The future of Australian property prices

[waterbottle]

Why would rents increase if NG was quarantined?

AFAIK, rents are correlated with the renter's income, not with the value of the property or the value of the landlord's debt.

 

[sydboy007]

Do you understand how NG works? Fund what losses? That is WHY you are doing it? It is the taxable income that is being reduced with the hope of being compensated for by a capital gain in the future.

Here is how negative gearing works:

The average loss last year for NG "investors" was $10950. Since averages is all we can deal with and the fact that nearly 3/4 of NG investors earn less than 80K a year I'l work with the rather large 32.5% marginal tax rate.

With NG quarantined you're looking at a reduction in cash flow of $3558 a year or a tad over $68 a week.

Would that be enough to reduce investor demand for property? I'm not sure, but I think it's a good idea to find out. If it doesn't then no harm done and reduces a cost to the budget. If it does, house price growth will moderate due to the reduced demand making it easier for renters to save enough to become FHBs.

With rental properties now on a PE of 28 and limited income growth potential due to low to negative real wages growth, the only reason to buy is the belief that prices will continue to rise at CPI + NG loss + reasonable rate of return each year. maybe foreign investor demand can continue to prop things up, but at 177% of household debt to GDP I don't think there's must juice left in that lemon to squeeze.

So I really hope that the rumours are true and soon NG will be for new housing only and hopefully losses capitalised onto the purchase price rather than being able to reduce unrelated income. It would certainly help tp focus an investor on the merits of the property rather than be mesmerised by the spruikers and NG tax savings.

 

[FxTrader]

Here is an interesting look at the false claims that negative gearing adds to stocks for renters and rumours that its going to be cut in the budget,

http://www.macrobusiness.com.au/2014/04/report-negative-gearing-is-on-the-chopping-block/

The summary in this article has been echoed in this thread many times...

In short, negative gearing is costing the government billions in lost tax revenue, but is doing absolutely nothing to boost supply. It also creates additional demand from tax subsidised investors, placing upward pressure on home prices and locking-out would-be first time buyers.

There is little policy rationale in favour of keeping negative gearing in its current form, whose foregone funds could instead be used to fund schools, hospitals, housing-related infrastructure, or any number of other worthwhile endeavors.

I would be happy to see NG policy modified to promote new housing construction and discourage the churning of established property at ever higher prices to satisfy investor demand. Let just see if the Libs and Hockey have the courage to make meaningful changes to NG policy that are long overdue. They have set the tone to prepare the electorate for significant tax policy changes.

 

[trainspotter]

Why would rents increase if NG was quarantined?

AFAIK, rents are correlated with the renter's income, not with the value of the property or the value of the landlord's debt.

Rents would increase as the "subsidy" of the NG was tken away from the equation so the investor would increase rents to cover the determined "loss".

 

[banco]

Rents would increase as the "subsidy" of the NG was tken away from the equation so the investor would increase rents to cover the determined "loss".

I'm not sure this would be the case. Think about it: you had an asset that was tax advantaged in one way and now it's not. Either its yield would have to increase to compensate or its price would have to fall to reflect the fact that it's now less attractive as an investment. I don't see why it wouldn't be the latter. Especially since when buying houses after the change buyers will be aware of the changed tax situation and will take that into account when deciding what to pay.

 

[trainspotter]

The average loss last year for NG "investors" was $10950. Since averages is all we can deal with and the fact that nearly 3/4 of NG investors earn less than 80K a year I'l work with the rather large 32.5% marginal tax rate.

With NG quarantined you're looking at a reduction in cash flow of $3558 a year or a tad over $68 a week.

Would that be enough to reduce investor demand for property? I'm not sure, but I think it's a good idea to find out. If it doesn't then no harm done and reduces a cost to the budget. If it does, house price growth will moderate due to the reduced demand making it easier for renters to save enough to become FHBs.

$68 per week or $10 a day is not going to stop an investor at all. Bump the rent by half of this loss and the investor would not even blink but rents would certainly go up across the board. Simple maths and supply and demand.

Rents have now gone up making it harder to save. Prices plateau for a period of 6 months while the markets sorts itself out and shrugs off the negative effect of no tax loss applicable. "Product" changes to construction due to the tax deductibilty of depreciation during the course of construction plus the interest component blah de blah blah.

