US Election Betting Has Trump Shading Harris

Betfair, Ladbrokes, Sportsbet and TAB are offering state by state betting on the November 5 US election.

I derived implied probabilities from the state by state odds from each agency and used them to simulate the election result. The method is discussed here. 

The odds are as at October 20. A lot may change between now and November 5, so I’ll run another simulation just before election day.

A simulation over 1,000,000 paths with a range of correlation parameters gives a 58% probability of a Trump victory. The variation in the 58% result was very small over the range of reasonable correlations. The most likely outcome in the 538 member Electoral College is 271 Republican and 267 Democrat, so whatever happens it is likely to be close. 

Looking at the odds, of the 50 states + Washington DC (3 delegates), only 13 states are in play at all. Those are Arizona (11), Florida (30), Georgia (16), Maine (4), Michigan (15), Minnesota (10), Nevada (6), New Hampshire (4), New Mexico (5), North Carolina (16), Pennsylvania (19), Virginia (13) and Wisconsin (10). The numbers in brackets are their Electoral College delegates. They are available here.

Of those, Florida is highly likely to go Republican and Maine, Minnesota, New Hampshire, New Mexico and Virginia are all paying between 1.05 and 1.15 for the Democrats. So that leaves 7 states which are highly uncertain. These are the 7 “battleground states” described in the media: Arizona, Georgia, Michigan, Nevada, North Carolina, Pennsylvania and Wisconsin.

States in play in 2020 such as Texas and Ohio are not in 2024, according to the betting. They appear to be firmly Republican.

Maine and Nebraska are the only states which do not use a winner take all system. However as Maine is usually 3 Democrat and 1 Republican and Nebraska 4 Republican and 1 Democrat, this usually balances out.

Any state where the odds of one party winning were at most 1.05 on all four sites was deemed to be already won and its Electoral College seats allocated by the model. That put the allocated standings at 190 Harris and 189 Trump. The 159 delegates from the other 13 states listed above were simulated from the odds.

Allocating the 6 low odds states and simulating just the 7 battleground states starts at 226 Harris and 219 Trump + the simulation of the remaining 93. The results obtained by this method show little variation from the results obtained by simulating the 13 states.

Interestingly, the head to head Trump (1.71) v Harris (2.40) odds imply a 58% probability of a Trump win. There is usually some arbitrage between head to head and state by state betting, but not in this market.

On a political note, if either party had a quality candidate, this election wouldn’t be close. If the Democrats had run anyone with the presence and electability of Bill Clinton or Barack Obama in 2020, they would likely have won by a much wider margin. But apparently the best they could put up was a senile, incompetent, corrupt old hack. Given the closeness of results in Arizona, Georgia, Pennsylvania and Wisconsin, the 306 – 232 margin was highly flattering to Biden.

Now, after 4 years of gross incompetence, manifest failure, lies and left wing ideology over pragmatism and substance, we have another close election. How?

Because the Republicans can’t find themselves a strong, credible, right-of-centre candidate. So Trump is back for another round of chaotic charlatanism. He might well win, because he can connect with people; at least enough of them to win against Kamala Harris, whose transparent insincerity connects with almost no-one.

Americans should rightly be asking what is so dysfunctional about their political system. In a nation of 340 million people, the best candidates they were offered were Trump and Biden, who was then replaced via backroom dealing by the possibly even more useless and self-serving Kamala Harris. How can America not do better?

The mainstream media should be asking these questions. But they are not. Instead of seeking the answers the public really wants and needs, they have largely descended into party political activism.

ABC, MSNBC, CNN, The New York Times and The Washington Post are the media organs of the Democratic Party. Fox has filled the gap and become the organ of the Republicans.

Until the media start acting with their true purpose: honest investigation and careful analysis, future elections are likely to evince as little genuine hope as this one. But that will require replacing the current party political activists with proper journalists.

Interestingly, current owner Jeff Bezos has directed long time Democratic Party mouthpiece The Washington Post to not endorse a candidate in this election. His reason?

"What presidential endorsements actually do is create a perception of bias. A perception of non-independence. Ending them is a principled decision, and it’s the right one."

Here is the Post's own piece on the matter.

