Real Estate MT: Prices, Capital Gains Tax (CGT), Negative Gearing, Foreign Investment, 'Bubbles'...

[Smiling Buddha]

(Title to make searching for this thread in future easier)

I think the AusPol board needs its own thread dedicated to all things Aus Real Estate: Policy (esp Capital Gains Tax concessions and the 'negative gearing' it is encouraging; and foreign investment), macroeconomics (esp wrt the US and China), the philosophies underpinning the different arguments involved, and everything else in between. I was sparked into starting this thread by the following graph:

(Source: Wikipedia)

Over the next two posts I will share some interesting stuff I have stumbled upon concerning these matters: The first on CGT and negative gearing, the second on foreign investment in Australian real estate.

 

[Smiling Buddha]

1) CGT concessions and negative gearing

In 1999 [Howard] was careful to avoid linking the 50 per cent capital gains tax concessions with his personal crusade. Instead he deferred to the advice of that renowned tax expert and Howard friend, businessman John Ralph, who in turn relied on a submission from one of the business world's most interested vested interests, the Australian Stock Exchange.

The exchange hired Alan Reynolds, a Reaganite from the Hudson Institute in Indianapolis, and got what it paid for - a courageous finding that slashing capital gains tax would actually boost tax revenue.

Of course, tax revenue from capital gains collapsed. What was achieved was a speculative housing boom and a further shift in the tax burden from capitalists to wage earners.

http://www.smh.com.au/news/business...e/2006/04/30/1146335612194.html?page=fullpage

And what has happened since then? Here's some more food for thought:

...negative gearing allows a property investor to deduct losses against the investor’s personal tax liability at their marginal tax rate (MTR), a tax-minimisation strategy adopted by 1,110,922 taxpayers who vote...

From 1996 to 2010, housing prices surged by 130%, adjusted for inflation and quality...

ATO data provides an estimate of the cost of negative gearing. In 1993-94 it was $850 million, fluctuating around the $1 billion mark over the next several years. As investors piled into the market, the cost rapidly escalated to a peak of $3.8 billion in 2007-08 before falling to $2.9 billion in 2009-10. Over the last seventeen years, negative gearing has cost taxpayers an inflation-adjusted $33.5 billion (2012 dollars).

http://theconversation.com/its-time-to-abolish-negative-gearing-9879

That reads bad enough, but in the years since the above was written, the situation has spiraled even further:

Negatively geared property investors lost an astonishing $13.2 billion in 2010-11, up from $10.1 billion the year before.

The latest Tax Office statistics show the average loss per negatively geared investor was $10,950, up from $9130 the year before. The average loss for a high-income negatively geared investor earning more than $180,000 was $23,800.

http://www.smh.com.au/federal-polit...investors-lose-13-billion-20130430-2irf3.html

Through negative gearing rules, and the capital gains discount introduced in 1999, the Commonwealth provides residential property investors with nearly $7 billion a year, or $4,500 on average for each property investor.

http://grattan.edu.au/publications/reports/post/renovating-housing-policy/

This effectively means a multi-billion dollar transfer of money from the Australian tax base to the banks. Every year. To put that into context, the previous government had budgeted to provide less than six billion dollars total in assistance to the local auto manufacturing industry from 2008 to 2020. $6b in total over 13 years to keep manufacturing jobs in Australia versus several billion per year to... do what exactly?

 

[Smiling Buddha]

2) Foreign investment in Australian real estate

Even the MSM are reporting that the Chinese are buying up Aus real estate in a big way.

The most recent figures available from the Foreign Investment Review Board show Chinese property investment during the 2011-2012 financial year was worth $4.2 billion, with China the biggest foreign investor in the domestic property market, behind the US ($8.16bn) and Singapore ($5.7bn). The figures for the most recent financial year are to be published by the end of December.

http://www.theaustralian.com.au/bus...-property-market/story-fn9656lz-1226747147870

So the three biggest markets for foreign investment into our real estate are the US themselves, Singapore, then China. Interesting.

