Wake Up to Yourself Son, Buy a Block of Land

22nd February 2016

Once upon a time, Australians were encouraged to build wealth through savings and investment. Now it is fashionable to condemn such behaviour as tantamount to tax evasion. The latest target seems to be anyone who has accumulated more than average value investments in superannuation or ridden the long property boom to capital gains wealth. The truth is the evangelical battle cry of ‘fairness’ driving this attitude, is no more than a base exhortation to ‘eat the rich’.

Savings and investments are sourced from a person’s surplus earnings. Even investment loans from banks are using other people’s savings. They are not produced from government largesse. Nor are they created from secret funds controlled by a cabal of super wealthy oligarchs, as the Greens would have you believe … at least not in Australia. Investment of a portion of our hard earned enables us to grow our wealth over time and improve our standard of living. Only inflation, incompetence, corruption and taxes erode the value of the wealth that is created.

Property ownership is a source of wealth. However, there is a view that negatively geared investment in property is bad and just a scam to minimise income tax. In reality (excuse the pun) the attraction to property is the potential capital gain and negative gearing is an effective means for small businesses owners and wage and salary earners to enter a market that they wouldn’t otherwise be able to do on their own. Negative gearing is one of the more egalitarian means of facilitating wealth creation in Australia. Whether it is the optimal use of scarce resources is another question altogether.

Looking at the alternatives, your average wage earners, independent contractors, doctors, lawyers, small business owners or company directors, really only have three basic means to manage earnings and grow their wealth once all the bills have been paid: cash, shares and property (Does anybody buy gold bullion anymore?). Currently your hard earned is eroded by fees and taxes whilst it sits in low interest term deposits. Share prices have flatlined since the collapse of 2009. But property prices in sought after capital cities continue to soar.

Negative gearing enables anyone with surplus earnings to enter the real estate market with the chance of solid capital gains. However, it also carries risk arising from the cyclical nature of property investment. At some point in the future the Australian property market bubble will burst and people will lose on the deal. Not every town or city is experiencing a property price boom.

So, is this some kind of scam? Should negative gearing be curtailed and capital gains tax increased?

If property is diverting unusually large amounts of investment capital then it is probably due to the relatively poor business outlook and weak alternative investment options. When the share market returns to a consistent growth path, watch the money move from property into the share market. If interest rates were to rise debtors will become creditors. When consumers start spending again and export markets open up opportunities, then we will probably see investment in business capital.

The current debate on taxation reminds me of a joke shared by my circle of friends growing up in north suburban Melbourne in the 1970’s. The source of our amusement was ocassional fatherly advice to “… wake up to ourselves, get a haircut and buy a block of land.” I am not sure whether we entirely wised up to our many short-comings, and the need to cut our hair has definitely diminished over the years. However, purchasing a block of land speaks of an Australian culture that was strong then and resonates today. Australians are keen to build their wealth, not just their income, and property provides an opportunity for them to do so. What’s wrong with owning land? Nothing at all.