Unsurprisingly, left wing "commentators" have responded with the line that Jeff Bezos is the wrong person to own a newspaper like The Post, because he is too rich. Yes, if The Post had principled owners, it would have done the right thing and endorsed the Democratic candidate, no matter who that was. And where was this honest commentary published? That principled defender of independent journalism, The Guardian.

Update:

Thought I'd go with orange due to who's in the lead in the betting.

The same simulation on the latest betting odds as of the morning of Tues Nov 5 (in Australia) has Kamala Harris edging slightly closer, but with Trump still more likely to win. The Nov 5 result was a 56% probability of a Trump victory, versus a 58% probability 2 weeks ago.

The most frequent outcome in the simulation was a 281 - 257 victory for Trump.

What has changed?

Most notably, the polling in Iowa, which has put that state in play. It was firmly Republican 2 weeks ago. Now the Republicans are paying 1.20 - 1.25.

The betting in Nevada and North Carolina has moved significantly toward Trump. In Michigan, it has moved significantly toward Harris. Pennsylvania has moved a little more toward Trump. Georgia and Wisconsin have moved a little more toward Harris.

Florida (Republican) is now on the border of the no contest criterion, although removing it from the simulated states does not materially alter the prediction. The movement of the betting in Iowa was the dominant factor in changing the Trump win probability from 58% to 56%.

 

NSW Election Betting Says Most Likely Outcome Is Hung Parliament

Sportsbet and TAB are offering seat by seat betting on the NSW election this Saturday March 26. Interestingly, Ladbrokes have decided not to.

I derived implied probabilities from the seat by seat odds from Sportsbet and TAB and used them to simulate the election result. The method is discussed here. 

A simulation over 1,000,000 paths with a range of correlation parameters give a 70 - 75% probability of a hung parliament with a Labor minority government. The most likely outcome in the 93 seat NSW lower house is ALP 45, Coalition (LNP) 37, Greens 3 and 8 independents. 

With the support of 47 members required to govern, the Coalition has almost no chance. To form a minority government, they will likely need the support of all 8 independents, plus possibly the Greens, which will not happen. 

The Greens are highly likely to win Newtown, Balmain and Ballina, so let's assume they do. 

The almost certain independent wins are Lake Macquarie (left leaning Greg Piper), Sydney (left leaning Alex Greenwich) and Wagga Wagga (Joe McGirr - conservative but from a Labor family and not a big fan of the current government). Highly likely independent wins are Orange (Philip Donato), Barwon (Roy Butler) and Murray (Helen Dalton). All three are conservative; ex Shooters, Farmers and Fishers. 

Let's assume the above seats give us 6 independents, of which 3 will likely support the LNP. 

Kiama is an interesting seat. Holsworthy MP Melanie Gibbons is running as the LNP candidate, with sitting Liberal MP Gareth Ward running as an independent after being charged with sexual offences.

Then we have the challenges to normally LNP seats by the "Teals" in Manly, North Shore, Pittwater, Wakehurst and Wollondilly. It is possible that some of these 5 and possibly Kiama will elect independents. The simulation implies at least 1 or 2. 

The outcome is that if Labor get close to 47 seats, even significantly above 40, they can probably count on Greg Piper and Alex Greenwich, plus possibly Joe McGirr to form a government without having to try to deal with the Greens, who will almost certainly try to hold them to ransom with delusional demands; self-righteous, glorified uni students that they are. 

The probability that the Coalition get to 43 seats and can rely on the 3 ex Shooters plus possibly Gareth Ward or Joe McGirr or one of the Teals is very low: about 8%. 

Thus, the overwhelmingly most likely outcome is a Labor government, probably a minority one supported by the left leaning independents and possibly requiring a deal with the Greens, the latter option leading to chaos.

Post election:

Looks like the money was on the money. Betting odds aren't always a good predictor, but in this election they were: ALP 45 LNP 36 GRN 3 and 9 other independents. We were only one cross bencher out.

There were a few seats paying 1.10 to 1.20 which at one time looked like they might swing to Labor: Holsworthy, Ryde and Terrigal, but the Coalition just got over the line in all 3.

Federal Election Betting Says ALP With Slim Majority

I derived implied probabilities from the seat by seat odds from Sportsbet, Ladbrokes and the TAB for today's federal election and used them to simulate the election result. The method is discussed here.

The most likely outcome was ALP 79 seats, the Coalition (LNP) 63, 1 for the Greens (Melbourne) and 8 independents (including Bob Katter in Kennedy), giving the ALP a slim, but workable majority.

