The future of Australian property prices

Dowdy · 22 April 2010

Beej said:
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??

There are so many things affecting house prices but we do live in a global economy and if countries like China falter we'll feel the brunt of it. Australia doesn't live in a bubble, we are connected. It only depends on how major companies invested abroad.

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.

You forget to ask why. Why did house prices rise are a <5% decline?

Because the government handed out more money to FHB, the RBA slashed rates. You said you don't see the fundamentals changing soon but they have already slashed the FHB grant and Stevens said himself that IR will be returning to normal levels.

You should pay more attention to politics then local factors as it's the government who has inflated the bubble and can easily pop with a few changes of regulation

-Bevo- · 22 April 2010

Dowdy said:
There are so many things affecting house prices but we do live in a global economy and if countries like China falter we'll feel the brunt of it. Australia doesn't live in a bubble, we are connected. It only depends on how major companies invested abroad.

On the subject of China anyone catch Marc Faber interview on bloomberg,
He talks about China property and mentions Australia housing.

http://www.bloomberg.com/avp/avp.ht...//media2.bloomberg.com/cache/vmN_XglahCZk.asf

MACCA350 · 22 April 2010

Beej said:
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.

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.

Yep, I see where I tripped up, thanks for pointing that out.

There just seems to be an imbalance somewhere, I mean why would someone purposefully purchase an asset with an expected yearly running loss. We all know it's not about helping out the community with rental housing, but purely the belief they are guaranteed exceptional capital growth that far outweighs the intermediate operational loss.

Sure the same rules apply to shares, I can see that now, but the volatility of the share market means that capital gain is not perceived as guaranteed in the same way as the property market. So the investor is less likely to cop an intermediate loss, and hence I'm assuming this is less of a burden on tax payers.

Surely this significant difference between asset classes should draw differences in the tax implications, especially when one has become such a burden on the tax payer. Maybe the 50% CGT deduction should be scrapped for property investment, this would reduce the speculation and reduce the tax burden.

What adverse effects would this cause

cheers

drsmith · 22 April 2010

MACCA350 said:
What about my suggestion and treating the property market like the share market.

For that to be effective different volume thresholds would need to apply to each asset class given shares are far more liquid than property. That would be a serious argument in itself.

I wasn't referring to CGT specifically in my comment on NG but serious reform of property taxes (or investment tax as a whole) obviously requires reviewing all elements and not just NG or CGT in isolation.

The Howard government in shaving capital taxes by the introduction of the 50% discount did it with an axe rather than a razor. It was poor policy made worse by not having a taper (say, 3 or 5 years) for investors to realise the full value. That obviously wasn't considered sufficiently electorally popular. The blood from the use of ths axe is currently on the faces of those wanting to enter an inflated property market.

To make matters worse, he screwed long term investors with this change by not maintaining CPI indexation as an alternative to claiming the discount. If inflation is over 4.1% pa over 10 years (>2%/20yrs, >8.4%/5yrs), the CGT discount is worth less than than the CPI discount it replaced. The discount was effectively funded by increasing shorter term speculation (more turnover) and higher CGT on longer term investors. Poor economic policy but good politics in that he was able to shout about a big tax cut which was in reality an illusion. That illusion will become a much sharper reality for many investors should inflation rise.

A better economic solution (broadly speaking) would have been to maintain CPI indexation of the cost base but cap the rate of CGT at the corporate tax rate (currently 30%) or similar (an overall internationally competitive rate). This though may have been too costly on the budget so at the same time he could have managed this by limiting (but not necessarily removing) deductions associated with negative gearing.

drsmith · 22 April 2010

Dowdy said:
You should pay more attention to politics then local factors as it's the government who has inflated the bubble and can easily pop with a few changes of regulation

The government stimulus can clearly be seen in the household income graph below.

Not only during the GFC but also during the latter Howard years.

Have we reached the point where governments are now trapped into maintaining the bubble as long as they can ?
The alternative is, well, not electorally ideal amongst other things.

MACCA350 · 22 April 2010

Thanks for the background info DrSmith I wasn't aware there was a CPI indexation back then. Was that also the case for the stock market?

cheers

drsmith · 22 April 2010

MACCA350 said:
Thanks for the background info DrSmith I wasn't aware there was a CPI indexation back then. Was that also the case for the stock market?

cheers

Yes. History of CGT in Australia;

Capital gains tax was introduced in Australia on 20 September 1985, one of a number of tax reforms by the Hawke/Keating government. The tax applies only to assets acquired after that date. Gains (or losses) on earlier assets, called pre-CGT assets are ignored.

The rules introduced initially allowed the cost of assets held for 1 year to be indexed by the consumer price index (CPI) before calculating a gain (calculation of a loss used only the unindexed cost though). This meant the part of a price rise due only to inflation was not taxed.

Also, initially an averaging process was used to calculate the tax on gains. 20% of one's net capital gain was included as income, and the amount of extra tax it caused was multiplied by 5. So instead of a big capital gain pushing the taxpayer into higher tax brackets immediately, the brackets were stretched out, allowing more to be taxed at one's existing marginal rate.