Colliers International's managing director of residential property in Australia, Peter Chittenden, yesterday said Asian buyers were purchasing 60 per cent of units being sold off-the-plan in big developments.

http://www.news.com.au/realestate/c...before-next-boom/story-fncq3era-1226704103879

60% is a staggeringly high number. But is even this figure understated?

As much as 80 per cent of homes in parts of Sydney are being sold to Chinese buyers, said chief executive John McGrath.

http://www.smh.com.au/business/prop...rd-rate-says-john-mcgrath-20130913-2tocn.html

Now there are obviously many factors that are at play in all of this. I wonder how much of it is attributable to the printing presses running hot in the US?

The [US] federal government expects inflation to ease the burden of its debts. Yet by one measure, inflation rose at an annual pace of 1.2 percent in August, just above the lowest pace on record.

“Weighed against the political, social and economic risks of continued slow growth after a once-in-a-century financial crisis, a sustained burst of moderate inflation is not something to worry about,” Kenneth S. Rogoff, a Harvard economist, wrote recently. “It should be embraced.”

http://www.nytimes.com/2013/10/27/b...-many-now-think-inflation-helps.html?hp&_r=1&

As I posted on the Money board recently, it looks as though the Seppos are printing money like it is going out of fashion - and if dudes like old mate Rogoff above get their way, this will only increase - and it still not enough to bolster inflation over there. Is this partly because the Chinese are using their US dollars to buy up real estate in places like Sydney and Melbourne?

 

[Smiling Buddha]

So there seems to be at least two major ingredients combining to keep Australia's house prices at high levels by world standards. One of them dates back to Howard's CGT changes in 1999, the other is a more recent phenomenon as wealthy Chinese investors flood the Aus RE market. The first one seems unsustainable given Australia's structural budget deficit, while the other one could conceivably bust tomorrow or increase dramatically and indefinitely, pending policy decisions here (foreign investment rules) as well as things out of our politicians' control (macroeconomic factors, esp in the US and China).

The banks are laughing. The property developers are laughing. Those who bought pre-'99 are laughing. The foreign investors are laughing. Young Australians (especially those with dumb/no parents)... not so much.

So many questions to ponder from all of this. How long can the foreign investment last? Is it a good thing? And what is driving it? How long can the CGT concessions last? Are they a good thing? What are the social ramifications of young Australians having to mortgage themselves to the hilt in order to get a home within cooee of the job centres? If the average Australian family now needs two wage-earners to service their mortgages, what affect will this have on a generation of kids brought up in time-impoverished households? Is your opinion on all or any of this clouded or biased by whether you see yourself as a winner or loser in the current system? What risk is there that this is a 'bubble' which will eventually pop, and what would the ramifications be if prices were to take a hit? Or do you think this is the new norm and people ought to get used to it? What changes, if any, do you want to see our governments make to current tax and foreign investment legislation?

Over to you, bigfooty.

 

[clogged]

The Tasmanian government will stump up around 10% of the cost of a median house

http://www.heraldsun.com.au/news/national/new-home-grants/story-fnjj6013-1226754568608

 

[CakeEater]

Meh, I have my negatively geared house stuff the rest of youse.

Baby boomer attitude.

 

[ClokesShankedIt]

The key thing that you need to understand is that there is no such thing as an Australian property bubble. These are things that happen in other countries, not in Australia.

Kept that in mind when you look at the graph in your OP.

 

[Unstable]

The key thing that you need to understand is that there is no such thing as an Australian property bubble. These are things that happen in other countries, not in Australia.

Kept that in mind when you look at the graph in your OP.

Australia, Canada, New Zealand are three nations in which house prices didn't collapse post-GFC. All three were saved by China’s thirst for resources and agriculture products and all three utilize negative gearing.