The simulation implies a 79% chance of a Labor majority, 20% chance of a hung parliament and < 0.5% chance of the Coalition government being returned.

Given that 2 of the cross bench MPs will be Andrew Wilkie and Adam Bandt, the ALP really only need 74 seats for government, as opposed to 76 to govern outright. When that is taken into account, Labor's chances of forming a government increase to about 90%.

Federal Election Betting Shows Coalition Firming But Labor Victory

I’ve done a series of 3 simulations of the May 18 Australian federal election using the betting odds. Sportsbet, Beteasy and Ladbrokes have all provided odds for every seat from mid April, just after the election was first called.

The simulation dates were 15 April, 25 April and today (election eve), May 17.

The exact method of simulating the probability distribution of possible election results is described in detail in my post simulating the 2013 federal election.

In brief, any seat for which all 3 betting agencies have one candidate paying 1.10 or less is deemed safe and allocated to that candidate. For the remainder of contested seats, I derive the probability of winning in each seat from an average of the implied probabilities from the 3 sets of bookmaker odds. I used 10 simulations of 100,000 runs each. In each run, a winner for each contested seat is decided by a random draw of each candidate, with the probabilities derived from the odds for that seat.

Each set of 100,000 runs gives an estimated probability distribution for the number of seats won by each party (and independents). The 10 sets of runs are to determine the stability of the distribution estimates.

In the current parliament, there are 150 federal seats, so 76 required to form a majority government. The Coalition (LNP) currently has 73, with Labor (ALP) 69 and 8 on the cross benches, although one of those is the Nationals’ Kevin Hogan from Page (northern NSW), who is there in protest at the ousting of Malcolm Turnbull.

However, with significant recent population changes in Victoria, South Australia and the ACT, an electoral redistribution last year gives the new parliament 151 seats, still requiring 76 to form a majority government. Victoria’s seat allocation has increased from 37 to 38, the ACT’s from 2 to 3 and South Australia’s is down from 11 to 10.

In the first simulation on April 15, there were 52 safe ALP seats, 20 for the Coalition and 1 independent: Andrew Wilkie in Clark in Tasmania. The imbalance was due to the bookmakers initially giving odds of 1.15 or 1.20 for many normally safe LNP seats in Queensland and Western Australia in particular.

The additional 78 contested seats were simulated and returned the most likely scenario of 91 or 92 seats for Labor, 52 or 53 for the Coalition and 7 on the crossbenches, most likely: Andrew Wilkie in Clark, Bob Katter in Kennedy (Nth Qld), Rebekha Sharkie in Mayo (Adelaide), any 2 or 3 from Rob Oakeshott in Cowper (centred on Port Macquarie), Kevin Mack in Farrer (western NSW), Helen Haines in Indi (country Victoria), Zali Steggall in Warringah (Sydney northern beaches), Kerryn Phelps in Wentworth (Sydney eastern suburbs), plus the Greens’ Adam Bandt in Melbourne and possibly Steph Hodgins-May in the neighbouring seat of MacNamara (inner city south and south east Melbourne).

The probability of an outright Labor majority was > 99%.

The simulation 10 days later on April 25 showed the Coalition closing slightly. The most likely scenario was 89 seats for Labor, 55 for the Coalition and the same 7 on the crossbenches. The probability of an outright Labor majority was still > 99%.

Over the past 3 weeks, the Coalition have been gaining some traction and opinion polls have been gradually shifting more toward them, though probably not sufficiently for a victory tomorrow. This has certainly been reflected in movements in the seat betting odds.

In today’s analysis (May 17), there were 59 safe ALP seats, 26 for the Coalition, 3 independents (Andrew Wilkie in Clark, Bob Katter in Kennedy, Rebekha Sharkie in Mayo) and 1 Green (Adam Bandt in Melbourne). The most likely scenario was 82 seats for Labor, 62 for the Coalition and 7 on the crossbenches.

The remaining 4 cross benchers are most likely Rob Oakeshott in Cowper, Kevin Mack in Farrer, Helen Haines in Indi and Zali Steggall in Warringah. Zali Steggall has come in to 1.40 and looks like removing Tony Abbott (if the betting can be trusted).

