The future of Australian property prices

[McLovin]

Ok that's probably the difference in our thinking here, I wasn't using the strict tax definition of "Carrying on a business"

The ATO's position isn't arrived at by using a "tax definition". It's formed from case law of the court's interpretation of what constitutes "carrying on a business".

If anything, there should be a definition or set of rules defined in ITAA 36 & 97, because it's bloody vague as is, which is never a good thing in a tax system. Then again, it could be because of the large gray area that they've chosen not to define it.

 

[sydboy007]

Because you are trying to say property in general loses money, when it doesn't. To weigh up whether an asset class is a viable investment you need to look at how it would perform debt free, a debt free property is a perfectly sound investment. It is then up to individuals whether they want to add debt based on their own judgement of the risks and rewards.

Its like me saying the aussie share market has lost money for 13 years, because based on a 100% loan at 8% the annual dividends don't cover the interest charges. the fact is that statement is false because a) the dividends have increased almost every year and even if you took a 100% loan it would be positive now, b) the fact that I'm judging whether it is profitable based on debt is the wrong way to look at it.

You're talking about hypothetical situations, the current losses for NG are REAL. People have chose to load up on debt. It doesn't matter what the situation would be if there was no debt. The current REALITY is there's over 1.2 TRILLION dollars of mortgage debt with ADIs. Around 1/3 of that debt is for investors.

More than half that debt was taken on in the last 13 years. 100% increase in mortgage debt that happens at the same time as house prices do a near vertical price increase. Seems owner occupiers and investors have decided to consume far more housing than is good for us.

High house prices, and land prices in general, destroy productivity, make it very difficult to compete against imports, and leaves the economy vulnerable to shocks.

you keep mentioning "after" inflation, as if the a neg geared properties income needs to outpace inflation to become positively geared, when inflation actually increases the rental yield while the repayments to the bank stay the same. Also Inflation is one of the reasons property investment is preferred to cash, as inflation decreases the value of cash, your property investment will maintain its value and the income will increase with inflation, so you position is maintained.

The current situation is we have a low inflation environment, so inflation is not going to erode your debt away terribly quickly like it did pre 90s. The current situation is wage growth in most industries is stagnant, so rental growth is also stagnant, as can be seen last year. Combined with the fact 3/4 of housing stock has at least 1 spare bedroom there's plenty of excess capacity out there to keep rental growth stagnant for years to come as people accept they have to to get someone to help pay the rent. I can see it in my suburb. Properties that would have never had a for lease sign in front of them now seem to take weeks to lease, all with a gross house rental yield of 3.8%, yet house price inflation is rising faster than rental growth. How long can house PE ratios keep on getting worse? The capital city median rental yield is roughly 4.2%, or a P/E of 23.8. Would you be keen to pay that kind of P/E for a share offering between -0.4% to 0.9% income growth?

You're also assuming property values can't decline. Australian housing can only defy gravity for so long. Either the debt bubble bursts via higher unemployment and falling participation rates in the work force, or a Government has the cajones to fix the constipated land supply issues and bring affordable land back onto the market. Land price inflation has been enormous, whereas the cost to actually construct a house has risen much in line with inflation.

most people will wait till their non deductable debt is cleared though.

Which causes other taxation to be higher than required. For every dollar in reduced taxation from NG means either another dollar in taxation from another source, or a reduction in spending.

no doubt they have been, but so what? Don't you think interest only loans are used in all sorts of businesses, the vast majority of business loans are interest only, the idea

Then can you at least acknowledge that I/O loans allow greater gearing, which also allows greater house price inflation?

 

[Smurf1976]

High house prices, and land prices in general, destroy productivity, make it very difficult to compete against imports, and leaves the economy vulnerable to shocks.

Thinking of politics and mainstream thinking, for about 20 years from the mid-1980s onward there was a lot of talk about "competitiveness", the notion that Australia needed to compete internationally and that this could best be achieved by various reforms aimed at cost reduction.

Now listen to what's being said today. There is little or no mention of cost reduction anywhere outside an individual business or within government itself. Nobody is focusing on reducing costs in the broader Australian economy so as to make the country more competitive, indeed the reverse is largely true.

In the news today there is mention that SA Water could be sold for $13 billion. Now, it makes a profit of $362 million a year and is supposedly able to be sold for $13 billion, representing a yield of 2.8%. I don't think so! Far more likely is that if sold then we'll see an increase in profit (easy since it's a natural monopoly) to around the $1 billion a year mark. That represents effectively a tax (and a privately collected one at that) on every business in SA which uses water or which employs someone who uses water. For practical purposes that's every single business in the area served by mains water who will end up with higher costs and become less competitive as a result.

