Category: Property Market

Capital gains tax concession is too generous: economists poll

From The Conversation.

As the federal budget approaches, the government is grappling with ways to enhance housing affordability, including reforming the current 50% capital gains tax (CGT) deduction on property investment.

The Economics Society of Australia (ESA) Monash Forum polled economists on this proposition:

Capital gains tax deductions for housing investment should be removed because they overstimulate the housing market, contributing to rising house prices.

This is a deliberately more extreme measure than the proposal reportedly being considered by the federal government, which is to cut the current discount to 25%. But we wanted to assess more generally the effect of capital gains taxes on the housing market.

The poll found 44.4% of economists agreed with a statement that the tax deduction should be removed entirely (22.2% agreeing and 22.2% strongly agreeing). But 40.7% disagreed with the statement (22.2% disagreeing and 18.5% strongly disagreeing); while 14.8% of respondents were uncertain.

While some economists support the current role of the CGT discount to avoid taxing the capital gains that arise as a result of inflation increasing house prices, as opposed to the valuation in the land or property due to development (Saul Eslake, Rodney Maddock, Nigel Stapledon and Doug McTaggart), others believe the tax should also apply to the gains as a result of inflation (Kevin Davis and Margaret Nowak).

Many argued the principle of the CGT discount is not a bad policy, however the level of the discount is generous and is open for abuse.

They also pointed out that changes in one type of tax will distort the economy, especially if it is only targeted to one type of asset, in this case property. Instead some economists suggested the approach should be a holistic reform to fix tax inefficiencies, and tax treatment should be equal between all forms of investment and saving.

Most of the economists agreed housing affordability policies should be focused mainly on housing supply and housing market constraints (as well as transport and infrastructure) to solve the crisis. Other policies such as shared-ownership schemes and government-backed bonds are also being considered.

Capital gains tax

The capital gains tax (CGT) is calculated at the effective marginal tax rate of the investor, on the capital gains made at the time of sale of the asset. Investors who hold an asset for longer than 12 months receive a 50% discount on the CGT liability, at the time of sale. For superannuation funds, the discount rate is 33.3%.

Owner-occupiers are fully exempt from capital gains tax on the sale of their primary residence.

Some of the options reportedly being considered by the federal government include decreasing the CGT concession to 25%, decreasing it to 40% discount (as recommended in the Henry Tax Review) only for property investments, or some other reduction in the CGT discount for property investments.

Another option is completely removing the concession if the property is sold in the initial investment years; and phasing the discount in after the investment has been held for some specified number of years.

The economists’ arguments for and against

Economists who supported removing capital gains tax deductions for housing investment said the discount provides incentives to over-invest in property rather than other assets that provide income. So by eliminating or reducing the CGT discount, the cost of capital will increase and buyers will reduce their demand for property, resulting in lower, more affordable house prices.

Those who agreed with the statement argue any change in the CGT discount to address property speculation should also be accompanied by reforming negative gearing. They argue that eliminating the CGT discount for property only would push residential investors towards cheaper properties or towards investing in other assets that maintain the CGT discount.

Most studies find no evidence of capital gains advantages being a main incentive for investors holding residential property. However it appears to be a small factor in the intention of investing in residential property.

Those against the statement argue the timing may not be right as the housing cycle is currently at its peak, and the double digit house price appreciation rates are only seen in the inner-ring suburbs of metropolitan cities and only for houses and not apartments.

Economists would expect to see only a short-term drop in house prices if the CGT deductions are eliminated, as investors switch away from property and into other assets. So the remaining residential investors in the market would purchase cheaper properties, potentially still crowding out first-home buyers.

They would also hold the property for a longer period. In the medium to long-term, the reduction in residential investment would impact on the new and existing supply of housing, resulting in housing shortage and rising house prices.

You can read the economists’ individual answers by clicking below.

The ESA Monash Forum is a joint initiative between Monash Business School and the Economic Society of Australia. Maria Yanotti was a guest writer for the Forum.

Explainer: the financialisation of housing and what can be done about it

From The Conversation.