Nothing changes IMO

 

[trainspotter]

I'm not sure this would be the case. Think about it: you had an asset that was tax advantaged in one way and now it's not. Either its yield would have to increase to compensate or its price would have to fall to reflect the fact that it's now less attractive as an investment. I don't see why it wouldn't be the latter. Especially since when buying houses after the change buyers will be aware of the changed tax situation and will take that into account when deciding what to pay.

You've answered your own question (my bolds) The "attractiveness" of the investment is the perennial hope of capital gain at the end of the day

 

[banco]

You've answered your own question (my bolds) The "attractiveness" of the investment is the perennial hope of capital gain at the end of the day

That assumes that property investors have the capacity to raise the rent to whatever they want to.

 

[trainspotter]

That assumes that property investors have the capacity to raise the rent to whatever they want to.

No assumption necessary. The capacity of the person renting to pay and or cover the increase is the key.

 

[Wysiwyg]

I have witnessed over the last 5 years demand outstrip supply in which rents increased to way above average. The influx was due to construction work and workers that were paid in accordance with extra hours worked. In other words high income workers.

So not only did demand outstrip supply, the investors raised rents to what the influx were able to afford. The under supply of rental properties saw a large number of units/houses built at the peak but now the demand has dropped away considerably with construction tapering off. Rents have come off considerably as investors jockey for renters. Many investors caught buying at the peak to capture the high yields.

Classic boom/bust cycle.

 

[sydboy007]

$68 per week or $10 a day is not going to stop an investor at all. Bump the rent by half of this loss and the investor would not even blink but rents would certainly go up across the board. Simple maths and supply and demand.

Rents have now gone up making it harder to save. Prices plateau for a period of 6 months while the markets sorts itself out and shrugs off the negative effect of no tax loss applicable. "Product" changes to construction due to the tax deductibilty of depreciation during the course of construction plus the interest component blah de blah blah.

Nothing changes IMO

Everything changes. Rents can only be set at what the market can afford. If rents go to high then I'd not be surprised to see younger peopl emove back with their parents, spare bedrooms used up. If rents go up faster than income growth something has to give.

Restrictions on NG will reduce investor demand. Less demand means lower house price growth, maybe even some falls. Cheaper housing allows cheaper rents.

As for missing out on over $3.5K a year, I'd say that would make the investment property calculations look a bit different. Certainly makes it harder for house price inflation to work its magic.

 

[banco]

No assumption necessary. The capacity of the person renting to pay and or cover the increase is the key.

Of course it's an assumption. You are assuming the rental market is tight enough and other economic conditions are such that landlords can increase the rent to make up for the loss of negative gearing. If the price of oil goes up the airlines can try and pass on 100% of the cost to passengers but in a competitive market if some of the airlines refuse to pass it on good luck to those that do. The same would apply to landlords who put up the rent while others in the neighborhood hold rent steady.

If it was so easy to pass the cost on to renters why do the used car salesmen that run the various real estate industry groups get so agitated at the prospect of negative gearing being curtailed? It's not like they give a **** about renters. It's because they are afraid the effect would be a fall in prices.

 

[CanOz]

From Zerohedge in regards to the US housing market...California has caught up to Sydney and Melbourne...

Hot Air Hisses Out Of Housing Bubble 2.0: Even Two Middle-Class Incomes Aren’t Enough Anymore To Buy A Median Home

“Prices have gotten to the stage where we cannot buy a house, renovate it, rent it, and still make a reasonable return,” explained Peter Rose, a spokesman for Blackstone Group, a private equity giant whose real-estate division, Invitation Homes, has grown in two short years from nothing to the largest landlord in the country with 41,000 rental single-family houses to is name. “There was a moment in time where it made sense,” Rose said.

Not anymore. Blackstone already cut its purchases in California by 90% last year. It wasn’t alone. Another mega-buyer with access to nearly free money, Colony Capital, is doing the same thing. Oaktree Capital is trying to dump its portfolio of 500 homes before prices head south.

“Private capital made a lot of money early, and now they’re starting to pull back,” Dave Bragg, head of Residential Research at Green Street Advisors, told the LA Times. “Home prices are up significantly, and houses are definitely less attractive.”

I guess they don't have a property investor mentality in the US, thats why PE was able to go in and do what they've done...?

Some similarities but some differences to Australia's property market...Population growth, average wage comes to mind...

