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Negative gearing doubts and ATO watches home purchasers

When Malcolm Turnbull addressed the National Press Club last week, I was really hoping he would announce a major policy addressing Australia’s ongoing housing affordability woes. Sadly, little was offered. He laid the blame at the states and territories which simply confirmed that little will happen to this space.

Possibility of a change in negative gearing rules

We can now expect political huffing and puffing until November 2019 when Australia must endure the next election. There is a strong possibility that we will see a changing of the guard, after which negative gearing laws will be amended, probably coinciding with a major property downturn. On that basis, the game plan for the next two and a half years is predictable. Property investors will go-hard simply because they want to get in before the negative gearing rules change.

There is little doubt that property prices will continue to rise in 2017 to the extent that we may see cumulative house prices reach 100% gains over five years in some areas. The latest statistics from CoreLogic to January 2017 showed Melbourne up 11.8% in the last year and Sydney continues to run amok at 16%. Since June 2012, the cumulative increase in house prices has been 70.5%, CoreLogic reported.

Compound annual change in dwelling values, 5 years to January 2017

Source: CoreLogic

Other potential policy responses

Two announcements I was expecting were on immigration and reducing the off-the-plan ratios to overseas buyers. CBA Senior Economist Michael Workman said,

“Housing affordability is set to worsen without federal action. The Federal Government controls some of the significant demand factors for housing markets, namely population growth via migration and the spectrum of tax and foreign investment policies that significantly inflate demand for existing and new housing. Housing affordability can be improved, via stabilising growth in house prices and rents, by gradual reforms to both supply and demand issues.”

In the present property environment, there is no need for off-the-plan sales to foreign buyers to remain at 100% and this ratio is controlled by the Federal Government.

Despite the construction of thousands of new apartments, we are not seeing an easing of rents as was expected. Data analysis from the NSW Rental Bond Board identified more tenants than ever. No surprises that the most expensive five suburbs are Manly, Waverley, Woollahra, Willoughby and Mosman. We can therefore expect to see these areas hot-spotting with investors to achieve the best rental returns as well as capital appreciation. Investors will keep driving these markets simply because the Federal Government has tinkered with superannuation, and property markets are out-performing the share market.

Of course, we all know that this will change over time although the momentum is strong with our respective governments doing absolutely nothing aside from weekly lip service.

Top ten weekly rents for a median 2-bedroom flat

Source: Housing NSW, tenants.org.au/tu/rent-tracker

Sydney’s apartments: How prices fared over last 6 months

Source: Domain Group House Price Report, December 2016 data

AUSTRAC and ATO asking direct questions

Much has been written about money laundering within the Australian property markets. The appointed watchdog, the Australian Transaction Reports and Analysis Centre (AUSTRAC), is investigating more than $3 billion in suspicious transfers from Chinese property investors last year. This was further backed-up late last year when the major Australian lenders ceased lending to foreign buyers. I was surprised to read last week that foreign investors are again rising but this time, they are paying cash to settle the full amount of the purchase.

Many will ask the obvious questions as to where all these monies are originating, based on recent announcements that the Chinese Government had shut down money transfers from China.

Well, allow me to lay your concerns to rest. The smartest thing Joe Hockey did when he was Treasurer was to hand all data collection on every property transfer in Australia to the Australian Taxation Office (ATO). Some months later, after reviewing the data, an excited ATO announced they were expanding their forensic property investigations back to 1985.

Just last week, I received a telephone call from an ATO investigator requesting purchaser contact information for a property we sold late last year. Nothing was said to justify the request. I simply provided the relevant information.

What this clearly tells us, is that every property transaction is scrutineered by the ATO and it should not be possible to beat the system.

With so many discussions on housing affordability, this development should please all those closely following real estate movements. As each property settles, the data is then sent to the ATO for recording and investigation.

Everybody buying Australian real estate should know that each transaction is noted and investigated. And yes, they have the resources.

 

Robert Simeon is a Director of Richardson and Wrench in Sydney’s Mosman and Neutral Bay and has been selling residential real estate in Sydney since 1985. He has been writing the real estate blog Virtual Realty News since 2000.

9 Comments
Mal
February 14, 2017

It isn't all negative gearing that distorts house prices. There is a substantial number of active live-in renovators enjoying a capital gains free investment. The investment often adding 50%+ to the house value. This is particularly true in some of the older single story semi-detached suburbs where many have had a second floor added to make them 4 bedroom and double the value.