That ultimately may not be a bad thing for the Liberals, because short of an “unfortunate” accident, it’s pretty much the only way they will get the ignorant wrecker Tony Abbott out of parliament. They are almost certainly going to be in opposition for at least 3 and possibly 6 years. Zali Steggall can’t do much damage because Labor will have an absolute majority and will implement their agenda (which she largely supports) without her. The Liberals can then preselect a new candidate in Warringah who will win back the seat, as Dave Sharma now looks increasingly likely to do in Wentworth, removing the aberration of barely disguised left wing activist Kerryn Phelps representing one of the wealthiest electorates in Australia.

The Greens have gone out to around 3.00 in MacNamara, but come in to 2.50 in the once apparently safe-ish neighbouring Liberal seat of Higgins, so they could also still pick up a second lower house seat.

The LNP gains from the 2 previous simulations were largely firming seats in Queensland and Western Australia, although Banks, Lindsay and Page in NSW have flipped from likely ALP gains to LNP holds.

The estimated probability of an outright Labor majority has reduced to 94%. However, given the left leaning Andrew Wilkie and Adam Bandt, the possibility of Zali Steggall and maybe even a 2^nd Green, Labor only really needs to get to 73 seats to form a government. The simulation estimates the chance to be 98.5%, with 74 seats at 97%.

With these odds, Labor should be paying about 1.03 as the sworn in government. But the 3 sites have them at 1.14, 1.14 and 1.15. Very generous odds, I suggest.

The Hawke Factor:

Will Bob Hawke’s death yesterday help swing the result to Labor?

Yes. A simple reason: brand recognition.

He was genuinely one of Australia’s best and most popular prime ministers. He had genuine vision and made important, lasting economic reforms, without the conflict. So it’s not unreasonable for there to be extensive coverage of his contribution to public life and the nation.

But his death couldn’t have come at a worse time for the Coalition campaign.

Hawke represented Labor ideals. Hawke was good. Therefore Labor is good. That will be the association in many people’s minds from all the coverage. It’s largely subconscious. It will almost certainly sway some undecided voters.

And of course the media arm of the ALP: the ABC, SMH and Age have been going out of their way to use their tributes as ads for their Labor masters.

For the Coalition, the one positive is the number of people who have already cast their vote.

Of course, that also increases the uncertainty in any simulation using current betting odds.

Election Betting Shows Coalition Minority Government Most Likely in NSW

I’ve done a belated simulation of the NSW election from the betting odds. I only used Sportsbet because by the time I got around to entering the data, Beteasy and Ladbrokes had removed their displayed odds and suspended betting.

There are 93 seats in NSW, so 47 required to form a majority government. The Coalition currently has 52, Labor (ALP) 34 and 7 on the cross benches.

46 safe seats were identified: 20 Coalition and 26 Labor. Normally there would be several more safe Coalition seats, however they are being challenged by the Shooters, Fishers and Farmers Party (SFF) in Barwon, Murray and Orange, and by conservative independents in Dubbo, North Shore and Wollondilly.

I ran a simulation for the 47 contested seats, deriving the probability of winning in each seat from the Sportsbet odds. A detailed explanation is given in my post simulating the 2013 federal election.

In brief, I used 5 simulations of 100,000 runs each. In each run, a winner for each contested seat is decided by a random draw of each candidate, with the probabilities derived from the Sportsbet odds for that seat.

25 of the 47 contested seats have the Coalition paying less than 1.40. In 17 of those, the Coalition are paying 1.20 or less. Comparatively, 9 of the 47 contested seats have the ALP paying less than 1.40. In 5 of those, Labor are paying 1.20 or less.

Thus, most contested seats are leaning toward the Coalition, so we should expect the simulation to show more contested seats going to the Coalition than Labor. Unless the betting money has completely misunderstood the mood of the electorate, which it did in Brexit and the 2016 US election, betting is pointing to the Coalition having stronger prospects of forming a (probably minority) government than Labor.

The simulation results show the Coalition with a 39% chance of forming a majority government, Labor a 1% chance and a 60% chance of a hung parliament. There was very little variation over the 5 simulations.

In terms of seats, the most likely outcomes are 45 or 46 for the Coalition, 40 for Labor, 2 for the Greens (Balmain and Newtown), 2 for the Shooters (Barwon and Orange) and 3 or 4 for independents (Lake Macquarie, Sydney, Wagga, with an outside chance of the 4^th being Dubbo or North Shore). There is also a small possibility of an 8^th on the cross benches being a 3^rd Green: either in Lismore or Ballina, or a 3^rd Shooter in Murray.

