Jul 11 2015 at 12:15 AM Updated Jul 11 2015 at 12:15 AM
Shanghai rout hits Chinese developers Fuxing, Poly, Ausbao in apartments
It's logical to think if your equities portfolio has taken a hit then you might be less inclined to buy a property overseas, says Kalai Pillay. Bloomberg
by Matthew Cranston
Several listed Chinese companies at the heart of Australia's apartment construction boom have been caught in China's sharemarket meltdown, raising concerns about the strength of their balance sheets amid warnings they're carrying too much debt.
Fuxing Huiyu Real Estate, Beijing Capital Development Holdings and one of China's largest real estate players, China Poly, are all listed on either the Shenzen or Shanghai Stock Exchanges and this week saw their share prices tumble by as much as 26 per cent. Hong Kong-listed giant Greenland, which is building one of Sydney's tallest residential towers, saw its share price collapse 20 per cent.
Chinese markets rebounded by 10 per cent during trading on Thursday and Friday after emergency measures by the Chinese government, including the placement of more than 1300 companies in a trading halt and the central bank giving a $A56 billion funding lifeline to stock brokers so that they could extend margin loans to clients. The potential problems for listed Chinese developers is a risk for Australia. Housing development is one of the few bright spots in the Australian economy, which is growing at a below-trend 2.3 per cent.
This week's extraordinary volatility in China saw Fuxing Huiyu Real Estate, known as Starryland Australia, slip into a trading halt as its share price sank 21 per cent. It is building 774 apartments near the University of Western Sydney after having paid $58 million for a site on the Parramatta riverfront – or more than double what the previous purchaser paid.
Ausbao, a subsidiary of Beijing Capital Development Holdings, listed on the Shanghai exchange, sank 25.57 per cent this week. The company is planning a $280 million development called the The Quay with 270 apartments in Sydney's Ultimo. It is also planning another 170 apartments for a property in Sydney it purchased for $55 million – almost double what was paid two years earlier.
While none of these projects is at risk, across the listed Chinese property sector companies now have an average 75 per cent debt-to-enterprise value according to Citi. S&P China's Matthew Kong has repeatedly warned that the sector needs to reduce debt.
"For some developers, improving sales and reducing debt are critical for their credit health this year due to large obligations from land acquisitions and aggressive increase in borrowings in the past few years," he said
Mr Kong said this week's sharemarket rout may pose "some minor problems" for reducing debt.
"Some developers do have difficulty reducing debt as they are still under pressure to expand and the growth in [apartment] prices is smaller."
In Australia, estate agents who are selling dozens of development properties to Chinese groups are showing some apprehension over how Chinese developers' debt and share prices will affect their demand for property in Australia.
"The Chinese raise a lot of money and they borrow as much as they can, but sometimes that can hit home and that is what is happening in Shanghai," McVay Real Estate's Dan McVay said.
"I think we should be careful about what is happening, but not overly concerned, because there is still so much capital from offshore and within Australia that wants property."
In Melbourne, CBRE's Mark Wizel has also been selling sites to Chinese buyers. "The unknown factor will be which 'new' Chinese groups had planned to come to Australia to invest who may now be shelving plans and waiting to see if stability can be restored within the Chinese landscape," he said.
Another one of China's largest real estate players, the Shanghai-listed China Poly, saw its shares lose 9 per cent before recovering. That company is planning a massive apartment development in Epping in Sydney's northwest. It bought the development site for $110 million last December at the end of an intense bidding war with local developers.
It also bought the NSW Water Board building in Sydney for $100 million among other transactions. Another of the giant Chinese residential developers R&F, whose share price slumped 7 per cent this week and did not recover, has also built a reputation for some massive development site purchases. It paid $46 million for a former TAFE college in south Brisbane last year which could see hundreds of apartments built. The price tag was more than twice the $22 million the seller had bought the site for less than 12 months earlier.
The risk of offshore troubles for Australia's commercial and residential real estate market has been raised several times by the Reserve Bank of Australia.
"The risk of a large repricing and associated market dislocation in the commercial property sector has increased," the RBA said in its March Stability Review. "This could be triggered by several factors, such as ... a sharp fall in foreign investor demand, perhaps due to a rise in global interest rates or weaker conditions in foreign investors' home countries.
"Property developers in some apartment markets are facing similar risks. Prices for development sites have risen sharply over the past year or so, largely reflecting strong demand from foreign residential developers."
