Governments must stop meddling in property markets – and negative gearing has to go

Governments must stop meddling in property markets – and negative gearing has to go

By Catherine Cashmore
Tuesday, 26 June 2012

Balancing a real estate market is not an easy task.  Too much supply and prices fall – too little and they rise. Over time, various incentives – negative gearing, grants for first-home buyers, reduced stamp duty rates for off-the-plan sales and new homes, have been introduced, changed, and intermittently withdrawn by government “movers and shakers”. All have the effect of falsely influencing consumer demand one way or another.  Sometimes it’s done in favour of the investor, sometimes the home buyer, however in most circumstances it results in price increases rather than the opposite.

As the RBA is well aware, it’s a fine line you tread when it comes to maintaining stability. It takes careful analysis of a broad range of data and an intrinsic understanding of various micro markets before decisions are made.  However when it comes to the property market, state laws seem to dictate their own agenda, not to mention the federal government stirring the pot whenever it’s time to collect more revenue.

For example, when the budget came out, Wayne Swan saw fit to remove the 50% CGT discount – previously available for non-residents who have held property for a 12 month period or more – with no warning and a little addition added to “honour the discount in relation to any existing accrued capital gains ONLY if the non-resident obtained a market valuation for the asset as at May 8, 2012”.

As Michael Matusik correctly pointed out earlier this year, the sudden change will reduce demand from foreign and expat investors.  Considering most offshore purchases of property are new home or off-the-plan sales, it will adversely affect construction resulting in further stagnation of supply concentrating demand on existing dwellings.  GFC aside, metropolitan property prices in Australia are counted amongst the world’s highest. Therefore it’s vital we plan our cities effectively if the aim is to keep real estate affordable and reduce inner-city inflation in the established housing market.  It’s something our governments have yet to achieve – as analysis of boom/bust housing cycles prove.

Encouraging broad-based investment with policies such as negative gearing, which incites investors to enter into the established housing market rather than the “new home” market, do nothing to increase the supply and stimulate the many retail offshoots that benefit from construction. However it’s vital we do so if we value our ethical responsibility to provide enough affordable choices for home buyers and also magnify the supply of rental accommodation.  As the recently released 2011 census data shows, the national median weekly rent has risen 50% since the last census in 2006.  Not surprisingly there’s also an increase in the number of households getting stuck on the rental ladder, with 10% paying in excess of 30% of their income for the privilege.

Those in favour of negative gearing always base their arguments on the historical data, which proved a rise in yields in Sydney and Perth when the policy was withdrawn during the Hawke government in 1986-1988.  There are a few issues with this – firstly, the policy changes were not in effect long enough for a reasonable adjustment of market demand to be established.  For example, due to a very low vacancy rate at the time in both Sydney and Perth, rents naturally rose.  It’s worth noting – as others have done, including Saul Eslake, on numerous occasions – that rents did not rise nationally and in Melbourne, growth actually slowed.  If the market had been allowed to adjust to the changes, the consequence would likely have eventuated in investor demand decreasing in the established market, levelling the playing field somewhat for first-home buyers to gain a foothold.

It’s also worth noting at the same time the policy was withdrawn, the Hawke government encouraged the supply of new housing by the introduction of:

“Accelerated depreciation for new buildings or major renovations in order to create more rental property and more opportunities for renters”. (Keating, 1985).

Unfortunately, two years of changes were not enough to monitor the success or otherwise of the plan.  Lobbying from the real estate industry and investors, who had previously benefitted from the scheme, resulted in political back-pedaling.  All in all, it was badly handled.

No other country has such generous negative gearing policies as Australia when it comes to property investment.  Yet investors don’t leave these markets in droves.  With the policy as it stands, there is no limitation on the number of residential homes a single investor can claim against.  Consequently, we see large property portfolios acquired by a smaller percentage of the population who benefit most from reducing their tax burden and consequently, less supply for the majority market.

We need a phasing back of the current policy while at the same time planning outer-suburban and rural/regional growth with infrastructure – if not already established, then at least approved and funded – to ensure we continue to provide feasible options for home buyers and not just vacant dwellings in paddock lands.

While we will always need property investors to assist the supply of rental accommodation, for those unwilling or unable to purchase, property should not become a speculators’ domain.  Over-investment in property markets drives up demand and consequently prices, resulting in higher rent – not lower.  Rather, property’s prime function as an abode for shelter should be respected in so much as any policy is aimed at making it an achievable option for our growing populous.

