A real Bag of Property Thoughts

Will “Negative Gearing” remain as a Government Agenda Item?

Suggestions that the federal government is considering a reduction to negative gearing benefits has been met with outrage by the property industry.

The Housing Industry Association (HIA) has labelled reports of a possible new sales tax on investment property as well as a reduction in negative gearing benefits disturbing as well as damaging to confidence in an already struggling housing market.

“The suggestion that the federal government has plans to introduce a new sales tax on investment housing has all the hallmarks of the disastrous move to introduce a similar tax in New South Wales in 2004. This tax led to home building in New South Wales grinding to a halt, a situation from which the state has struggled to recover,” said HIA chief executive Graham Wolfe.

According to a report in The Age, the government has sounded out unions about such potential changes.

“The Prime Minister or Treasurer must deny today’s media claims immediately before substantial damage is inflicted on home building in Australia,” said Mr Wolfe.

The Real Estate Institute of Australia (REIA) has also been quick to criticise the reports.

“Continued investment in property is critical to a healthy rental market. The report that the
government is considering changes to the current model would have a dramatic effect on the future supply of rental properties in an already tight market,” said REIA president David Airey.

“The suggestion appears to be at odds with the government’s goal of addressing the supply of
rental accommodation through the Housing Affordability Fund (HAF) – negative gearing is
complementary to these goals,” he said.

Mr Wolfe said removing negative gearing would be ludicrous.

“Allowing taxpayers to claim interest expenses on borrowings is entirely appropriate – it is not a tax rort. Income from rental properties is assessable, and expenses should be deductible. This is the basic premise of Australia’s taxation system”.

The cost to government revenue of negative gearing is less than $2.5 billion per annum, Mr Wolfe said – around half the amount the federal government will raise through its newly introduced flood tax.

“Yet, despite its small quantum, negative gearing is crucial to investment in rental housing,” said Mr Wolfe.

“After the disastrous flirtation with the quarantining of negative gearing on rental investment property in 1985, and New South Wales Labor’s dire experience with a vendor tax, I doubt the Gillard Government is really suggesting such a strategy,” said Mr Wolfe.

“But the federal government does need to clarify its position on today’s reports.”

Growth in Capital Values v Rental Growth

A comparison of capital city property price growth and rental price growth has confirmed that rents are delivering investors the best returns.

Over the five years to February 2011 capital city rents grew faster than property values, RP Data reported today.

“The debate over affordability in the past five years has intensified however what is often missed is the fact that over this time capital city rental rates increased at a greater average annual rate than capital city property values,” RP Data senior research analyst Cameron Kusher said.

During the five year period capital city house and unit values increased at average annual rates of 6.2 and 6.7 per cent while rents grew at an average annual rate of 6.8 per cent for houses and 7.5 per cent for units.

Darwin was the star performer with rents increasing at an average annual rate of 10 per cent for both houses and units.

Rental growth was also strong in Perth with house and unit rents rising at average annual rates of 8.7 and 8.4 per cent respectively.

Mr Kusher said investors could expect strong rental growth to continue.

“With investors and first home buyers reluctant to spend at the moment, couple with housing affordability stretched because of recent value growth and a weaker period of interest rates and construction for the remainder of 2011, we anticipate that this will put upwards pressure on rents,” he said.

Rents can and will grow

The vast majority of renters are prepared to pay more rent in order to stay in their existing rental property, a new survey has found.

According to the Matusik Snapshot, two thirds of renters (67 per cent) are prepared to pay up to five per cent more in rent in order to stay put, while 29 per cent say they will pay as much as 10 per cent more in rent.

The survey, which collected responses from 682 respondents, also found that 71 per cent of renters would like to stay in their current rental property after their lease expires.

According to the report, the rental cost is the most important consideration when it comes to selecting a rental property. Factors which also scored highly among tenants were location, the number of bedrooms, suitable lease term and housing type.

“What isn’t important at all, according to our survey anyway is the ability to keep pets and environmental sustainability measures such as rain tanks, solar power and other water/energy saving devices,” said Michael Matusik, author of the report.

