“It Ain’t Necessarily So”
We see them regularly, don’t we? Often as part of a media item, as part of a “beat up” on one political party or other, or simply where someone is endeavouring to convince someone else with “statistics” (or outright lies!)
I thought it might be good to air a few grievances in one thread (this one) which can a repository for untruths, half-truths, or straight-out lies regarding Real Estate investing.
This one I caught this morning – it was referred to by Jason in his Twitter account (this was the link – http://theconversation.com/what-housing-issues-should-the-budget-tackle-this-is-what-our-experts-say-73751 ), and I include some of their words as one example of “It ain’t necessarily so”:-
… negative gearing is a tax deduction … the higher your marginal tax rate, the more you get. Someone on $200,000 will receive about half their loss back. Someone on $30,000 will only get about a fifth.
OK – they are right, or at least half-right, so I think of this one as a “half-truth”. What is the other half? Well, it paints the poor old battler as being hard-done-by (getting only one-fifth back).
They are right in that someone claiming losses would do so “at their marginal rate” – and yes, someone on $200k would have a Tax Rate (after Medicare, etc) of roughly 50%. So, when claiming losses, any deductions would be relative to that marginal tax rate of ~50%.
But wait a minute – there IS more to it than that surely….
The WHOLE truth is that the person earning $200k would usually pay $63,232 in Tax – but “he gets half back” of any claimable deductions he has that are in excess of his income.
If these deductions are earned while investing to make a profit into the future, the law says “It’s OK to do that”. Same for BOTH of them!!
But remember, rich dude “gets half back” ONLY BECAUSE he had paid his marginal Tax at that Rate !!
The battler on $30,000 pays $2,242 in Tax. And that poor old battler, well his Taxable Income is at the 19% marginal Tax Rate – so, yeah, about one-fifth is near enough. Once again though:-
But remember, he “gets one-fifth back” ONLY BECAUSE he had paid Tax at that Rate !!
For each, it is the Tax THEY had paid that is being returned to them, at the very rates they had PAID tax. None of this “poor battler” nonsense – it is all fair as it is.
Another old chestnut that deserves a place in this thread is the well-known media headline that reads as some variation of “Cash Rate up (or down) by 0.25%” and is often extended to read “Mortgage Interest Rates up (or down) by 0.25%” – and that may not necessarily be correct. Often, when the RBA drops the rate, Banks DON’T drop by the same amount. And recently, the Banks have increased the rate WITHOUT the RBA saying “Boo” !!
Now those are out in the open, and displayed in the headlines. The “hidden” (or ain’t necessarily so) bit is what that headline actually means when rates increase.
Take an example – let’s say it is time for Interest Rates to start heading North again. With rates as low as we have right now, it won’t be too long…. So, one day soon, the headline will read “Mortgage Interest Rates up by 0.25%” With current Mortgage Rates being around 4% of a loan amount, what effect will 0.25% have?
Answer: About a 6.25% difference !! If you have an IO loan for $400k and pay 4% Interest right now, the yearly cost is $16k (400,000 x 4%). Now lift the Interest by 0.25% and you will be paying $17000 (400,000 x 4.25%) – true? So, with your Interest payment lifting from $16k to $17k, how much increase is that? ((17-16) / 16 x 100 = 6.25%)
What if the RBA decided to do 4 such lifts in one year? Then that 1% is really a 25% lift in costs. I figure most tenants would be OK with a “1% increase” but how will your tenant be with a 25% lift in rent? It is this vast effect that has me thinking the RBA had better not go lifting rates TOO fast in TOO short a timeframe – it would be a disaster for the whole economy.
And next time you see a headline telling you about some small lift in Interest rates or the Cash Rate, think “That ain’t necessarily so!” and go work out what it will really mean to you.
Oh my – here we are, knee-deep in electioneering ahead of next week’s Federal Election, and half-truths and untruths are flying thick and fast. Do share some of yours too as you see/hear them.
I rather like someone’s suggestion “That parties found to be telling blatant lies during an election campaign should be brought to justice!” I can’t see how easily such an idea could work, but boy, I am hearing some whoppers out there right now.
1. This one, this morning, from Get Up who are actively targetting Right-wing sitting members – targetting Tony Abbott because “he refuses to debate Climate Change”. That’s funny – for years, I’ve been hearing “the Science is settled” whenever anyone wants to debate the issue – and THAT four-word slogan has been widely promoted by the Left side of politics. Is GetUp now saying “the Science is NOT settled after all?” Not really – they are simply slinging mud and hoping some will stick !!
2. Ads right now (from Greenpeace) show Tasmanian “survivors” posing in front of blackened land (after a bushfire supposedly) and blaming the Govt as if the burning of coal has created the bushfire….
Both Tasmanians and Victorians should be looking to the REAL cause of out-of-control bushfires, and that is the Greens themselves who, with the balance of power in both State Govts, vetoed the long-held practice of “burning off” yearly. So, when lightning eventually DID start a fire, there were many YEARS of build-up of fuel on the floor of the forests, such that it became a wildfire that was impossible to stop.
For those of you that think “Oh, we shouldn’t burn off, as it makes ground-dwelling animals homeless, and kills lots of them” I simply say “Think about it – a small fire started on a day where wind is low, specifically for the purpose of burning off the fuel load, WILL allow animals to escape as it creeps along the ground. It also greens up the forest, and promotes the seeding of fresh grass and new trees. But now, think how many animals CAN’T escape when a wildfire is roaring and jumping highways as it burns out of control. And think how many people lose their lives, including firemen who are attempting to control the uncontrollable?
Fortunately, the Greens don’t hold that power in Qld – yet – so we still burn-off to contain the build-up of fuel and keep future fires more manageable. It’s all about common sense – some parties have it, others are sadly lacking.
More thinking is required methinks :p
Let’s hear some of YOUR beefs too…. ;)