What does this mean to form government?

The Coalition, with 45 or 46 seats only need to cut a deal with the Shooters and/or the independent in Wagga. These are all conservative electorates, so it shouldn’t be too difficult. Although most will remember the 2010 federal election, when the perfidious Tony Windsor and Rob Oakeshott betrayed their conservative electorates to install a minority Labor government.

Anything less than 44 seats for the Coalition will make a minority government difficult, since at least 4 of the cross bench MPs will be left leaning. The simulation gives a 31% chance of this happening.

Update:

The Coalition achieved a slender outright majority with 48 seats to Labor's 36 and 9 on the cross benches. Of those 9, 3 are Shooters and 1 is the conservative independent Joe McGirr in Wagga. Thus, even if they lose a couple of by elections, they will still be able to maintain government.

Independents Strengthening In Election Eve Betting

As promised, I have run a final simulation of the Federal election, using the individual lower house electorate betting odds as of this Friday night (1/7).

The most probable seat distribution is now almost evenly split between 79 - 65 - 6 and 78 - 65 - 7. Labor’s chances of forming a majority government is now less than 0.1%, but the chance of a hung parliament is still high: 25% ± 2.5%. Although several seats have firmed in either the Coalition or Labor’s favour, the extra uncertainty around the independents is offsetting this clarity.

Independent (ALP stooge) Rob Oakeshott now looks to be a real problem for the Coalition in the NSW electorate of Cowper. With Cowper now at almost even money, as well as Mayo and Batman, there is a real chance of 7 on the cross benches.

There are 14 lower house seats in which 2 candidates are both paying less than $3 on all sites and thus could be considered genuinely close contests: Cowper, Greenway, Macarthur and Macquarie in NSW, Batman and Chisolm in VIC, Brisbane, Capricornia and Petrie in QLD, Hindmarsh and Mayo in SA, Cowan in WA and Braddon in TAS. Of these, Cowper, Macarthur, Macquarie, Batman, Mayo and Cowan are very close.

This is a slight change from Wednesday night’s run. Greenway has tightened, but Gilmore now looks safer for the Liberals. Brisbane is now close as the ALP have improved and Forde now looks safe for the Liberals, as do Burt and Lyons for the ALP.

PS: Don’t forget to vote for minor parties in the senate before you choose a major (if you choose a major at all). There are plenty of liberal choices: Liberal Democrats, Voluntary Euthanasia, Drug Law Reform, HEMP . It’s hard to tell what the Secular Party and the Science Party / Cyclists Alliance are all about, but I voted for them anyway.

Latest Election Betting Implies 6 On Cross Benches, But Still Coalition Majority

Last Tuesday night (21/6) I ran a simulation of the looming Federal election using probabilities implied by the individual electorate betting odds on Sportsbet, Luxbet and Crownbet. The odds implied Coalition 79 seats, ALP 66 seats and 5 on the cross benches as the most probable result.

I just ran another, using the betting odds as of this Wed night (29/6).

The most probable seat distribution has changed to 79 - 65 - 6, with an extra cross bench seat for either the Greens or Nick Xenophon. As the odds in some marginal seats have firmed for the favourites, Labor’s chances of forming a majority government have fallen from about 1% to less than 0.25%. The chance of a hung parliament is still high: 25% ± 2.5%.

Nick Xenophon’s odds in the conservative Adelaide electorate of Mayo have significantly shortened, from about $3.00 to $1.50 - $1.60. He has also come in to between $3 and $4 in Barker, Boothby and Grey. All of these are normally conservative electorates, so the swing toward Xenophon must be a concern to the Coalition. The betting now puts Xenophon at a 35% chance of winning multiple lower house seats in SA.

With the Greens shortening from $4 to even money in the north Melbourne seat of Batman, they now have a 50% chance of winning 2 lower house seats. Moreover, Batman borders Adam Bandt’s seat of Melbourne, so a win here would give the Greens the makings of a contiguous heartland in inner city Melbourne.

The perfidious Tony Windsor and Rob Oakeshott are still chances in New England and Cowper (God help us).