A recent United Nations report on the right to adequate housing identifies the financialisation of housing as an issue of global importance. It defines the financialisation of housing as:

… structural changes in housing and financial markets and global investment whereby housing is treated as a commodity, a means of accumulating wealth and often as security for financial instruments that are traded and sold on global markets.

The UN Special Rapporteur on the Right to Housing argued that treating the house as a repository for capital – rather than a place for habitation – is a human rights issue. Leilani Farha explains her role as the UN Special Rapporteur on the Right to Housing

The financialisation of housing has been central to wealth creation in Australian households since at least the second world war. Today, it underwrites the bank of mum and dad, amateur property investors as landlords, asset-based welfare, and foreign real estate investment.

Australia’s financialised housing system

Following Prime Minister Robert Menzies’ “Forgotten People” speech, Australian governments have effectively subsidised housing investment through taxation incentives for home ownership.

Capital gains exceptions, the exclusion of the primary home from pension calculations, negative gearing, tenancy policies that favour property owners, less restrictive mortgage financing arrangements and first home owner grants are commonly cited examples.

These policies and practices underpin many of the benefits of property investment. But they also change the way Australians think about their home. Houses have shifted from being valued as a place to live and to raise a family towards being viewed also as a place to park and grow capital.

This strongly influences Australians’ decision-making about buying and selling property. It also affects how they think about and use housing equity for business, retirement, family and other purposes.

21st-century winners

Owner-occupiers and property investors benefit most from a financialised housing system.

While many Australians own investment properties, these investors tend to be amongst the wealthiest in our society, challenging the myth of the “mum and dad” investor. The Household, Income and Labour Dynamics in Australia (HILDA) Survey shows, for example, that “over 50% of owners are in the top wealth quintile, and over three-quarters are in the top two quintiles”.

Property investors also tend to have higher incomes, with 70.3% earning in the top 40% of all incomes. They can access their housing equity by buying and selling when market conditions are right. The home can also be treated like an ATM via redraw mortgages.

Linked with foreign investment policies, this system can expose local housing markets to foreign investors and shifting global capital and financial markets. This can change the investment dynamics of local property markets and rental stock.

21st-century losers

Richard Ronald recently highlighted the emergence of “Generation Rent”. While some young people will eventually inherit from their parents, those whose parents rent or are over-leveraged mortgage-holders are increasingly shut out of home ownership.

This suggests a growing polarisation in housing opportunity.

People earning middle and lower incomes, younger people whose parents are not home owners and women who have lost a home or never gained housing wealth are among the most disadvantaged.

Pensioners who rent face housing insecurity and difficulties making ends meet. People remain homeless despite it costing government less to provide permanent supportive housing to end homelessness than to provide services to the homeless.

People living in public, social and other “affordable housing” can be doubly disadvantaged.

First, due to their affordable housing tenure, these groups have not built any capital in their housing.

Second, some residents face eviction through large-scale public housing redevelopments by governments that view their homes as key real estate assets.

Housing experts call for action

In their book, David Madden and Peter Marcuse explain how to definancialise the housing system.Verso Books

David Madden and Peter Marcuse have shown how to definancialise a housing system. They argue that even the term “affordable housing” is a financialised way of thinking about housing provision.

They call for an increase in public and social housing, and for an end to the eviction or rehousing of public and social housing tenants. Some affordable housing advocates agree, arguing for an increase of “at least 2,000 new dwellings a year for ten years” in New South Wales alone.

More affordable housing and low-cost social rentals, which peg housing costs to income, are needed. Government and not-for-profit builders could provide such housing. This would also require “new ways to finance affordable-rental housing”.

Private rentals need to be more secure, too, so tenants have the regulatory support to treat their housing like a home. Removing no-cause eviction is an important start.

A long-term plan for overhauling the taxation system is key. This would, however, need to limit the financial risks to current home owners and investors.

A slow winding back of tax breaks for investment properties would encourage property owners and investors to move their housing wealth into other asset classes over the long term.

This would help to ameliorate the current “distorted investment pattern that disadvantages the supply of affordable rental housing”.