However, it’s not just distortion from negative gearing that has negative effects on property prices.  The other initiatives I mentioned at the start of this article, such as the first-home owners’ grant, have done their fair share to ramp up debt in Australia’s residential market.  For example, I was recently asked to negotiate on a property that was purchased late 2009, when the first-home owners’ boost was available.  The one-bedroom unit in question was acquired off the plan, therefore, when reduced stamp duty had been taken into account, along with federal and state incentives, the owner would have benefitted from some $30,000 ‘saving’.  However – even taking into account comparable sales during the same period when purchased – the asking price at the time was easily $30,000 in excess of what it should have been – arguably even $50,000 in excess. Three years later, and the owner of the property in question never moved into the home due to a change in circumstance (boy meets girl).  Consequently – the property is “as new” – never lived in.

The documentation provided in the vendor statement shows the mortgage still owing on the home (in excess of 80%) remains above current market value.  Clearly the grant did little to help this vendor purchase – it simply helped him spend above and beyond what the commodity was worth and landed a first-home buyer – now starting a family – with a debt burden he won’t be able to resolve with a quick sale.  It’s one of the more interesting examples of many similar stories I come across monthly.

Despite the many incentives offered under the guise of “helping affordability”, Australia’s household debt-to-income ratio has accelerated to a little under 150%.  Perhaps it’s time to admit that the intention in the first place was not to assist affordability at all. Rather they were introduced to “prop up” the property market subsequently encouraging a greater debt burden. Considering the tax revenue governments receive from the housing market it’s no surprise there’s a fear of any natural reduction in demand. Stamp duty – taken under the guise of covering “transaction costs” – is without doubt an extortionate tax albeit a major source of revenue.

The question of how/if to replace it has been debated for years, however as Andrew Leigh MP noted in 2009 observations on the “impacts of stamp duty on housing turnover” show a “10% increase in stamp duty lowers turnover by 1-2% in the first year, and by 4-5% if sustained over a three-year period.” The reluctance to sell due to stamp duty charges has the potential of encouraging a “mis-match” between the type of property and family size.  It’s doubtful we’ll see any short-term answer to housing tax reform, therefore other strategies to improve affordability and create a greater supply of residential housing and supporting infrastructure are required.

Despite all the handouts, incentives and abundance of market meddling, we’re no closer to solving Australia’s housing problem than we were decades ago. As the 2011 census shows, Australia’s population has grown by nearly five times over the past 100 years and yet the vacancy rate for the last 30 of those years (the true guide to the housing shortage) has never exceeded 5%.

No one likes the idea of losing equity in their principal place of residence, however there’s a reluctance to accept that the pre-GFC relatively long-lasting boom in house prices is no longer a feature of Australia’s real estate terrain. RBA governor Glenn Steven’s has twice sought reason to warn us about, once in 2010 when he stated:

“I think it is a mistake to assume that a riskless, easy guaranteed way to prosperity is just to be leveraged up into property. It isn’t going to be that easy,”

And more recently in his “Glass Half Full Speech”, when he stated that the return to confidence we don’t need is;

“The kind of confidence based on nothing more than expectations of ever-increasing housing prices, with the associated willingness to continue increasing leverage, on the assumption that this is a sure way to wealth, would not be the right kind.”

The RBA has made it clear it is not in the business of creating boom bust cycles.  However there’s an overall reluctance by state and federal government to take its fingers out the pot and stop feeding a beast that will forever require market meddling to prevent a return to what Glenn Stevens calls “building wealth the old-fashioned way” – careful saving and strategic long-term educative planning.  If it weren’t for the commodity boom propping up weakness in the economy, we’d have suffered the same demise as Europe. In such a case, Prime Minister Julia Gillard wouldn’t have been giving lectures to world leaders at the G20 summit – she would have been receiving them.

Market meddling in the housing industry is based partly on greed and partly on a broad misunderstanding of the policies needed to balance it for all – not just a few. As the 2011 census data has shown, home ownership is reducing, not increasing. We don’t need meddling in the housing market from those sitting behind desks – who don’t work daily with buyers, sellers and renters, and therefore have little understanding of housing market dynamics outside of ‘on paper’ data.

A healthy market is one that is allowed to rise and fall thereby establishing its own long-term trend.  The role of government should be to provide equal opportunity for all and not target policy initiatives on a select few. We need more than a CEO sleep-out, which managed to reach top trending spot on Twitter last week, to raise awareness of the fundamental need for affordable secure shelter.  There’s not a single country that has completely cracked the problem of homelessness, however I have great belief in Australia – one of the pioneers of democratic rights – as a country with abundant potential to do so.

Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition. 