Bob Katter, Andrew Wilkie, Cathy McGowan, plus 2 Greens and a Nick Xenophon Team or 1 Green and 2 Nick Xenophon Team ... not an easy cross bench for Malcolm Turnbull to deal with. Wilkie and the Greens will be obstructionist and Katter, McGowan and Xenophon will hold the government to ransom.

There are 14 lower house seats in which 2 candidates are both paying less than $3 on all 3 sites and thus could be considered genuinely close contests: Cowper, Gilmore, Macarthur and Macquarie in NSW, Batman in VIC, Capricornia, Forde and Petrie in QLD, Hindmarsh and Mayo in SA, Burt and Cowan in WA and Braddon and Lyons in TAS. Of these, Macarthur, Batman, Capricornia, Mayo and Cowan are very close.

I will look at the betting odds again this Friday night.

The Best Brexit Result: A Very Narrow Bremain

With voting about to get underway in the Brexit referendum, what is the best outcome for Britain?

I won't link to the betting sites, because the odds will change so rapidly, so there is not much point in deriving probabilities from them. Last estimate was 1.25 for Remain and 4.00 for Brexit. That translates to an implied 81% probability for Britain to remain in the EU. 

Better for Britain is a very close Bremain, say 51 - 49 or 52 - 48. This would force the Eurocrats to really put a dollar value on Britain remaining part of the EU, without the chaos of it actually exiting.

The salient problem driving the Brexit vote is the technocratic socialism which Britain has always hated. To imagine anything else in the EU is anathema to the EU MPs in Brussels and that is the nub of the problem

Election Betting Says Coalition With Slim Majority, But Strong Possibility Of Hung Parliament

Last federal election I ran several simulations of the outcome, based on the betting odds on the 150 individual electorates. The initial post explained how the simulation worked.

This federal election, Sportsbet, Luxbet and Crownbet are all offering odds for every electorate. Interestingly, William Hill is not, despite doing so in 2013.

The simulation as of Tues 21 June gives the most likely outcome as Coalition 79, Labor 66 and 5 on the cross benches, made up of independents Bob Katter, Andrew Wilkie, Cathy McGowan, Green Adam Bandt and probably one Nick Xenophon seat in SA, most likely Mayo.

The first 4 are incumbents, strongly tipped to retain their seats. In particular, Cathy McGowan is benefiting from the Liberals’ insane decision to rerun lazy, arrogant and unpopular erstwhile member Sophie Mirabella. Why would they not find a new, more capable candidate in an electorate which will clearly vote conservative, given a halfway decent choice?

The number of cross benchers is a serious problem for both the Coalition and Labor, particularly as the phenomenon is looking to be not just entrenched, but growing. It certainly shows up in the simulation. Based on current betting, Labor has less than 1% chance of forming a majority government. However 20 - 30% of paths lead to a hung parliament. The large confidence interval is due to the sensitivity of seat distributions to the uncertain correlation parameter in the simulation. The 20 - 30% chance of a hung parliament is estimated from the range of reasonable voting correlation parameter estimates.

There are approximately 70 seats “in play”. Of these, some are under speculative attack from the Greens (Grayndler, Sydney, Higgins, Wills, Fremantle), but in the North Melbourne Labor heartland of Batman, the Greens are currently paying 2.10 - 2.30.

Tight contests are Eden-Monaro (as usual), Macarthur and Page in NSW, Dunkley and LaTrobe in VIC, Brisbane, Capricornia and Forde in QLD, Grey, Hindmarsh and Mayo in SA, Burt (new), Cowan, Hasluck and Swan in WA, Braddon and Lyons in TAS and Solomon in the NT.

Only 18 seats in the genuine 50/50 range and the government with a 30 seat majority goes a long way to explaining the low probability of an ALP majority.

The other problem for the major parties is the translation of the upper house voting strength of Nick Xenophon to the 11 lower house SA electorates. His team is polling strongly in 7 of these 11 electorates. More problematic for those who want to avoid a hung parliament is that 5 of the 7 would otherwise go to the Liberals.

Xenophon’s team will probably win 1 or at most 2 of these 5, however that increases the likelihood he will be in a strong position to negotiate in BOTH houses with Malcolm Turnbull (who has shown himself to be more eager to please all interests than a leader should be).

