It’s Time for the Australian Property Debate

It’s Time for the Australian Property Debate

When you start to see politicians debating tax changes you should be afraid – very afraid. We know with the negative gearing debate that neither party has completed any costings preferring to work from the economic theory of guesstimates. This is a very dangerous path as Australia does not have a Housing Minister and any changes are fraught with danger.

Just this week, the Australian Bureau of Statistics (ABS) revealed that for the first time rental, hiring and real estate service companies made $14 billion before tax in the second half of 2015 while mining companies made $9.8 billion. This is not the time to start meddling with property taxes as an excuse for economic reform policy. I have no doubt that any changes to negative gearing will distort the market, and should there be an “investor run” prices will inevitably fall.

Australia is currently recording wage growth at a record low of 2.2 per cent a year. This is the lowest annual growth since the ABS started recording annual growth back in 1998. On top of that statistic in the September quarter, the ratio of household debt to income hit a new high of 184.6 per cent which translates to households’ debt now being at 1.85 times their total income. This record growth in debt is a by-product from record low interest rates. But before we hit the panic button we need to investigate further and try and identify what is causing this.

Summer_Haze_Sydney_aerial-photography

SYDNEY AERIAL PHOTOGRAPHY

On many occasions I have said “if there was a gold medal for real estate portfolios Australia would win hands down.” I see no use comparing Australia’s debt ratios with other countries when the Australian model has no tax payable on the principal place of residence and the overseas models do have tax payable on the principal place of residence. Australians work their principal place of residence as their main superannuation platform, which works very well when you have the cash rate at record lows. If you were a betting person you would definitely be betting that the next cash rate movement will be down. Of course these high debt ratios will be challenged when the Reserve Bank of Australia (RBA) starts increasing the cash rate, but nobody really knows when that will be or in what decade even.

Prior to the Global Financial Crisis the average cash rate over a 25 year term came in at around 7.25 per cent, where based on what we are seeing today mortgage holders are going hard at 2.00 per cent.

Another statistic that is flying well off the radar are reverse mortgages which very few people discuss within the Australian property debate. In its annual Reverse Mortgage Report, Delloitte estimates more than $500 billion of home equity is held by Australians aged over 65, with the total reverse mortgage loan book worth $3.66bn as at the end of 2014. This figure is naturally added to the Australian household debt figure so this would go part of the way to explaining why we are starting to see record debt levels. Back at the end of 2014 there were almost 40,000 reverse mortgages on issue in Australia with the average size being $92,000, up from $86,000 in 2013. It would then be reasonable to suggest that the number of reverse mortgages would have increased in 2015 as too the average mortgages – this is clearly a growth market.

To put this into further perspective the reverse mortgage market loan book was $3.66bn in 2014 and the Commonwealth Bank home loan portfolio currently sits around $393 billion. With many retirees opting for reverse mortgages this is another reason why we are seeing fewer properties on the market. Although this would change significantly once the cash rate starts increasing or a federal Government starts tampering with negative gearing in an adverse way. What it does tell us is that Australia needs property investors as they play an integral part in Australian property machinations. If you want to have a rational debate about housing affordability in Australia firstly examine the delays by respective governments who forever and a day burden and choke the supply side of the property industry. It’s obvious to most that they fail to understand the Supply V demand equation.

Furthermore the Labor negative gearing proposal states that this will only apply to new properties. Well somebody should advise them that in December 2008 they lifted the number of properties that can be sold from new developments by foreign buyers from 50 per cent to 100 per cent. Property developers are selling all their new developments directly overseas as that way they can achieve higher prices so the local markets are blocked from buying these developments. Nor is there any requirement nor legislation stipulating that foreign buyers must rent the property out to the local market – we do know that currently in Australia there are thousands of properties that have been land banked. Politicians are hopeless when it comes to the Australian property market.

The last thing the Australian economy needs is a domino effect with property prices because they are not pretty and should be avoided at all costs. If you want to bring property prices down do it organically by increasing supply which just so happens to be the greatest failure of local, state and federal Governments in the modern economy.