We must encourage regional and rural living to house and feed our growing population

We must encourage regional and rural living to house and feed our growing population

By Catherine Cashmore
Tuesday, 05 June 2012

This past week, another revolutionist was busy plotting the future of the human race and this time the savior of the world is going to be surrounded by concrete in the form of a vertical city.  The founder of TED, Chris Anderson, told a Sydney audience that the worlds 10 billion (which is expected to be achieved over the next 70 years – providing we don’t self-destruct, which I ponder is an ever present reality) can only be fed, sustained, and resourced, with urban living.  Chris’s view of urban living isn’t in the suburbia that fueled the old Australian Dream, providing a backyard to grow food and sustain a comparatively healthy lifestyle for the average family.  In Chris Anderson’s vision, children will be born and raised in vertical towers, the family car will become a bygone antique, and once habitable rural land will be allowed to regenerate into forests and wilderness.

While I admit to being a fan of TED and love a healthy exchange of ideas, Chris’s vision is frighteningly close to the reality of our inner-city municipalities. Especially when you consider Melbourne’s currently undergoing a massive growth spurt with high-rise CBD expansion set to grow from 180 hectares to 900 hectares in a bid to accommodate our unprecedented population growth. In his speech, Anderson did make comment advocating a standard of quality in his vertical vision.  He maintains that architects need to design towers where residents are not living in a rat trap or boxes jammed together.  However, in our modern, money-making, bang for buck economy, it’s doubtful whether any developer would put internal floor space above the potential of squashing as many on a block as possible while selling in bulk to the first foreign investor to register interest. It’s well accepted that our current high-rise craze is the bread and butter of the foreign investor market – most of which are sold off the plan with generous rental guarantees.

Anderson isn’t wrong in his assessment of urban growth, however.  Back in the 1800s just 3% of the world’s population lived in urban areas. By 1900, the figure had swelled to almost 14%, with 12 of those cities numbering a population of 1 million or more. By the 1950s the numbers jumped again, with 30% of the world’s population choosing city living over a rural lifestyle – 83 cities had a population of 1 million or more. In 2008, for the first time in recorded history, half the world’s population was living in towns and cities. And by 2030 – assuming we’re not hit by a plague on the scale of Spanish flu, which wiped out 3% of the world’s population – the number living in towns and cities will swell to almost 5 billion – that’s 70% of the population.

This unprecedented growth in urbanisation is a powerful force.  The top 25 ‘mega-cities’ now account for over half the world’s wealth, 50% of which comes directly from within India and China – Australia’s largest migrant populations (which are incidentally now on the brink of outnumbering the European-born residents). However, while we’re busy urbanising the world and working out how to squash the average family into a vertical tower while still providing quality living, it might be worth while sparing a thought for who’s going to be farming the land to feed the world’s 10 billion?  Especially considering there are still in excess of 1 billion people suffering worldwide from hunger and according to thePopulation Reference Bureau, there are a further 8  billion mouths to feed each year.  Not to mention the robust level of population growth Australia is experiencing.

In a recent report led by land-use expert Trevor Budge at La Trobe and RMIT universities questioned if “Australia risked being profligate in wasting or taking out of production its best farmland.” Coal seam gas exploration knows no bounds in this regard – quickly eating into some of the richest agricultural land in NSW and Queensland.  As an excellentFour Corners documentary pointed out last year, Australian landowners are only considered owners of the top soil – not the mineral reserves below.  Therefore gaining planning permission to drill and prosper is seemingly no hard task. However, according United Nations’ Food and Agriculture Organisation (FAO), over the past 33 years, our farmland has diminished by 16%.  It’s not due to building so much as the financial pressures on small farmers who can’t compete with the big players in the industry.  Much of the land has been reserved for conservation, some has been urbanised, however in short, it’s an industry that should be a thriving magnet for young Australians and yet for a number of reasons it’s dwindling . Consequently, intensive farming rules to the detriment of our smaller farmers who can’t compete with the large global companies who bid and buy prime Australian arable land.

As farming struggles, regional locations suffer the consequences.  According to the National Farmers Federation (NFF), Australia has more than 135,000 farms, which our inland regional towns and centres largely service. Not only are these regional towns the life and blood of our farming communities, they are areas of natural beauty preserving age-old traditions and providing an historical link to the roots of Australian culture.  While we’re busy building up our cities and taking advantage of the prosperity spanning from urban migration, there are some real challenges facing our primary farming communities. Low commodity prices, years of draught, foreign imports, increasing debt and the dominant duopoly of our major two supermarkets forcing prices down have caused many to sell up and move on.  Losing primary rural industries results in the devastating loss of smaller rural communities, and if we’re really to solve Australia’s population challenges this is exactly where we should be pouring funds rather than building more vertical towers.