 

Authors: Dallas Roger, Senior Lecturer, Faculty of Architecture, Design and Planning, University of Sydney;  Emma Power, Senior Research Fellow, Geography and Urban Studies, Western Sydney University

 

The forgotten cost of the housing boom: your retirement

From The New Daily.

The house price boom is going to costing us thousands of dollars in retirement, according to a new report.

The entire retirement income system is based on the assumption that home ownership is affordable, and that anyone stuck in lifelong renting will be helped out by state governments.

But these assumptions are “increasingly dubious”, prominent economist Saul Eslake has warned.

The Australian Institute of Superannuation Trustees, which represents all not-for-profit super funds, commissioned Mr Eslake to dig into the potential impact of rising housing costs on retirement.

In 2013-14, about 88 per cent of households headed by Australians aged 65+ spent less than 25 per cent of their gross income on housing — down from about 92 per cent in 1996-97, the economist found, using official statistics.

Worse still, the proportion of 65+ households with housing costs of more than 30 per cent gross income has doubled from 5 to 9 per cent over the last 15 years.

This is partly because Australians are buying and paying off homes later in life because of price growth, Mr Eslake warned.

housing costs retirement

Many of us will never make it onto the property ladder at all, trapped for life in the private rental market, which a recent report estimated can cost an extra $500,000 in retirement.

Outright home ownership has fallen from 61.7 per cent in 1996 to 46.7 per cent in 2013-14, Mr Eslake found using official ABS data.

“Compared to 15 years ago when almost three out of five home owners owned their home outright, home owners with a mortgage are now in the majority.”

This is a serious threat to retirement balances, as renting in later life is a drain on income streams, and many more retirees will use bigger and bigger chunks of superannuation savings to pay off the remainder of their mortgages, he predicted.

“In other words, there is a clear link between deteriorating housing affordability and the adequacy of Australia’s current retirement income stream.”

While price growth is not the only explanation, it’s a big factor, Mr Eslake wrote. Other reasons include less state government investment in social housing, and adults spending more time in formal education.

So, not only are irrational prices in Sydney and Melbourne squeezing out first-time buyers, they are likely to punch big holes in the federal government’s coffers when today’s struggling buyers become tomorrow’s age pensioners.

Tougher home lending not the answer for WA: REIWA, UDIA WA

From The Real Estate Conversation.

The Real Estate Institute of Western Australia and the Urban Development Institute of Australia WA Division have spoken out strongly against applying tightener home lending conditions across the country.

REIWA President Hayden Groves said any decision to do so would be a knee-jerk reaction to market conditions on the east coast, in particular in Sydney and Melbourne, and would not be taking into account the varied market circumstances of all states and territories.

“Western Australia’s property market has softened considerably over the last couple of years. If lending conditions are made tougher for existing home owners, new home buyers and investors in WA, this will have a detrimental effect on our local housing market,” said Groves.

The Western Australian market is just beginning to show signs of stabilisation, said Groves, so any disruption at this point could have a particularly negative impact.

UDIA WA CEO Allison Hailes said imposing further lending restrictions may be viable on the east coast where the market is heated, but in Western Australia it will do more harm than good.

“Decision makers in the eastern states need to take Western Australia’s delicate economic and property market situation into account before introducing any changes, otherwise we could see the green shoots that are just starting to emerge killed off,” she said.

“Affordability remains a significant issue for West Australians, with the recent slowdown in the mining sector and challenging economic conditions continuing to present difficulties. Tightening lending conditions in Western Australia will have an adverse effect on affordability for West Australian home buyers, owners and investors,” said Groves.

Lending finance for investment represents a substantial proportion of the Western Australian property market, with 35 per cent of all lending in the state attributed to investors.

Even if tightened lending conditions were only applied to investors, increased borrowing costs “would mean investors have no choice but to pass this down to tenants and would also limit the number of investors entering the market,” said Groves.

Hailes said tighter lending conditions would also constrain the housing construction sector, and therefore would mean fewer jobs.

Spotting The Bubble

From The NewDaily.

Former Liberal leader John Hewson has openly said what others have been too afraid to: we’re in the midst of a property bubble.