 

[Patrick Bullet]

Is that 'wage' column referring to household income or individual income? I don't think purchasing conditions in the 70s and 80s or even the early-mid 90s are really comparable to conditions now. During the 80s and early 90s most families I knew lived in single income households but now, most families I know (at least in my age group) live in double income households. Certainly, everyone I know who bought in the last 10 years is in a double-income situation. Not sure if it was cause or effect, but filthy-rich cash purchasers aside, prices are largely constrained by people's borrowing potential, which is in turn constrained by access to income. As more people had access to education during the 80s and 90s, incomes started to go up. More women in education --> more women in professional relatively high-paying jobs (and older when first child is born) --> more dual high-income households --> access to more credit --> bidding war for good property. Thus, in sum, I blame the sexual revolution (but do not in any way begrudge it!).

Of course, one could apply this logic to other countries where prices dropped. But there are some differences. In the US, where prices were also driven by access to credit, this credit was given to people who couldn't manage it. Different here. Australia is also unique in at least some other important ways. E.g. it's fairly isolated so little regional alternatives for similar cultural lifestyle, whereas in US if you don't like Detroit or there's no work there, there are hundreds of alternatives; good economic conditions meaning immigration; limited number of major cities but all with the bulk of the population. All of our capitals are basically variants of the hub 'n' spoke design which means access to amenities will be increasingly more valuable as the population grows.

Many people like to dig up stats from other countries to point out the imbalance. I think though to do fair comparisons with other countries, you should really look for like-for-like properties rather than broad medians. E.g. A small apartment in inner Paris will go for ~400 000 Euros easy - which is about on par, if not a little more expensive than an apartment in inner Melbourne. Nobody seems to bat an eye at the cost of a Parisian apartment though.

IMO, high prices will probably be sustained until there is a bad recession which forces a lot of those professionals out of work and then forces them to sell. Thing is, recessions don't tend to hit the professionals as hard as the less educated. Also, most double-income households, after their first 3-4 years with a mortgage should be able to save a bit of a buffer so forced sales will be rare.

Having said that, I can't see another boom happening though until society accept people in three-way relationships as the norm... (cue Cory Bernadi) or unless inflation goes crazy for some reason.

FWIW - I don't really believe that negative gearing is the key driver of property prices. To take 'advantage' of it, you still need to be losing money.

(Sorry for the poorly structured post.)

 

[Run n Spread]

Anything, houses included are worth whatever someone is willing to pay for. At its core it is basic supply and demand economics. House prices,especially in good areas will always be high as people need somewhere to live and preferably in a good location. As such those with the most money are in the box seat.

Now problems come in when as mentioned in the OP the market has been tinkered with to keep prices high. Stuff like negative gearing, CGT and foreign ownership has been covered. The point I guess being that housing has gone from something exclusive to live in to a way to get rich and generate a passive income. Part of this relies on prices growing. Those with the most political clout thus determine the policy.

Whether this is a bubble that will soon burst or demand will continue to outstrip supply I'm not sure as I don't really know enough about the intricacies of the market of late. Those who bought before 99 have cashed in and good luck to them.

Now those looking to buy from now onwards have probably been cashed out of the market. Unless people are willing to live 50km+ away from major job centres or pay 60%+ in a mortgage prices are probably out of range. And it is certainly not a guaranteed investment strategy given job uncertainty for most.

IMO the best thing for people to do is get ahead of the next boom. Use the cash that would otherwise be spent on property (in a sense it is now a commodity anyway) to invest in a strategy to generate a passive income and/or a sh*& load of money. The boomers/others have the property market cornered. Time to find the next gold rush I guess.

One thing I do wonder thou is what would happen if all tax concessions, grants and market manipulation were removed what the true value of property really would be? My guess is the key areas will always trend up and be bloody expensive but the unbelievable prices in some outer outer suburbs would flatline and even sink after a while.

