The future of Australian property prices

[UBIQUITOUS]

With the 'Ken Henry' tax review a week or so away, I am surprised that there is no discussion here on something which could have the largest impact on the RE market since negative gearing was introduced.

Any thoughts on what it will include in relation to RE?

 

[Beej]

What you should learn from those countries is why their property market collapsed and since they all collapsed recently it shouldn't be ignored... but hey, this time it's different, right?

Well for a start, Canada has not really had a property collapse. The UK had one from about 2007 but has since recovered more than half of that correction. The US is down about 20-30%, but we all know why (sub-prime debacle, NINJA loans, non recourse loans, over-building, deep recession = unemployment at 10% etc etc). Japan has had a long slow decline on the back of a systemic banking crisis still not fully dealt with from a decade ago, plus an ageing and declining population, and despite their "crash" cities like Tokyo still have the most expensive real estate on a per square metre basis than just about anywhere else on the planet!

Regardless of all that, so what? All those markets have had major corrections, and massive booms in the past and ours hasn't. Likewise our market has had it's own booms and busts in the past (in different regions even at different times as well), without any correlated boom or bust on the markets of those other countries either.

The only ones arguing that "it's different this time" are those (like you) who expect that after 50 years+ of essentially non-correlated real estate markets, that suddenly the residential property markets in each country have "gone global" and should all track each other, regardless of local market factors and fundamentals??

Me, I don't think it is/will be different this time, in fact I think it will be the same as "every other time" where the UK or the US may crash or boom, and we may not, or vice versa. I watch the local factors to understand what has happened and is likely to happen around here. The facts are that after a small decline of < 5% across the board in 2008, Australian real estate prices have risen more than 13.6% on average in 2009 (ABS figures), and still rising by all accounts, with Melbourne and Sydney market having done especially well on the back of large population growth, pent up demand and very limited supply of stock for sale in sought after locations, and not enough new building. I don't see those fundamentals changing much any-time soon.

With the 'Ken Henry' tax review a week or so away, I am surprised that there is no discussion here on something which could have the largest impact on the RE market since negative gearing was introduced.

Any thoughts on what it will include in relation to RE?

I expect no changes to NG. The thing with NG is there is actually no special legislation that allows it for property, it is really a general tax mechanism available for anyone who incurs costs, including interest costs, related to ANY income producing investment. To remove it, you would have to remove it from everything, and I don't see that happening. The actual impact of NG is more likely that it keeps rental yields (and therefore rents) lower, rather than pushing property prices higher IMO anyway. This was proven pretty well in the 80s when it was last tinkered with by Hawke/Keating.

Cheers,

Beej

 

[So_Cynical]

I expect no changes to NG. The thing with NG is there is actually no special legislation that allows it for property, it is really a general tax mechanism available for anyone who incurs costs, including interest costs, related to ANY income producing investment. To remove it, you would have to remove it from everything, and I don't see that happening. The actual impact of NG is more likely that it keeps rental yields (and therefore rents) lower, rather than pushing property prices higher IMO anyway. This was proven pretty well in the 80s when it was last tinkered with by Hawke/Keating.

Cheers,

Beej

You cant have genuine tax reform and leave NG alone...and the Henry review was all about reform...hows the saying go, don't have an inquiry unless you already know the answers.

 

[satanoperca]

Hi Beej,

While I agree with the majority of your statement I would like to highlight the following to the discussion.

Japan, while it has an aging population, they also have a very limited supply of buildable land and incredible low interest rates. This has had not affect on the decline in property prices.

The UK, while having regained some of the losses the latest stats show that property prices are declining again. They also have very limited land for new buildings and very favourable IR's. This has been confirmed by friends who are full time property investors in the UK.

While property might not be connected globally, finance/credit/debt is certaintly connected globally with our four pillar of banking borrowing on average 50% of the funding overseas. Credit and availability of it does determine price increases.

The small decline in property prices in 2008 was quickly corrected with the govnuts using taxpayers money to prop up the market, FHBG and the RBA slashing interest rates to historical lows to stop the country falling into recession. How much IR's impact on prices will be determined over the next year as the RBA pushes IR's back to normal levels and possibly above as the mining sector thrives. Also adding to increases is the fact that KRUDD and his team have sold out our land to any cashed up foreigner. This I see as treason and I fail to understand why my grandfather and Uncle went to war to only find out that the people they fought can buy the land they were defending.

As for statement not enough new buildings, you will find that the number of new starts over the last 12months has been higher than the past and will add to supply. A change in public sentiment can quickly have the pollies changing immigrations levels.

As for prices continuing to rise, current evidence shows this is not the case with a small and I do say small decline in prices in Melbourne over the last three months. Only time will tell in the coming months if this is just a blimp or a change in the trend.