Dr Hewson, who has a PhD in economics, said parts of Sydney and Melbourne (and possibly Brisbane) are in a “bubble” and a “housing crisis” that risks a US-style “big correction”.

“The bubble’s there because of the pace at which prices have risen. The market is now out of reach of so many people,” he told The New Daily.

“We have very strong demand from the natural rate of population growth plus immigration. But we’ve allowed that to be accentuated by investor demand, through artificial, favourable tax concessions; by foreign demand; and by self-managed super fund demand.”

This is a “difficult situation” to remedy, said Dr Hewson, a former Reserve Bank employee and Macquarie Bank director, because the Australian banks are “exposed” to high leverage on mortgages.

So any government intervention to slacken this artificially-stimulated demand risks dire consequences, he said. “There are no silver bullets.”

This followed his very frank comments to ABC Lateline on Tuesday night, where he repeated the warning of a property market “crisis” created by “neglect and drift”.

The former Liberal politician’s comments contrast starkly with those of major bank CEOs, big-name property developers like Harry Triguboff, Prime Minister Malcolm Turnbull and Treasurer Scott Morrison, who have all assiduously avoided the B-word.

An economic ‘bubble’ is when prices rise far above the true economic value of an asset — in this case, dwellings.
Dr Hewson is at odds with many conservatives who believe in the ‘efficient market hypothesis’. This is an economic theory that says ‘bubbles’ cannot, by definition, exist because prices always reflect economic reality.

But he’s in good company with former Commonwealth Bank CEO David Murray, ASIC boss Greg Medcraft and Treasury secretary John Fraser.

The Reserve Bank, tasked by Parliament with preserving the “economic prosperity and welfare of the people of Australia”, recently strayed as close to candidness as is possible for a regulator that can panic markets with a single word.

Its latest coded warning: there has been “a build-up of risks associated with the housing market”.

This was buried at the bottom of the minutes of the RBA board’s March meeting, published on Tuesday. It was the briefest of mentions, but many experts read into it deeply.

The bank noted rising property prices in Melbourne and Sydney, the “considerable” number of apartments coming onto the market over the next few years, resurgent growth in investor lending, and household debt rising faster than household income.

The implicit warning was confirmed later on Tuesday when the Financial Review reported that three regulators – the RBA, ASIC and APRA – have formed a working group to explore tougher mortgage lending rules on the banks.

Whether the word “bubble” passes their lips or not, the experts are worried.

The latest ideas to use super to buy homes are still bad ideas

From The Conversation.

Treasurer Scott Morrison wants to use the May budget to ease growing community anxiety about housing affordability. Lots of ideas are being thrown about: the test for the Treasurer is to sort the good from the bad. Reports that the government was again considering using superannuation to help first homebuyers won’t inspire confidence.

It’s not the first time a policy like this has been floated within government. While these latest ideas to use super to help first homebuyers are marginally less bad than proposals from 2015, our research shows they still wouldn’t make much difference to housing affordability.

A seductive idea with a long history

Allowing first homebuyers to cash out their super to buy a home is a seductive idea with a long history. Both sides of politics took proposals to the 1993 election, before Prime Minister Paul Keating scrapped it upon his re-election.

Former Treasurer Joe Hockey last raised the idea in 2015 and was roundly criticised, including by then Coalition frontbencher Malcolm Turnbull.

Politicians are understandably attracted to any policy that appears to help first homebuyers build a deposit. Unlike the various first homebuyers’ grants that cost billions each year, letting first homebuyers cash out their super would not hurt the budget bottom line – at least, not in the short term. But as we wrote in 2015, that change would push up house prices, leave many people with less to retire on, and cost taxpayers in the long run.

Having learned from that that experience, the government has instead flagged two different ways to use super to help first homebuyers. Neither proposal would make the mistake of giving first homebuyers complete freedom to access to their super. But nor would they make much difference to housing affordability.

Using voluntary super savings for deposits

The first proposal reportedly supported by some in the Coalition, but now denied by the Treasurer, would allow first homebuyers to withdraw any voluntary super contributions they make to help purchase a home. Any compulsory Super Guarantee contributions, the bulk of Australians’ super savings, could not be touched.