That is just one example of a broader shift that has taken place in the Australian economic debate. After 20+ years of focusing on being more competitive that is clearly no longer the case. The focus now seems to amount to dog eat dog, a form of capitalism that differs markedly from what happens everywhere else from the US to China. Instead of aiming to make all businesses more competitive, the aim now seems to be to create a very small number of large and highly successful businesses by effectively taxing all other economic activity. Qld gas exports are one, the discussion about SA Water is another.

Housing is much the same. From the perspective of the broader economic competitiveness of Australia, logic would say that cheaper housing and lower wages are better than expensive housing and an inevitable need at some point for a wages boom. But again, we've become focused on making a profit in one area that is a very basic part of economic activity (water, gas, accommodation) at the expense of everything else.

It's not hard to see why practically every business which actually needs to compete and which doesn't have a huge natural advantage in its' favour (eg WA iron ore mines have a natural advantage due to easy accessibility of the ore) is struggling or closing altogether.

I can't see this ending well. How does an economy with little apart from mining, expensive housing and expensive water / gas / electricity and where very few businesses are competitive actually function? I just can't see how that's going to work in the longer term. We already have high costs and we're doing just about everything possible to push them even higher.

 

[CanOz]

Sums it up nicely smurf!

 

[sptrawler]

Yes smurph, it either ends in a bust or a devaluation of the $Aus to about $0.40cU.S, which is as good as a bust. IMO

 

[sydboy007]

In the news today there is mention that SA Water could be sold for $13 billion. Now, it makes a profit of $362 million a year and is supposedly able to be sold for $13 billion, representing a yield of 2.8%. I don't think so! Far more likely is that if sold then we'll see an increase in profit (easy since it's a natural monopoly) to around the $1 billion a year mark. That represents effectively a tax (and a privately collected one at that) on every business in SA which uses water or which employs someone who uses water. For practical purposes that's every single business in the area served by mains water who will end up with higher costs and become less competitive as a result.

It's not hard to see why practically every business which actually needs to compete and which doesn't have a huge natural advantage in its' favour (eg WA iron ore mines have a natural advantage due to easy accessibility of the ore) is struggling or closing altogether.

I can't see this ending well. How does an economy with little apart from mining, expensive housing and expensive water / gas / electricity and where very few businesses are competitive actually function? I just can't see how that's going to work in the longer term. We already have high costs and we're doing just about everything possible to push them even higher.

Considering the land of ultra free capitalism, the USA, doesn't have any privatised airports, and Australia has hocked pretty much all of them and we're now faced with some of the highest fees in the world. Jetstar culled their Darwin hub expansion because the private owners got too greedy.

If a Government owned asset is reasonably efficiently run, provides enough cashflow to maintain and expand as required, then I don't see how selling it to the private sector benefits us. As you say, it just adds a pervasive tax kept by the private sector. Considering the lack of apprentices since most of the state utilities were privatised it's not been good for the economy. We're stuck with some of the highest electricity / gas / water / rent costs in the OECD.

Our restrictive land zoning, urban growth boundaries, extremely slow processes to bring new supply to market all make what should be a relatively cheap input some of the most expensive land there is.

I fear we'll have to have our Greek economic slap down to reset things. Even if by some miracle new land supply comes to market at affordable pricing it will decimate the value of existing stock, which will wipeout a lot of retirement savings and probably cause a banking Armageddon since the gang of 4 and regionals are all really just glorified building societies.

We seem to have chosen economic suicide by doing our best to have the most expensive land in the world. I suppose we'll console ourselves by continually selling existing properties too each other at ever higher prices and feeling like we're rich. Anyone think we can double household debt again over the next 13 years and keep the economy roaring along??

 

[sptrawler]

Considering the land of ultra free capitalism, the USA, doesn't have any privatised airports, and Australia has hocked pretty much all of them and we're now faced with some of the highest fees in the world. Jetstar culled their Darwin hub expansion because the private owners got too greedy.

If a Government owned asset is reasonably efficiently run, provides enough cashflow to maintain and expand as required, then I don't see how selling it to the private sector benefits us. As you say, it just adds a pervasive tax kept by the private sector. Considering the lack of apprentices since most of the state utilities were privatised it's not been good for the economy. We're stuck with some of the highest electricity / gas / water / rent costs in the OECD.