Most city dwellers have their eyes firmly fixed on residential investment, the argument being that everyone needs shelter and we simply don’t have enough affordable accommodation to support the unprecedented level of urban growth our capital cities are attracting. This is true, however, land is about more than just shelter – it’s about food, biodiversity, productivity, and sustainability.  The answers to Australia’s population growth aren’t contained in the skies above – although vertical living is part of that plan. Rather the answers are to be found under the soles of our feet – in the abundance of land that surrounds us.

As our arable land diminishes, investment in farmland is promising large returns. Wheat prices have soared due to poor weather conditions in Russia and Ukraine.  According to the Australian Farm Institute, Australia is the second biggest wheat exporter – hence why we see so many international investors eyeballing our crops.  However, the profit taking is dominated by the bigger players and in the meantime small communities are missing out.  Victoria’s government have been harshly criticised for its plans to build over prime agricultural land in Werribee South and Casey, and the suburban sprawl is daily fodder for the passions of media journalism.

However, when you consider the challenges facing our increasing population, you’d be woefully shortsighted if you didn’t recognise the roll on effect assisting smaller land owners would present, in encouraging numbers to enter the industry and consequently reviving growth and business in dying regional communities.  Fostering an atmosphere where smaller farmers could compete without being swallowed up by larger companies (often part internationally owned) would be dependent on policy changes.  Areas not so centralised on capital locations should play a significant part in our grand plans for population accommodation.

Not everyone wants to be a city dweller.  A significant minority would happily relocate to regional centers if opportunity presented itself.  For example, a few weeks ago, in excess of 8,000 attended Melbourne’s Exhibition Centre for the inaugural Regional Victoria Living Expo. Following the expo, Peter Ryan, the Victorian Deputy Premier released evidence indicating 11% of Melbourne’s metropolitan residential population (around 450,000 people) are contemplating moving to regional Victoria in the next three years.  The challenge will be sourcing employment in the regional centers – the primary industries being agriculture and tourism.  The will is there if the chances arise.

Last week’s episode of Four Corners “Casualties of the Boom” uncovered similar sentiments.  The program focused on the small Queensland town of Moranbah, which is suffering a self-sacrificing demise as miners fly in and out without contributing to the greater community.  Although the majority of workers would choose to reside only temporarily, a significant minority would be happy to move their families and lives to the area permanently.  Unfortunately, the cost of housing and lack of essential facilities from smaller businesses, unable to compete with wages offered by the mining sector, prevent those willing from doing so. The key to solving this problem is closer work and communication from industry partners and local government with the community as a whole – ensuring dominance doesn’t always mean demise.

As it stands at present, demand for agricultural university graduates is double current supply and enrolments are diminishing. According to La Trobe University, over the past decade, the number of university campuses offering agricultural courses in Australia has fallen by more than half – down from 23 to nine. Yet, Australian farms have grown into a $40 billion industry, with just over half our land mass devoted to agriculture.  Mining will adequately fuel Australia’s growth for the foreseeable future, but agriculture will be one of the prime industries we’re left with. Therefore, we need to make moves now to ensure opportunity in this sector serves Australia and her citizens – and more importantly, use the wealth to benefit and increase the feasibility of living in regional centers. It will take more than the NBN – we need to empower local communities to enable them to take control of local development.

Meanwhile global demand in our farmland is growing. TIAA-CREF, a leading US financial services provider, has recently raised $2 billion in commitments to invest in farmland in the United States, Australia and Brazil. On its website it states: “Farmland presents a risk-return profile that meets our depositors’ objectives and that offers portfolio diversification.” Other big investors allocating money into farmland assets include Jim Rogers, the chairman of Rogers Holdings and Beeland Interests, Inc. who has recently established an Australian farmland investment fund – boldly announcing that we’re in the middle of an agricultural “super cycle”. China is pushing for less scrutiny in its Australian farmland acquisitions and according to one report, even theKiwis can purchase Aussie farmland cheaper than Australian investors.  The ABS have foreign investment in Australian farmland at 11% – under current policy, this will no doubt increase.  Our own farmers simply can’t compete.

Of course, reviving regional localities is not just about agricultural investment – it’s part of a much broader plan.  Alignment of state and regional responsibilities, greater attention on transport and telecommunication, establishing strong connections between smaller and larger neighborhoods to enable the support and development of high performance industries, which will in turn attract a younger work force, are essential.   Let’s start developing our country for people and community rather than selling it off to big profiteers who have a vested interests elsewhere.  We are the lucky country by world standards, but complacency should never be allowed to dominate. Vertical living may suit some, however we need a better plan for all.  Part of that plan should be dramatically speeding up the regional agenda and this requires a much larger investment in Australia’s agricultural industry by way of education, along with immediate policy changes to level the playing field so smaller farmers are able to compete once again.

Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.