MOSMAN – 2088

• Number of houses on the market this time last year – 83

• Number of houses on the market last week – 64

• Number of houses on the market this week – 63

• Number of apartments on the market this time last year – 53

• Number of apartments on the market last week – 52
• Number of apartments on the market this week – 53

CREMORNE – 2090

• Number of houses on the market this time last year – 10

• Number of houses on the market last week – 18

• Number of houses on the market this week – 11

• Number of apartments on the market this time last year – 23

• Number of apartments on the market last week – 23

• Number of apartments on the market this week – 25

NEUTRAL BAY – 2089

• Number of houses on the market this time last year – 4

• Number of houses on the market last week – 8

•Number of houses on the market this week – 10

• Number of apartments on the market this time last year– 36

• Number of apartments on the market last week – 26

*Number of apartments on the market this week – 25

For this week’s sales in Cremorne real estate, Cremorne Point real estate, Mosman real estate, Beauty Point real estate, Clifton Gardens real estate, Balmoral real estate, Neutral Bay real estate, Cammeray real estate.

Click Here

For this week’s open for inspections

Click Here

Source: APM Price Finder

5 Responses to “It’s Time for the Australian Property Debate”

  • jim elliott says:

    Hi Robert,
    State governments in Australia are totally addicted to the current tax setup as it provides so much revenue to the States by way of stamp land and GST taxes they would be totally unsupportive of any federal move of any significance.

    From the Feds point of view they have no incentive other than for headline space to do anything to jeopardise the states revenue streams.

    Nothing much will happen is my guess.

    Jim

  • Robert, Australia unquestionably has high residential property prices. Domain is today reporting that “Sydney’s housing affordability crisis has breached a new threshold with a median-priced detached house in the city now beyond the reach of families with two average full-time salaries”. This is a result both of inadequate supply but also of taxation policy, including negative gearing and favourable taxation of capital gains.
    I have to take issue with two points you make. Firstly, you say that “any changes to negative gearing will distort the market.” Well hello, our current negative gearing policy substantially distorts the market so arguably any change might lessen that distortion. Other countries do not allow you to offset losses on passive investments, like property, against earned income so we have distorted the market. I have personally benefitted from negative gearing, like many baby boomers, but I can acknowledge that a policy that has aided many of my generation is harming younger people keen to enter the property market.
    Secondly, you say “Australians work their principal place of residence as their main superannuation platform.” Superannuation is a pool of savings to be used to fund retirement and as a financial adviser I can assure you that the family home can only fund retirement expenses if the owners downsize and free up capital, which few choose to do. Of the “downsizers”, many end up spending most or all of the sale proceeds on a new property so capital freed up for living costs is modest. The family home is definitely not a superannuation platform for most people.

    Andrew

  • Andrew

    I find this debate intriguing and long overdue. have you read the BIS Shrapnel negative gearing article that just appeared in Property Observer?

    http://www.propertyobserver.com.au/forward-planning/investment-strategy/property-news-and-insights/51077-negative-gearing-reform-could-lead-to-lost-decade-bis-shrapnel.html

    Whilst the principal place of residence remain a tax haven – home owners will always put all available capital into it. The market is running amok again and what was $3.000 million is now the new $4.000 million – we have runs and corrections where at the moment we are in another run. But that’s understandable when you see that just over 1 per cent of houses in Mosman are on the market for sale.

  • Jim

    Everything from a revenue perspective is now clearly weighted in the favor of Mike Baird. he can clearly see that so he’s “making hey whilst the sun is shining.”

  • Hi Robert

    No I haven’ read the BIS Shrapnel report but I understand the authors have already distanced themselves from some of the “conclusions” various commentators have drawn from it. Also, I’m always sceptical of long term forecasts as they nearly always prove to be wildly inaccurate eg. Treasury’s Budget forecasts or anyone’s forecasts of the AUD exchange rate.

    Regarding your second point, yes the family home is a tax haven and that’s a key reason that our residential property prices are so high. My point is that it doesn’t help fund retirement unless the owner frees are capital by selling and buying a cheaper home. Some do this out of necessity but few do it willingly or as part of a plan to fund their retirement.

Leave a Reply

Your email address will not be published. Required fields are marked *