Using super tax breaks to help first homebuyers build their deposit would level the playing field between the tax treatment of the savings of first homebuyers and existing property owners.

First homebuyers’ savings typically sit in bank term deposits, where both the initial amount saved and any interest earned is taxed at full marginal rates of personal income tax. In contrast, the nest eggs of existing property owners are taxed very lightly. For owner occupiers, any capital gain is tax free. For investors, capital gains are taxed at a 50% discount, and they get the benefit of negative gearing.

But even if there’s some merit in allowing first homebuyers to use super tax breaks to save for a home, it’s unlikely to make much difference. Few people are likely to take advantage of the scheme. Households are reluctant to give up access to their savings, especially when they’re already saving 9.5% of their income via compulsory super.

In fact the proposal works out to be very similar to the former Rudd government’s First Home Saver Accounts, and is likely to be just as ineffective. First Home Saver Accounts provided similar financial incentives to help first homebuyers build a deposit. Treasury expected A$6.5 billion to be held in First Home Saver Accounts by 2012. Instead only A$500 million had been saved by 2014, when Joe Hockey abolished the scheme, citing a lack of take up.

A “shared equity” scheme for super funds

The Turnbull government is reportedly also considering a “shared equity scheme” where workers’ super funds would own a portion of the property investment, and money would presumably be returned to the super fund when the property was sold.

Details are scarce, but the proposal raises several questions.

First, would the super fund use only the super savings of the co-investor to help buy the home, or would they add capital from the broader super fund pool?

Second, how would the super fund generate a return on the investment? A super fund that invests in rental housing gets the benefit of a rental income stream. A super fund co-investing in owner-occupied housing would not. The super fund could take a disproportionate share of any capital gains to compensate, but that hardly seems attractive for the funds in a world where interest rates are already at record lows.

Third, why involve super funds in a shared equity scheme in the first place? Australia’s super sector is already notoriously inefficient – total super fund fees equate to more than 1% of Australia’s GDP each year. A shared-equity scheme would inevitably add to super funds’ administration costs.

If the federal government is serious about super funds investing in housing, it needs to encourage wholesale reform of state land taxes, which levy a higher rate of land tax the more investment property a person owns. This discourages institutional investors such as super funds from owning large numbers of residential properties, because they pay much higher rates of land tax on any given property than a mum-and-dad investor.

Focus on what matters

If Scott Morrison really wants to tackle housing affordability, he can no longer ignore those policies that would make the biggest difference. That means addressing both the demand and the supply side of housing markets.

On the demand side, that means reducing government subsidies for housing investment which have simply added fuel to the fire. Abolishing negative gearing and cutting the capital gains tax discount to 25% would save the budget about A$5.3 billion a year, and reduce house prices a little – we estimate they would be about 2% lower than otherwise.

The government should also include the value of the family home above some threshold – such as A$500,000 – in the Age Pension assets test. This would encourage senior Australians to downsize to more appropriate housing, while helping improve the budget bottom line.

At the same time the government should support policies that boost housing supply, especially in the inner and middle ring suburbs of our major cities where most of the new jobs are being created. Population density in the middle ring has hardly changed in the past 30 years.

The federal government has little control over planning rules, which are administered by state and local governments. But it can provide incentives to those tiers of government, if it is looking to do something that would really improve home ownership.

While there are plenty of ideas to improve affordability, only a few will make a real difference, and these are politically hard. In the meantime, the latest thought bubbles about using super savings for housing might be less bad than in the past, but they would be just as ineffective.

Authors: John Daley, Chief Executive Officer, Grattan Institute; Brendan Coates, Fellow, Grattan Institute

ABC Lateline Does Housing

An excellent and balanced debate about housing last night on ABC Lateline.

Jeremy Fernandez speaks to economist and former federal leader of the Liberal Party John Hewson, director of research at Essential Media Rebecca Huntley, Managing Director of Market Economics Stephen Koukoulas and Victorian CEO of the Urban Development Institute of Australia Danni Addison.