SMSF Trustee
February 15, 2017

I think I see what you're trying to say - that median house prices on a like-for-like basis haven't gone up as much as the raw statistics imply, because the stock of houses has improved in quality. I'd be interested in testing that empirically.

What I don't see is how this could double the value of a property. When you build on a vacant block you don't increase the value by what you spent on the house, because you've automatically reduced purchaser options for what to do there. It becomes worth more than the vacant block, but doesn't increase by the cost of the house. When you extend an existing building the same applies. You increase the price you'll get for the property, but it can't double. Another factor is that extending doesn't change the land value which is a substantial proportion of the property's total value.

Bruce
February 10, 2017

An excellent article. Clearly the major reason why prices are increasing in Melbourne and Sydney is because the vast majority of migrants want to settle there. Proposals by the Government to offer 10 year visitor visas to Chinese nationals, without obtaining similar access for Australians wanting to live or work in China, will only create an additional demand for holiday homes in Sydney and Melbourne.

Another factor adding to the price growth in Sydney and Melbourne is the substantial infrastructure spending by the NSW and Victorian Governments at a time of peak demand for the construction industry. The amounts being spent in these cities is significantly more than when the mining investment boom was underway in the Pilbara and Gladstone.

Finally, Australia’s negative gearing and capital gains tax policies provide most benefit to investors in markets where the capital gains are greatest. Whilst this creates a voter issue, the effect is more insidious because these policies distort investment flows by encouraging investment in apartments at the expense of productive businesses. For example, although tourist arrivals are at record levels, developers are not building hotels.

Paul
February 09, 2017

We are unfortunately becoming a nation of housing 'haves' and 'have nots'. This cannot be good for a balanced society going forward. There are multiple reasons for reduced housing affordability due to the spiralling of house prices relative to wage increases over the past 20 years. These include: low interest rates, relaxation of bank lending requirements and a surge in foreign investors. However, it is the taxation disparities (via capital gains tax concessions and negative gearing) that appear to be hitting first homebuyers the hardest. And this is the main area where the Federal Government has the capacity to bring about change.

As a Grattan Institute Report issued in 2016 pointed out, Australia's negative gearing arrangements favour investors over homebuyers and are out alignment with housing and taxation arrangements in most other countries. Our current Treasurer, with his background in the property industry, can be relied upon to do nothing to address this distortion. Vested interests (i.e. property investors; banks and real estate agents) continue to prevail.
This is a significant emerging voter issue that the Government continues to ignore - potentially at its own peril.

Robert Simeon
February 10, 2017

Since 2009, Sydney home values have doubled and Melbourne have climbed 85 per cent. In 2011, less than 10 per cent of investors held multiple investment properties, according to Digital Finance Analytics. This has now grown to 16 per cent nationally, and on the east coast multiple investment properties is now approximately 18 per cent.

Jessjess
February 09, 2017

Negative gearing apparently don't impact WA or NT... Turnbull is right. You can all go home now

Greg
February 09, 2017

What a surprise! The big increases relate to the most popular and desirable in Sydney, mostly with harbour views!! If you are looking for your first house, don't complain about affordability if you are seeking a property in those areas. Do what the baby boomers did (me included) - save your money - make do with a purchase in an affordable suburb and gradually move to where you would like to be - it isn't that hard - it just requires discipline. None of the data presented shows the other side of the equation - just how much has the population of Sydney/Melbourne increased? Also the rate of household formation has a huge impact on demand - neither of those things has anything to do with negative gearing. Hence the point made last week, if negative gearing is the cause of price increases, why does London etc suffer from the same issue - where they don't have negative gearing. Let's get a little more analytical about this rather than attempting a simplistic solution that is going to have a dramatic impact on rents - just ask Paul Keating when he tried it between July 1985 and September 1987!

Gen y
February 10, 2017

Greg, the boomers who bought in the undesirable suburbs, those hell holes like randwick, marrickville and stanmore didn't need to deal with 3 hours of daily commuting that first home buyers now buying in the Wild West need to deal with.

Chris
February 09, 2017

Australian banks may have stopped lending to the mainland Chinese - a smart move, but maybe too late - but what about the recent, almost “bottomless” amount of money that HNA is spending on acquisitions around the globe.

The mechanics involved look pretty risky to me, with seemingly multiple layers of borrowing against assets.

Mark my words, it is not going to end well. We saw the same thing with the US Sub-Prime crisis and the same mechanics there too. You cannot just “create” money out of thin air by borrowing against an asset that has been borrowing against another asset (ad infinitum) for multiple SBLCs.

 

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