On the case of NG, I think it is fine to have NG on property but any loss should only be able to be offset against any profit in the same asset class as is found in shares, not against other incomes. Any loss should be able to be carried forward for several years. Please correct me if I'm wrong.

The only point I do question is the belief/assumption that if NG was removed it would lead to a rental shortage and rental price increases. I do ask for some supporting evidence to this assumption, rather than a short period in time during the Keating era when the rules changed. I look at the USA that has no NG and an oversupply of property. I do find it interesting that the countries with NG on property have had no real corrections in property prices during and after the GFC, this includes Canada.

If NG was removed wouldn't it lead to lower property prices and affordability, allowing more people to own and less pressure on rental demand.
It might also force people to invest in product assets. Sorry but buying an established IP is hardly productive.

The one thing that has pricked up my ears is a very recent interview with the CEO of NAB who is concerned that lending is to heavily weighted in the RE sector, on average 50% and not enough lending to business to develop, grow and employ. Without business growth how are people to pay mortgagees?

Cheers

 

[MACCA350]

I expect no changes to NG. The thing with NG is there is actually no special legislation that allows it for property, it is really a general tax mechanism available for anyone who incurs costs, including interest costs, related to ANY income producing investment. To remove it, you would have to remove it from everything, and I don't see that happening. The actual impact of NG is more likely that it keeps rental yields (and therefore rents) lower, rather than pushing property prices higher IMO anyway. This was proven pretty well in the 80s when it was last tinkered with by Hawke/Keating.

That's the thing, they're investors not traders.

Each are treated differently with regard to the stock market and one needs to decide which way they would like to be taxed.

If you trade frequently you are better off being seen by the ATO as a TRADER whereby you relinquish the ability to claim the 50% discount on Capital Gains of stocks held for longer than 12 months for the benefit of offsetting losses against income(etc).

If you trade less frequently and prefer to hold stocks over 12 months you are better off being seen by the ATO as an INVESTOR whereby you relinquish the ability to offset losses against income(etc) for the benefit of claiming the 50% discount on Capital Gains held for longer than 12 months.


As I see it Property INVESTORS are having it both ways

What would happen if the stock market tax rules applied equally to the property market?

cheers

Disclaimer: None of this post should be taken as advice, seek financial/tax advisers if needed

 

[MR.]

Did you a favour

Top effort.... thanks.... "House volumes dictate interest rates"


Satanoperca, great post.

...........On the case of NG, I think it is fine to have NG on property but any loss should only be able to be offset against any profit in the same asset class as is found in shares, not against other incomes. Any loss should be able to be carried forward for several years. Please correct me if I'm wrong.

IMO not wrong, however Beej might not agree with your conclusion though!

Also if you have a loss within a single company in different divisions often the losses from one division can't be offset against another for tax. It is the same with training. If business training is different to the usual business, that training can only be claimed once an income is made from that new venture. The loss from training is carried forward. I don't see why NG of investment properties is any different and should be changed!
Only 1 out of 10 NG properties are new dwellings, so what's the point? Surely not to displace existing owners?

 

[drsmith]

If NG for residential property was removed for all investors (existing and new investors), that would be like declairing prohibition on the punchbowl. There would be a rush for the exit.

If it was removed for new investors this would be like restricting new entrants to water. Not an attactive proposition particularly post entry charge (stamp duty). This may also lead to a rush for the exit.

 

[MACCA350]

If NG for residential property was removed for all investors (existing and new investors), that would be like declairing prohibition on the punchbowl. There would be a rush for the exit.

If it was removed for new investors this would be like restricting new entrants to water. Not an attactive proposition particularly post entry charge (stamp duty). This may also lead to a rush for the exit.

What about my suggestion and treating the property market like the share market.

It would allow those who turnover quicker(and even those who don't as they have the choice) to claim losses against income(etc).

While those who hold long term can do the above knowing they have to pay CGT on all their capital gains, or they can decide to not claim their losses against income(etc, but can still carry it forward for 3 years) and have the 50% CGT reduction once they sell.

Seems pretty fair to me, you either claim the loss OR you get a discount of CGT but NOT both!!

Would certainly put some brakes on runaway pricing.

A Trader can claim losses against income(etc), but will pay 100% CGT even if they sell after 1 year

An Investor cannot claim losses against income(can against CG and can carry the loss forward 3 years) but can get the 50% CGT reduction after 1 year.