The Business Does First Time Buyers And Raiding Super

In The Business tonight there was a segment on the issue of making super accessible to facilitate first time buyers entry into the housing market. Something which today the Government has ruled out, killing off recent speculation. We feature in the segment.

The super industry has launched an unprecedented advertising attack against the big banks likening them to foxes in a hen-house. It comes as a debate rages about an idea to allow first home buyers to use retirement savings for a house deposit.

Think The Unthinkable – The Property Crash We Have To Have?

In past years we have been highlighting the misaligned policy settings which have allowed home prices to balloon, household debt to soar, interest rates to slide and investors to gain more than a third of the market, higher than UK or USA. As banks have continued to lend and inflate their balance sheets and bolster their profitability, despite some tightening of standards; households are massively exposed.

The high debt means households have less disposable income and banks choosing to lend for housing rather than for productive business investment; both growth killing. The current capital rules have also encouraged more home lending and despite some recent tweaks, are still very generous.

Here is a tracker of home price growth, working back from today’s prices. The problem is not just the Sydney and Melbourne markets.  Its just that Sydney and Melbourne came later to the party.

Wage growth is still slowing whilst debt continues to lift. This is a real problem.

Had the settings been adjusted several years ago, this was then a manageable problem, but I am not sure it is now.

If the RBA cuts the cash rate it will stimulate housing further, whilst if it lifts rates, then mortgage rates will rise (beyond the recent and continuing out of cycle uplifts) and move the ~22% of households in mortgage stress higher.  Some will default.  The international rate cycle is on the way up, not down.

If more homes come on the market they will continue to be snapped up by cashed up investors (often levering the capital in their existing property) and overseas buys, which account for perhaps 10% of transactions.

If first time buyers are offered incentives, be they stamp duty relief, money from parents, cash payments/grants or cannibalising their super, the net effect will be simply to drive prices higher, it being a zero sum game. We know there are more than 1 million households who “Want to Buy”. Plus more arriving thanks to migration.

Investors still want property, thanks to the tax breaks and years of sustained growth, despite crushed rental yields. If lending standards are tightened, and a lower speed limit put on investor lending, we will see more investors going to the smaller lenders and the non-bank sector.  Also, some who already bought will be unable to refinance as they would now fall out of revised tighter requirements – about 9% of buyers fall into this category.

Switching away from stamp duty to a property tax may make more people trade, but that will just change the demand/supply curve, and perhaps drive prices even higher (as an artificial barrier is removed).

In fact, even joined up thinking which collectively attempts to cool the market whilst encouraging first owners into the market, is unlikely to succeed. Given the current political environment, this is even more unlikely.

Beneath all this is the financialisation of property, where it is seen as an investment class, not a source of shelter. This was called out recently in a UN paper, and is a global problem.

So, it looks to me as though we need a circuit breaker to kick-in, and that circuit breaker has to be a property correction, or even a crash.

A correction would scare off many investors, drop home prices to allow new entrants to purchase, and whilst many households would see paper profits falling, it was always funny money anyway.  Banks would take a hit, but then they have the capital buffers in place, and the RBA backstop.

In parallel, we still will need tighter rules of lending – especially for investment purposes, and the removal of the tax breaks which underpin the sector.  I think we need lending growth to track wage growth.

From here if we are careful, we can perhaps manage the settings such that such an explosion in prices wont happen again in the future.

But I wonder if we NEED a property crash. We certainly seem unable to manage under the current conditions.

 

 

Preliminary clearance rate and auction volumes increase across the combined capital cities

From CoreLogic.

The capital city clearance rate increased this week, with preliminary results showing that 76.2 per cent of reported auctions across the combined capital cities were successful, compared to 75.1 per cent last week and 68.8 per cent one year ago. Auction activity increased over the week with 2,844 homes taken to auction, up from 1,473 last week; however this time last year, volumes were higher with 3,540 properties taken to auction. Each individual capital city market has seen a rise in auction volumes over the week, while clearance rates have been somewhat varied. The highest preliminary clearance rate was in Sydney where 83.9 per cent of auctions cleared over the week, followed by Canberra at 76.6 per cent.