“Many commented that fast internet connection was far more important than the ‘green’ stuff.”

What about State Revenues from Stamp Duties ?

First National Real Estate CEO Ray Ellis has slammed stamp duty on house sales as “inefficient” and “a complete rort”.

The reaction comes after reports that the property industry would support moves to replace stamp duties with another form of tax.

It has long been recognised that stamp duty as a tax is inefficient and a complete rort, Mr Ellis said.

“So, while First National Real Estate agrees it needs to go, it does not support the notion that it be replaced with some other tax.”

Mr Ellis said stamp duty should have been phased out with the introduction of the GST in 2000.

“Now, more than a decade on, we are still being burdened with stamp duty,” he said.

“What’s worse, the property industry appears to be portrayed in some news articles as willing to settle for replacing the duty, instead of having it abolished altogether.”

Mr Ellis said the upcoming 2011 Federal Tax Summit presents the ideal opportunity to get blanket approval from state and federal governments to abolish the levy.

“The government needs to look at policies that will encourage mobility rather than inhibit it.”

High cost of living a threat to property owners

The rising cost of living is placing an increasing strain on household budgets that should be acknowledged in banks’ lending policies, according to Merrill Lynch.

According to a recently released Merrill Lynch report, all of Australia’s banks have relaxed their lending criteria in recent months in a bid to attract a greater share of home loan customers.

The report argued that relaxed lending could put property owners into trouble, as many will be allowed to borrow more than they could possibly repay.

Merrill Lynch research analyst Matthew Davison said the strain on the household budget is too big to ignore and that banks aren’t accurately measuring household costs.

Meanwhile a report from Standard & Poor’s suggests incomes could have just as much impact on mortgage stress as the rising cost of living.

While Standard & Poor’s agreed that the rising cost of living would inevitably put greater stress on borrowers, their report found that not all mortgage stress is being borne exclusively by lower income borrowers.

“In our opinion, for middle-to-higher income earners, the income characteristics of borrowers is another key factor that may influence mortgage affordability, possibly even more so than living cost assumptions,” the report read.

The report found that any changes to income could have a much more significant impact on mortgage affordability and stress in the middle-to-higher income borrower categories than rising living and/or interest costs.

“While income growth can offset rising costs, a drop in income may put significant pressure on certain borrowers.

“For middle-to-higher income earners, we believe that the Henderson Poverty Index (a measure widely used by lenders in Australia to estimate living costs to qualify borrowers for housing loans) does not reflect these borrowers’ typical lifestyle choices and resulting costs of living.

“When qualifying borrowers, most lenders also incorporate a minimum net surplus ratio in their calculations to allow for potential escalation in costs of living and/or interest rates. Nevertheless, we have found that neither cost of living nor interest rate increases erode the net surplus ratio as quickly as a drop in the borrower’s income.”

Supply v Demand in Land Values

Residential land values have continued to rise whiles sales volumes sink, according to the latest Housing Industry Association/ RP Data Residential Land Report.

In the final quarter of 2010 the volume of land sales was down more than 40 per cent compared to 2009 while the weighted average land value grew 4.1 per cent.

“The escalation in land values highlights an on-going deterioration in new home affordability driven by constraints on supply,” HIA economist Matthew King said.

“The sharp drop in the volume of land sales signals a very weak 2011 for new home building.”

Mr King said new housing was sagging under the weight of the excessive servicing costs as well as damage wrought by last year’s interest rate hikes.

“Put together planning and zoning delays, high regulatory costs, deficient land release strategies, disproportionately high taxation, user pays infrastructure charges, and an on-going credit squeeze, and you have a recipe for crippling land values.”

“Policy solutions can be found by all levels of government, but there is currently little evidence of solutions being sought, which is to the detriment of affordable housing for entry level buyers and rental households alike.”

RP Data’s research director Tim Lawless agreed that the low number of land transactions painted a worrying picture for future housing supply.

“Land sales are a reasonable lead indicator for future supply additions to the market and a forty per cent reduction in land sales points to ongoing weakness in the housing construction sector which is already very soft,” he said.