It's a trade off. Simply it means that someone looking to buy property can have the choice. Either they accept that they have to pay 100% CGT if they wish to claim losses against income OR they accept the loss can only be carried forward 3 years and can only be put against income or CG on the property but they get the bonus of a 50% CGT discount

What impact would this have?
I'd say pretty much everyone who is negatively gearing will decide to be a Trader to offset losses against income, in which case pay more CGT.
Those who are positively geared will decide to be an Investor as they don't need to offset against income, in which case they get a discount on CGT.

Surely it's a good thing, it's not a complete abolishing, but reduces the tax payer funded speculation. It allows negative gearing for those who need it just with reduced capital gains incentive, but it incentives positive gearing.
All this in a way that reduces the burden on the taxpayers.

cheers

 

[MR.]

If NG for residential property was removed for all investors (existing and new investors), that would be like declairing prohibition on the punchbowl. There would be a rush for the exit.

If it was removed for new investors this would be like restricting new entrants to water. Not an attactive proposition particularly post entry charge (stamp duty). This may also lead to a rush for the exit.

I/we have no doubt the outcome of the examples above. Those changes surely wouldn't be change for those reasons. Or thirdly, a simple clause of No NG for existing newly purchased properties from a date. Will have its implications no doubt as well but would be the better of the three.

 

[robots]

Hi Beej,

While I agree with the majority of your statement I would like to highlight the following to the discussion.

Japan, while it has an aging population, they also have a very limited supply of buildable land and incredible low interest rates. This has had not affect on the decline in property prices.

The UK, while having regained some of the losses the latest stats show that property prices are declining again. They also have very limited land for new buildings and very favourable IR's. This has been confirmed by friends who are full time property investors in the UK.

While property might not be connected globally, finance/credit/debt is certaintly connected globally with our four pillar of banking borrowing on average 50% of the funding overseas. Credit and availability of it does determine price increases.
Cheers

hello,

if Aus has the same situations as Japan and UK, then whats keeping it all going well Satanoperca?

its whats out the front door, the sun the sand the surf, docklands, southbank, the dandenongs, Uluru, gold coast, great ocean road, collins st, little collins street, frankston, dandenong and all the rest

paradise and something no other country comes close to offering

just people grabbing a part of it, and if some are able to AFFORD to get more then good luck to them

thankyou
robots

 

[satanoperca]

hello,

if Aus has the same situations as Japan and UK, then whats keeping it all going well Satanoperca?

Where did I state that we have the same situations as Japan and the UK. I was just highlighting the aspect of their markets which could influence prices, like land shortages.

It seems ironic that Australia has plenty of land but rising prices and the UK and Japan have declining prices and a shortage of land.

The only thing connecting us is the global economy and finance.


Cheers

 

[robots]

Where did I state the we have the same situations as Japan and the UK. I was just highlighting the aspect of there markets which could influence prices, like land shortages.

It seems ironic that Australia has plenty of land but rising prices and the UK and Japan have declining prices and a shortage of land.

Cheers

hello,

we dont have plenty of land, we have exactly the same circumstances as UK and Japan (and every other city in the world)

thankyou
robots

 

[Beej]

Hi Beej,

While I agree with the majority of your statement I would like to highlight the following to the discussion.

Good morning to all!

Several valid points made. I'll respond to the parts I have something to add to or disagree with:

While property might not be connected globally, finance/credit/debt is certaintly connected globally with our four pillar of banking borrowing on average 50% of the funding overseas. Credit and availability of it does determine price increases.

True to a point. I would add that the actual o/s funding proportion for ALL Australian bank lending is actually around 25%, and that mortgage lending constitutes about 2/3 of total loans outstanding. The figures can be derived from the APRA website here (http://www.apra.gov.au/Statistics/Monthly-Banking-Statistics.cfm) quite easily. Also an article the cites similar figures here: http://www.bankers.asn.au/default.aspx?ArticleID=1366

The be clear though, the financial "link" is purely related to the cost of money from o/s, which will be an input to the cost of credit (interest rates) here. It is a factor yes, but only one of many more fundamental factors.

[snip Foreign property buyer stuff]. This I see as treason and I fail to understand why my grandfather and Uncle went to war to only find out that the people they fought can buy the land they were defending.

The treason call is a more than a little bit extreme!! For a start your (and my) grand-fathers went to war for far more dubious and ambiguous reasons than you cite.....especially in the case of WWI. Also I don't recall us being at war with the Chinese in WWI or WWII? Or the UK? Or the US? Or India? Are the Germans in fact buying up all our land at the moment?? Regardless, not just ANY cashed up foreigner can buy established property here - they have to at least have a temporary visa of 12 months duration or more (like a 457 visa etc), or be a permanent resident, and in those cases have to be buying to live in it. In fact these people could always buy property - they just needed FIRB approval, and apparently in 95% of cases always got it in the past anyway.