From 20 September 1999 indexing of the cost base was discontinued, and instead the present 50% discount on the plain gain above the cost base was introduced. For assets acquired before that date the taxpayer can choose between indexing (up to the CPI at 30 September 1999) or discount.

Source: Wikipedia

Tysonboss1 · 22 April 2010

CamKawa said:
Some intersting reading.

Rentals showing poor yield

''You can put money in the bank and get 5.5 per cent without any maintenance costs, insurance and repairs.''

When you subtract the 4% that your money/capital has been devalued because of inflation, your 5.5% gain is really only 1.5%. and if you also subtract tax on the interest you will end up breaking even or losing.

See the main benefit of property is that it is naturally hedged against inflation as with most real assets, cash however is not.

mythos · 22 April 2010

This is a very interesting video on the Financial Times website.

http://www.ft.com/cms/86a30e34-dfd5-11dc-8073-0000779fd2ac.html?_i_referralObject=15762261&fromSearch=n%20%3Chttp://www.ft.com/cms/86a30e34-dfd5-11dc-8073-0000779fd2ac.html?_i_referralObject=15762261&fromSearch=n%3E

The guy is saying out of the last 34 bubbles he has studied, there are only two in the world that have not currently popped. The UK and Australian housing bubbles.

drsmith · 22 April 2010

-Bevo- said:
On the subject of China anyone catch Marc Faber interview on bloomberg,
He talks about China property and mentions Australia housing.

http://www.bloomberg.com/avp/avp.ht...//media2.bloomberg.com/cache/vmN_XglahCZk.asf

He's not too keen to drink from our punchbowl to say the least.

It's a pity the interviewer didn't have a greater financial intelect.

Dowdy · 22 April 2010

drsmith said:
He's not too keen to drink from our punchbowl to say the least.

It's a pity the interviewer didn't have a greater financial intelect.

There no need. Marc Faber is probably the best economist/investor/forecaster in my opinion. When he talks, pay attention

He predicted the crash, the bottom (on the exact day it happened), the boom that followed, the new highs in the stock market - and that was just the last 24months

Some economist predicted the crash but didn't predict what happened after.

robots · 23 April 2010

Dowdy said:
There no need. Marc Faber is probably the best economist/investor/forecaster in my opinion. When he talks, pay attention

He predicted the crash, the bottom (on the exact day it happened), the boom that followed, the new highs in the stock market - and that was just the last 24months

Some economist predicted the crash but didn't predict what happened after.

hello,

oh come on, what about that guy that was around at ASF: Associate Professor Robots

he's got it right year after year as well by the looks of it

thankyou
robots

drsmith · 23 April 2010

robots said:
oh come on, what about that guy that was around at ASF: Associate Professor Robots

Just for you

robots · 23 April 2010

hello,

oh yeah:

http://www.theaustralian.com.au/bus...erest-rate-rises/story-e6frg926-1225857524478

what a great article from the australian, so interest rates back up to where they want them is just fantastic, just let them plod along for a while

thankyou
robots

drsmith · 23 April 2010

Mr Stevens is very wary of diluting the punch too much as he does not want to see the party goers rush for the door trampling the government door charge collectors on the way out.

UBIQUITOUS · 23 April 2010

robots said:
hello,

oh yeah:

http://www.theaustralian.com.au/bus...erest-rate-rises/story-e6frg926-1225857524478

what a great article from the australian, so interest rates back up to where they want them is just fantastic, just let them plod along for a while

thankyou
robots

The longer that interest rates stay low, the higher that they will eventually have to go. The noose is tightening!

So last quarter, there were capital losses and net income losses. All for the sake of saving some tax. Hilarious!!

Dowdy · 23 April 2010

robots said:
hello,

oh come on, what about that guy that was around at ASF: Associate Professor Robots

he's got it right year after year as well by the looks of it

thankyou
robots

Being a biased property bull with nothing insightful to say about the market makes you alot of things, but definitely not an Associate Professor, wouldn't even make you an Undergraduate!

Weren't you banned for a few months because you gave yourself BS titles?

drsmith · 23 April 2010

Assuming a continued growth path for civilisation as a whole, the bulls will be right more often than the bears but in this instance I wouldn't be betting the house on the house.

UBIQUITOUS · 24 April 2010

http://m.smh.com.au/national/foreigners-face-tighter-rules-on-property-ownership-20100423-tj3q.html

...and about time!!!
The downward pressure on property prices just grows and grows!!!

cutz · 24 April 2010

drsmith said:
Assuming a continued growth path for civilisation as a whole, the bulls will be right more often than the bears but in this instance I wouldn't be betting the house on the house.

That's right,

The bulls are correct most of the time, the bears are incorrect most of the time but when the bears are correct it's usually in a huge way.

It's in the math.

The future of Australian property prices

Dowdy

-Bevo-

MACCA350

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mythos

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UBIQUITOUS

Dowdy

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