet jobs on property as an investment, and if he presented this sort of investment advice in a particularised context, he would probably be in danger of being successfully sued and of losing his licence. You are being too nice and overly generous with him, it seems to me, regarding his oversimplifications.
Nick & All – If you missed it last night, here is a link to an excellent interview of three independents on the 7.30 Report. I especially note the matters raised by Katter.
http://www.abc.net.au/7.30/
“So again, we’re really keen to hear from property spruikers and investors about how they plan becoming wealthy when the income is less than the expense, and the capital growth is non-existent.
We’re all ears. Send us an email to
Dear Sir,
In the limited, simpleton, scenario you painted you cannot make a profit.
But, as that situation will only be for a certian period of time, if you wait for property to boom again, then you can get wealthy.
You buy wisely, hopefully only taking a small loss each year. Of course as most property investors know, you will get a tax deduction of your full loss, and that equates to a return based on your highest tax rate margin. You wait for property to become popular again, ride the price increase, and sell at a capital gain. If the property is in your personal name and owned longer than 12 months, then only half the capital gain is taxable.
That sir, is how it can be done.
Now, presume you buy some shares or in vest in a super fund during a bear market. You borrow 80% of the price to buy in , so are paying interest. The economy is in a trough, the dividends are not not covering the loan interst, the share price index is falling as are your shares. Your losing money. Tell me how you can get rich in this scenario?
Dumb question aint it?
Muchos love
Steve
← Previous Comments
Next Comments →
Comments on this entry are closed.