There is a lot of hype about this issue at the moment - I personally think the impact is being over-played by people with other agenda's, but will wait until the data becomes clearer before making a final judgement (there's some sort enquiry under-way right now I believe).

As for prices continuing to rise, current evidence shows this is not the case with a small and I do say small decline in prices in Melbourne over the last three months. Only time will tell in the coming months if this is just a blimp or a change in the trend.

True - I have said many times I expect the market to cool significantly this year for several reasons, including rising interest rates, but it will look more like 1992/93 than 1930/31 .

On the case of NG, I think it is fine to have NG on property but any loss should only be able to be offset against any profit in the same asset class as is found in shares, not against other incomes. Any loss should be able to be carried forward for several years. Please correct me if I'm wrong.

That is actually not correct, and several posters here seem to have the same mis-undertsanding. You CAN negative gear the net "operational" costs (eg interest costs minus dividends) of a leveraged share portfolio against income from other sources, just as you can with property. I think you are thinking of CAPITAL losses, which can only be regained via offset against future capital gains (if you are an investor) vs a trader who can offset capital losses as an operational loss like a business can.

If NG was removed wouldn't it lead to lower property prices and affordability, allowing more people to own and less pressure on rental demand.
It might also force people to invest in product assets. Sorry but buying an established IP is hardly productive.

I don't think so. I think you would see rising rents as a result. Perhaps in the long term lower relative prices at the low end for property but there would be a lot of pain in between.

Without business growth how are people to pay mortgagees?

Businesses have other sources of capital, including the share market - they made great use of that during the GFC, and the banks didn't want to lend to business then and they were calling in, not rolling over loans, leaving business with no choice but to go elsewhere for capital, which they did. I think that has resulted in a bit of a distortion on the lending stats now compared to "normal". Things will move back to "normal" over the next few years.

That's the thing, they're investors not traders.
As I see it Property INVESTORS are having it both ways

What would happen if the stock market tax rules applied equally to the property market?

The tax rules are applied equally, and property investors to not get it both ways - see my above point on this topic. i think there are several mis-understandings around.

Cheers,

Beej

 

[robots]

hello,

awesome work Beej,

and this:

http://www.theage.com.au/business/a...lobal-forecast-20100421-t024.html?autostart=1

the leaders again

and so many americans coming to our shores or hooking up with aussies, just fantastic, i guess grabbing a piece of the action

thankyou
robots

 

[UBIQUITOUS]

hello,

awesome work Beej,

and this:

http://www.theage.com.au/business/a...lobal-forecast-20100421-t024.html?autostart=1

the leaders again

and so many americans coming to our shores or hooking up with aussies, just fantastic, i guess grabbing a piece of the action

thankyou
robots

Thanks Robots for the great news. The IMF are just confirming what we all know already: Interest rates are going to be jacked up BIG TIME

Who in their right mind would be buying a unit in St Kilda right now?

 

[robots]

hello,

those who can afford it, they do exist

many on good dollars and they can pay to get in, simple

or they can pay to rent it, superb

or might just leave it empty (probably best solution)

thankyou
robots

 

[satanoperca]

hello,

those who can afford it, they do exist

many on good dollars and they can pay to get in, simple

This is very true, still lots of money out there and lots of people on good incomes.

Robots would have no problem at the moment selling his St Kilda apartment for a tidy profit. Demand is still high.

Someone said to me the other day, how would you invest $10M?

Regardless of IR's, NG and everything else, a proportion of it would go into realestate.

Cheers

 

[UBIQUITOUS]

This is very true, still lots of money out there and lots of people on good incomes.

Robots would have no problem at the moment selling his St Kilda apartment for a tidy profit. Demand is still high.

Someone said to me the other day, how would you invest $10M?

Regardless of IR's, NG and everything else, a proportion of it would go into realestate.

Cheers

I agree, that a cashed up person should hold some property. But what if you had less than $100k like the majority of home buyers? Would you borrow the other $400k on an uptrend in interest rates?

 

[satanoperca]

I agree, that a cashed up person should hold some property. But what if you had less than $100k like the majority of home buyers? Would you borrow the other $400k on an uptrend in interest rates?

No, I would wait until interest rates looked like peaking, at a guess between 8-10%. If they go higher than 10%, I dont think the economic outlook would be pretty and would be more concerned with keeping my income/job.

Cheers

 

[Mofra]

With the 'Ken Henry' tax review a week or so away, I am surprised that there is no discussion here on something which could have the largest impact on the RE market since negative gearing was introduced.

Any thoughts on what it will include in relation to RE?

Realistically it is hard to speculate, because regardless of the recommendations the political realities will prevent some of the recommendations from passing through both houses of parliament without significant amendment.