 

[Power Raid]

The problem isn't negative gearing or capital gains. These are about right.

The problem lays in poor town planning and density, plus poor public transport and road design.

The biggest issue is poor taxation of property. We think we have the right to own land.......but the land belongs to the nation! We need to reconsider an annual taxation which properly reflects the benefit the nation and our cities provide.

 

[Slax]

The problem isn't negative gearing or capital gains. These are about right.

Personally have a massive problem with negative gearing. Property is bought for dual investment purposes, capital growth and income generation and I therefore don't believe that it should be allowed.
I do though agree that the CGT laws as they currently stand are about right.

The problem lays in poor town planning and density, plus poor public transport and road design.

This has been a massive issue, town planning has been terrible in Australia for over 50 years, just look at Melbourne, we built factories and housing over prime agricultural land and only now are building over what was poor grazing land, it should always of been the other way around (but that is another debate). Poor planning though has lead to poor transport, be that public or road and even poorer community facilities, this has pushed up prices in established suburbs. For those who think roads aren't that bad I suggest a trip to any of the new housing estates during peak hour.

The biggest issue is poor taxation of property. We think we have the right to own land.......but the land belongs to the nation! We need to reconsider an annual taxation which properly reflects the benefit the nation and our cities provide.

Changing land tax laws is definitely something that I could handle as a way to offset negative gearing. Rental properties should be charged commercial rates rather than the same level as owner occupier. This would therefore force up annual costs and recover monies lost through negative gearing.

There is though one massive deterrent to government in doing big changes to either negative gearing or land taxes, popping the housing bubble. By making either of these changes it will cause people to reasses the benefits of investing in rental properties and will lead to a substantial lowering in demand thus dropping prices, this then would cause some of those who already own investment properties to jump out before they end up with negative equity and start running the risk of losing other assets if they have to sell.

Personal preference is to see a simple land tax system of owner occuppier being charged one rate and a commercial rate.

 

[knife]

The biggest issue is poor taxation of property. We think we have the right to own land.......but the land belongs to the nation! We need to reconsider an annual taxation which properly reflects the benefit the nation and our cities provide.

Like council rates?

 

[Power Raid]

Like council rates?

yes but more than that

council rates are for services etc where a property tax would and should be based on the benefit of public infrastructure.

ie let's pick on the burswood casino

Packer buys it with the public infrastructure of a highway, a freeway, two train stations and now a football stadium and a walk bridge across the river. How much does he pay for these bonuses that improve his business?

now pick on CBD prime land with two owners both who have held the land for 60 years. One develops his property and spends $250m on a 30 story building (maximum height as per building restrictions in the 90s) whilst the other owner chose to keep a single story old building.

Both have seen the capital city grow around them increasing the price of the land of which they have not contributed to but benefited from. This tax is designed to capture some of that benefit and return it to all people in the state and not just the first people.

The council then changes the building restrictions allowing 50 story buildings. The person who has not developed his land gets the most benefit as the demolition costs and opportunity costs are lower than the 30 story building. How can we have a system that rewards people doing the least? For me, if you can build a 30 story building you should pay a tax based on the potential income of a 30 story building.


On this system CBD areas, special privileged zoning and economic hubs with infrastructure such as ports etc would pay more and pay their fair share. None of this windfall crap like Packer getting 60,000 potential customers to his pubs, hotels (footy teams, interstate supporters and country supporters) and the casino.

 

[clogged]

There are so many myths around negative gearing. I don't believe they reduce rents as claimed, but nor do I believe they inflate house prices to the degree claimed.

The far bigger impact is the lack of new development.

 

[Rob]

Sounds exactly like land tax Power Raid

Personally i'd abolish stamp duty and raise land tax to make up the shortfall.

 

[The_Reaper]

Sounds exactly like land tax Power Raid

Personally i'd abolish stamp duty and raise land tax to make up the shortfall.