The most important outcome of this simulation is the higher than I thought probability of a hung parliament. Many other countries have them, however Australia has no tradition of it, so the minor parties and independents have no real experience of working WITH governments instead of in their own interests. This is a serious problem, given the level of global and political instability. Great for derivatives traders, bad for manufacturers.

I will run another simulation on Fri July 1, the day before the election.

A Simple Fix For Negative Gearing

There is a simple way to remove the taxpayer subsidised market distortions of negative gearing of property investments: allow losses to be carried forward, but not offset against other income, such as wages.

For example, suppose someone has an investment property which earns $25,000 pa rent and has interest costs of $30,000 pa, plus other costs of $5,000 pa. The investment is making an accounting loss of $10,000 pa. The current law allows the investor to deduct this $10,000 loss from their salary (or other) income in their yearly tax return. For high income earners ie. those earning above $180,000, this $10,000 deduction saves $4,900 in tax.

The alternative is that the $10,000 would not be allowed to be deducted from salary or other income. Rather, it could be carried forward to future years and only deducted from future property investment income. A modification would be to class all income producing investments eg. property, bonds, equities as being of the same type and allow income and expenses (including interest) to be combined within this class. This effectively allows investment property to be negatively geared only against profit generating investments in that class.

This is not an unusual or radical solution: in fact it is the current norm in tax law.

The underlying principle is that losses can only be claimed as deductions if a business intends to make a profit. It is understood that businesses may have several years of losses in their start up phase, or in difficult market conditions. However, the goal of the business should be to grow revenue and eventually become profitable.

The Australian Tax Office does not allow “non-commercial losses” to be offset against other income. That means a business activity must be structured with the intent of being, or at least becoming profitable. Deductions for losses derived from “hobby businesses” or structures designed to run at a loss through cross invoicing, transfer pricing or similar are disallowed. The circumstances and tests for allowable deductions are listed on the ATO website.

The rules around offsetting losses from one business activity against profits from another are part of Division 35 of the Income Tax Assessment Act. They essentially boil down to whether or not the business activities are deemed separate or substantially similar. For example, a winery with its own restaurant would be considered similar business activities, so if the restaurant made a loss, that could be deducted from winery profits. A car repair business which bought a florist could not offset losses of the florist against profits of the other, because those would be considered separate business activities.

In the latter example, the losses of the florist would be carried forward and only offset against future profits of the florist business.

This is exactly the rule I am proposing for property investment. Investing in property (and other tradable financial instruments) is clearly a separate business activity from most people’s wage generating employment. Thus, it should be treated according to the existing tax rules for separate business activities.

The problem with negative gearing is that the property investment is deliberately structured to make a loss. When the current portfolio begins to generate positive cash flow, more property is purchased to re-establish the negative gearing. Thus, those deliberately generated losses should be carried forward and offset against future investment profits, not deducted from salary income and subsidised by the taxpayer.

A meaningful effect of this change in policy would be to force property investors to pursue strategies designed to eventually return significant profits, or else the losses carried forward will not be able to be used. Note that this does not prevent investors from negative gearing: it requires them to make investment profits to deduct those losses. After becoming cash flow positive, an investor could add another negatively geared property into the portfolio, reducing profits or even creating an accounting loss, which would be carried forward to future financial years.

This simple change in policy brings the tax treatment of property investment into line with that of other asset classes. Disallowing negative gearing against salary income will cause some investors to have a lower price ceiling, however those with existing, cash flow positive portfolios will not have their strategies or price ceilings materially affected.

Contrary to self serving, dishonest and hysterical claims that restricting negative gearing could cause property prices to crash, the downward pressure on prices through decrease in demand will be modest, certainly smaller that the effect of a couple of interest rate hikes, when they eventually happen. There will not be waves of forced sales because there will not be waves of investor defaults. After the lessons of the GFC, banks will certainly not do any forcing based on lower debt coverage ratios alone.

With the property market severely overheated in most capital cities due to chronic undersupply, interest rates at historic lows and forward rates expecting further falls, this is probably the best time we’ll get to make sensible changes to negative gearing.

Coupled with the gradual, longer term effect of more investment in public housing, this change to negative gearing will help control the excessive growth of Australian capital city property prices, which has been fuelled by low interest rates, undersupply and high immigration of money. Additionally, after causing initial hardship to those currently in negatively geared positions, it will lead to decreased risk in investors’ positions and thus lower credit risk and capital charges for lenders.