Our restrictive land zoning, urban growth boundaries, extremely slow processes to bring new supply to market all make what should be a relatively cheap input some of the most expensive land there is.

I fear we'll have to have our Greek economic slap down to reset things. Even if by some miracle new land supply comes to market at affordable pricing it will decimate the value of existing stock, which will wipeout a lot of retirement savings and probably cause a banking Armageddon since the gang of 4 and regionals are all really just glorified building societies.

We seem to have chosen economic suicide by doing our best to have the most expensive land in the world. I suppose we'll console ourselves by continually selling existing properties too each other at ever higher prices and feeling like we're rich. Anyone think we can double household debt again over the next 13 years and keep the economy roaring along??

All you have to figure out, is how they are going to sort it out.
From my experience they are three steps ahead of us, if you can work it out, there is money to be made.

 

[Smurf1976]

It's hard to see any real solutions to this one.

Once you've sold the water pipes, dams, pump stations and so on (SA Water in this example) to someone and given them what amounts to a privately owned right to tax consumers then they aren't going to hand it back without one hell of a fight that's for sure. Same goes for airports, power and so on.

It says rather a lot that an old power station that was decommissioned in New Zealand was subsequently shipped to Victoria and reassembled. The equipment dates from the 1960's and is an outright fuel guzzler. Much the same happened in SA, although theirs was cobbled together from various old plants from several countries and all put together in SA. A nice "new" power plant that's already rusty - says it all really. It's a fuel guzzler as is the one in Vic and that's why nobody else wants it.

As a country, I just don't see how it's going to all work. Expensive real estate, high wages, installing machinery that's obsolete, private "taxation" and so on. It's all making Australia an extremely uncompetitive place in which to do business.

 

[burglar]

... Much the same happened in SA ...

Which plant is that?

 

[sptrawler]

It's hard to see any real solutions to this one.

Once you've sold the water pipes, dams, pump stations and so on (SA Water in this example) to someone and given them what amounts to a privately owned right to tax consumers then they aren't going to hand it back without one hell of a fight that's for sure. Same goes for airports, power and so on.

It says rather a lot that an old power station that was decommissioned in New Zealand was subsequently shipped to Victoria and reassembled. The equipment dates from the 1960's and is an outright fuel guzzler. Much the same happened in SA, although theirs was cobbled together from various old plants from several countries and all put together in SA. A nice "new" power plant that's already rusty - says it all really. It's a fuel guzzler as is the one in Vic and that's why nobody else wants it.

As a country, I just don't see how it's going to all work. Expensive real estate, high wages, installing machinery that's obsolete, private "taxation" and so on. It's all making Australia an extremely uncompetitive place in which to do business.

Well if the state governments sell off all their infrastructure, they then only provide an administrative function.
If then they standardise the laws throughout Australia(which makes sense), then the function of the State Government can be carried out by an administrative commitee.
We then become a Country run by one Government, instead of a Federation.
That should lead to better utilization of our own resources, rather than as you say shipping a power station from New Zealand. We probably had one here that could have been relocated.
As for housing, the government has a multitude of things it can do, the reserve bank has limited tools.
High wages are relative, at $1U.S to $1 Aus, that's a high wage because our minimum wage is twice theirs.
At $1 Aus to $0.50c our minimum wage is the same as theirs, and our houses are worth 50% of what they are now, in relative buying power.
Like I said, if you can guess the end game, there is money to be made.
Simplistic, but it always scares me when polticians give themselves a 40% payrise, it tells me they know something I don't.lol

 

[Uncle Festivus]

We seem to have chosen economic suicide by doing our best to have the most expensive land in the world. I suppose we'll console ourselves by continually selling existing properties too each other at ever higher prices and feeling like we're rich. Anyone think we can double household debt again over the next 13 years and keep the economy roaring along??

Actually we've already moved past that point of flipping to each other - it's all about the Chinese appetite to 'diversify' to a 'safe' country. From what I can tell, it's pretty much exclusively Chinese buyers, particularly new developments, in the big capitals. Throw in some stupid government incentives/grants for foreign buyers and the usual NG farce for the locals and we have the perfect storm brewing.....

 

[Bill M]

It says rather a lot that an old power station that was decommissioned in New Zealand was subsequently shipped to Victoria and reassembled. The equipment dates from the 1960's and is an outright fuel guzzler. Much the same happened in SA, although theirs was cobbled together from various old plants from several countries and all put together in SA. A nice "new" power plant that's already rusty - says it all really. It's a fuel guzzler as is the one in Vic and that's why nobody else wants it.