I was only young at the time but wasn't this meant to go out when the GST came in?

 

[Power Raid]

Sounds exactly like land tax Power Raid

Personally i'd abolish stamp duty and raise land tax to make up the shortfall.

yep absolutely

we should move away from a transaction tax to a fair annual tax.



The only difference between a land tax and my preferred model is the concept of "lost" revenue collection by the government due to the lack of investment/ development.

 

[tandino]

Land tax should only be considered as part of a broader look at both revenue and expenditure, as much as I doubt that will actually happen.

Frankly, it's got all the chance of turning into another mining tax disaster, booking expenditure against revenue that doesn't exist.

 

[Ratts of Tobruk]

Leave it out, Tandino. Starting another Mining Tax debate isn't what the OP had in mind.

Howard and Costello's plan seemed to be to turn everyone into housing investors so that they'd become highly sensitive to interest rates and the Liberals could run their lines saying 'interest rates were 17.5% under Keating - interest rates will always be lower under the Coalition'. CGT changes and first home buyers grants followed. I think there is very limited benefit from Negative Gearing and that it is substantially detrimental to housing affordability. We should remove incentives for investing in property.

If dual-income households were the reason for the rise then we should realistically expect a doubling of the ratio (women are paid less and a lot of people aren't in dual-income households, but housing supply has apparently not matched population growth so that might balance it out). The rise has been far more than that and it's naieve to think people in the old days just 'didn't realise' the value of property.

 

[tandino]

Leave it out, Tandino. Starting another Mining Tax debate isn't what the OP had in mind.

When has any any thread ever kept on topic anywhere?

The discussion has been on land tax.

 

[Ratts of Tobruk]

Yep, and your comment that the govt may spend money before it has let the tax run long enough to assess the full impact of the tax is hugely relevant to a thought bubble that has just been suggested by a couple of people on Big Footy.

Abbott - don't say you weren't warned.

 

[tandino]

I know the mining tax failure is a touchy subject to some, but it is a relevant case study when talking about broader tax reform and its upsides and downsides.

CGT, Negative Gearing and Stamp Duty/Land Tax impacts the property market, to what extent is debatable, but reforms of taxation in this area needs to be more of the "Henry Tax Review" in style, and less of the "Rudd's response to the Henry Tax Review"

 

[Ratts of Tobruk]

I know the mining tax failure is a touchy subject to some, but it is a relevant case study when talking about broader tax reform and its upsides and downsides.

CGT, Negative Gearing and Stamp Duty/Land Tax impacts the property market, to what extent is debatable, but reforms of taxation in this area needs to be more of the "Henry Tax Review" in style, and less of the "Rudd's response to the Henry Tax Review"

Normally your better than just being a spin merchant, Tandino, but obviously something has you fired up today. Putting aside the Coalition spin that the Mining Tax raised nothing (incorrect), we are talking about the worth of various taxes and government levers on housing affordability. Expenditure hasn't been brought up.

If you really, really need it to be pointed out - then, yes, I'm sure the land tax proposals above are put forward on the basis that they will run longer than a couple of years. The MRRT did not (altho the PRRT is still going - the Liberals haven't touched that). Now how do you expect these plain-as-day observations to effect the conversation? Perhaps you think we shouldn't propose anything since it might only run a year or 2 before the govt is changed?

 

[clogged]

By that guy Clive Hamilton (yeah yeah I know), but ...

http://www.theguardian.com/commenti...yers-are-making-sydneys-housing-problem-worse

Juwai.com, the leading broker connecting Chinese buyers with overseas property, estimates that 63m Chinese are rich enough to buy property abroad. It claims that over the last three years, the number of Chinese buyers in Australia has grown nine-fold, faster than anywhere else. For wealthy Chinese looking for a safe haven, both for their money and for themselves, it is hard to go past Australia.

Of it was a Rudd era change in policy that led to this situation, something Clive seemingly glosses over.