Its amazing, for all the meddling in the markets the Fed still can't understand that THEY cause bubbles. You give out enough Dosh to the Wall Street nuts and they'll find a way to make their coin at the expense of Joe Average, who'll get stuck holding the bag, again....

 

[FxTrader]

I guess they don't have a property investor mentality in the US, thats why PE was able to go in and do what they've done...?

There is no NG subsidy for investment property in the U.S. Only the mortgage interest on PPOR is tax deductible. Cashed up entities have stepped into the gutted real estate markets there and capitalised on the easy credit and the low interest rate environment but the opportunities to make fast money are fading quickly. California real estate has always been expensive, especially the SF Bay area.

Its amazing, for all the meddling in the markets the Fed still can't understand that THEY cause bubbles. You give out enough Dosh to the Wall Street nuts and they'll find a way to make their coin at the expense of Joe Average, who'll get stuck holding the bag, again....

Yes indeed, the Fed has caused asset bubbles to reinflate across many asset classes with an explosion of speculative debt washing through markets. It's hard to foresee how this money creation experiment will not end badly for the highly leveraged or indebted.

 

[CanOz]

Its not going to be pretty FXTrader...

Bear ETF anyone? Its not quite showing any bullish signs though, other than the volume at the historical lows recently...

DRV, Direxion Real Estate Bear 3x ETF

 

[kid hustlr]

Rents can only be set at what the market can afford.

Bolded for effect.

Can we revisit this, I've heard the standard line 'oh well if they cut NG then landlords will just increase rents'. My view is that of the above. You can't just raise rents, I don't think it works like that, unless I'm missing something?

 

[Macro Polo]

Bolded for effect.

Can we revisit this, I've heard the standard line 'oh well if they cut NG then landlords will just increase rents'. My view is that of the above. You can't just raise rents, I don't think it works like that, unless I'm missing something?

You aren't missing anything - property is sort of like fixed income (or any asset really) in that, if you need to be compensated with higher yield for holding that asset, the variable that moves is price.

I.E. If there is credit risk for an issuer of fixed income, price will fall to raise the yield - but this only benefits new investors. However, issuers don't suddenly start giving you larger coupon payments to increase your yield - that is backwards. Those saying that landlords will increase rents are dreaming - price is the variable that moved out of line with incomes, and price will be the variable that falls back in to line to allow for a decent yield for new owners/investors.

If NG gets taken away, I would expect landlords will take whatever they can get to make sure they have a tenant to help pay the interest.

 

[sydboy007]

You aren't missing anything - property is sort of like fixed income (or any asset really) in that, if you need to be compensated with higher yield for holding that asset, the variable that moves is price.

I.E. If there is credit risk for an issuer of fixed income, price will fall to raise the yield - but this only benefits new investors. However, issuers don't suddenly start giving you larger coupon payments to increase your yield - that is backwards. Those saying that landlords will increase rents are dreaming - price is the variable that moved out of line with incomes, and price will be the variable that falls back in to line to allow for a decent yield for new owners/investors.

If NG gets taken away, I would expect landlords will take whatever they can get to make sure they have a tenant to help pay the interest.

Every time I hear removing NG will cause landlords to sell and the rental market to dry up I laugh. Who do the land lords sell to? Other Investors? Renters? Unless they're selling to 1800-I_SAW_AN-ASIAN-AT-AN-AUCTION and they're leaving the property empty I don't see how quarantining NG to the income of the asset would have much immediate impact on the rental market. Going further and also limiting it to newly formed assets would be even better. There's much cheaper ways to provide low cost housing if that is what we as a society decide to do.

Now probably there will be less demand for investment properties in the future, but with the lower demand prices should moderate allowing FHBs back into the market and they wont be renters any more.

 

[Vixs]

The only way to get spending levels back to what they were to fuel growth (not saying that's a good idea, but hey, this is the economic system dependant on perpetual growth) we need HOME prices to increase and provide the wealth effect.

Investment property prices affect the investors, but for everyday people the biggest wealth effect boost they could get is from increasing home values.

Disregarding the current conversation on the possible consequences of the removal of negative gearing, many of the current renters WOULD like to be owners, and will be one day. There are certainly a lot of people that either are not financially secure enough to own, or are not in a fixed area long enough to warrant it, but many people given the ability to would buy not rent. Only when that happens can they participate in the wealth effect and ramp up their spending and other investing accordingly.

 

[wayneL]

What about the small issue of servicing the debt?