Bit off topic but we got one on the Central Coast ready to go with plenty of coal nearby and sitting there doing nothing. More info following:

---
Delta Electricity announced via media statement on the 3rd of July 2012 the closure of Munmorah power station after 45 years of operation due to decreasing energy demand. Units 3 & 4 had been maintained on standby but have not been in production since August 2010.

http://en.wikipedia.org/wiki/Munmorah_Power_Station
---

 

[Bill M]

Actually we've already moved past that point of flipping to each other - it's all about the Chinese appetite to 'diversify' to a 'safe' country. From what I can tell, it's pretty much exclusively Chinese buyers, particularly new developments, in the big capitals. Throw in some stupid government incentives/grants for foreign buyers and the usual NG farce for the locals and we have the perfect storm brewing.....

The Sydneyites are coming up to the Central Coast in droves, selling their properties there and buying one for half the price up here and pocketing the difference. I think this will go on a bit longer yet, I might put my IP up for sale towards the end of the year who knows. I can tell you everything that comes on to the market here is gone within 2 weeks at firm prices.

 

[Smurf1976]

Which plant is that?

Hallett. It's a collection of 12 old gas turbines from several countries all relocated to SA and assembled into the one plant. It works but suffice to say we've bought what someone else didn't want due to being too old and inefficient.

In the past, we sold our old stuff to Third World countries who couldn't afford the cost of buying new. We got new and efficient, they at least got something which was better than nothing since they couldn't afford anything else. Now we're the ones buying the old equipment which says rather a lot.

My point is really about the principle rather than power or water per se. We're doing rather a lot of things that ensure we remain a high cost country in which to do business.

In terms of property prices, I see the relevance as simply the broader economic situation. Practically every business in the country is becoming uncompetitive and that can't end well.

 

[beachlife]

I think you are confusing business owners with business managers, shareholders are definitely part owners of the underlying businesses in the companies they own shares in. Shareholders own the businesses, management is employed by the shareholders to run the businesses.

If you don't think the bhp shareholders own bhp's businesses assets, who does?

A business owner has control over their business. I'm sure you own shares in a bank. That does not make you an owner. I would like to see you try and call a management meeting so you can instruct the managers that you supposedly employ. I would like to see you remove one of your assets from a branch. Go into one and ask them to give you a calculator - its your asset right?

As a shareholder you are not a business owner, you are a shareholder with limited entitlements. The assets are owned by the company which is a legal entity in its own right.

 

[DB008]

Stakeholder -

Stakeholder may refer to:
Stakeholder (corporate), an accountant, group, organization, member or system who affects or can be affected by an organization's actions.

Stakeholder, an entity that can be affected by the results of that in which they are said to be stakeholders, i.e., that in which they have a stake.

Project stakeholder, a person, group or organization with an interest in a project

Stakeholder theory, a theory that identifies and models the groups which are stakeholders of a corporation or project

Stakeholder analysis, the process of identifying those affected by a project or event

Stakeholder (law), a third party who temporarily holds money or property while its owner is still being determined

 

[McLovin]

Considering the land of ultra free capitalism, the USA, doesn't have any privatised airports, and Australia has hocked pretty much all of them and we're now faced with some of the highest fees in the world. Jetstar culled their Darwin hub expansion because the private owners got too greedy.

There are reasons for that. The two biggies are that unlike most countries, US airports are owned, in the main, by municipalities and cities, not the national government. The second one is because of the first, airlines can exert a lot of influence over airport management and decision making.

 

[sptrawler]

Well looking at the 20 year currency exchange rate charts, it looks as though we only need a recession and we're back on track.lol

http://www.exfin.com/historical-forex-aud

 

[sydboy007]

Seems the financial sector has come up with a way to continue the housing price boom.

40 year home loans. That's right. Pay off your home loan just about at retirement, and hey, if you haven't there's always that tax free lump sum you can use to get debt free then hold y hand out and expect a full pension from the Government.

7 lenders with 17 deals on 40 year mortgages. Will we catch up to the Japanese and have intergenerational loans next?

 

[sydboy007]

seems like the apartment sector is using the same tricks as the chocolate and breakfast cereal manufacturers. Keep the price the same, just make things smaller.

The Age reported the median size of a new one-bedder in inner Melbourne has dropped from 52 to 44 square metres in five years. The smallest apartment was 11.2 square metres plus a closet bathroom at 268 Flinders Street.

http://theage.domain.com.au/small-apartments-big-headaches-20140216-32tlb.html

No more chicken coops, we'll be packed in like sardines shortly.