Kalai Pillay, a senior director at Fitch Ratings in Singapore, believes that while Chinese developers are in reasonable shape to weather the sharemarket downturn, property buyers may be harder hit.
"We could see a pullback in purchases by Chinese buyers overseas, including Australia," he said. "At this stage the evidence is anecdotal, but it's logical to think if your equities portfolio has taken a hit then you might be less inclined to buy a property overseas."
Other Chinese developers such as the Hong kon- listed Country Garden and Dalian Wanda Group, headed by one of China's richest businessmen, Wang Jianlin, have committed or already invested a combined $2 billion to Australia's apartment market
Country Garden is planning a $550 million landmark project in Sydney's north with 830 units, while Wanda is investing $900 million for 500 apartments and a hotel called Jewel at the Gold Coast's broadbeach. It has also bought Gold Fields House office building fronting Sydney's Circular Quay, and plans to turn that into accommodation as well.
From a housing shortage to a glut?
BUSINESS SPECTATOR JULY 15, 2015 3:33PM
Callam Pickering
Economics Editor, Business Spectator.
Melbourne
Australia’s infamous housing shortage is at risk of quickly turning into a housing glut with our residential construction boom set to undermine price growth over the next couple of years.
With population growth slowing and apartment buildings approved at a record rate — it is only a matter of time before capital growth begins to ease.
Building approvals have increased by 18.5 per cent over the past year on a trend basis and, adjusted for population growth, it sits at around its highest level since 2000. This has been spurred on by unprecedented activity in the higher-density units segment, with high-rises sprouting up all over Melbourne and Sydney.
Over the past couple of years we have slowly seen these approvals translate into actual construction. The number of residential building commencements has increased by 13 per cent over the past year, while the number of completions rose by 20 per cent.
History tells us that approvals are not a perfect leading indicator of construction activity. Some projects fail to progress from the approval to the construction stage. The figures for completions have, for example, a standard deviation that is around 36 per cent and 30 per cent lower than approvals and commencements, respectively.
As a result, we can safely say that the residential construction boom will not be quite as large as that indicated by the approvals data. Completions will fall well short of that level and this should be factored into calculations of economic growth.
Nevertheless, the residential construction boom is significant by historical standards. We are building properties at the fastest rate since 2000 and that has important implications for the housing sector.
Australia is widely considered to have a severe housing shortage. It’s a fact that is rarely questioned — at least not within conventional channels — but it isn’t as clear cut as many might expect.
There have been periods over the past quarter century when Australia has had a housing shortage and periods in which we have arguably overbuilt. Since the onset of the global financial crisis we have mainly experienced the former; in the preceding decade we mostly experienced the latter.
It’s one of the reasons why dwelling price growth has been relatively volatile since the turn of the century. We have experienced three property downturns during that time — despite a mining boom and favourable income growth — and we have clearly set the scene for a fourth downturn over the next few years.
One way to measure housing supply dynamics is to deflate approvals or completions against population growth. This won’t determine whether we have a cumulative shortage or not, which is almost impossible to calculate, but it does help determine whether the shortage is increasing or not.
We know from the ABS that household size is roughly 2.5 people, which should, in theory, provide a useful cut-off for determining whether we are building too many properties.
Unfortunately, there is an important caveat to this discussion that isn’t directly observed and can only be estimated poorly. We need to remember that the net change in housing supply is not only determined by how many properties are built but also by how many we destroy.
Census figures indicate that completions data between census dates over-estimate the net increase to the housing supply. Since the census is completed every five years and not released in a timely manner, we don’t have a good estimate of the number of properties destroyed until well after the fact.
Nevertheless, the completions-to-population ratio is still a fairly useful indicator, even if it is somewhat understated. The ratio fell to its lowest level in a decade during the March quarter and should fall further over the remainder of the year.
The underlying dynamics point to weaker price growth — or alternatively an outright price decline — over the next couple of years. Population growth continues to moderate, with net migration easing, while construction remains elevated.
Investors are banking on a housing shortage propping up prices but that may be misguided. Supply is now increasing more quickly than demand; perhaps more importantly though there is mounting evidence that demand has eased.
Australia’s housing shortage isn’t a myth but it clearly isn’t as relevant to market dynamics as it has traditionally been since the onset of the GFC. As a result, unprecedented construction activity, particularly in Melbourne and Sydney, should put downward pressure on dwelling prices over the next couple of years. Investors would be wise to take account of these dynamics if they intend to enter an already overheated property sector.
Aussie policy makers just like to talk... talk is free... until then still more talk unlike that of Singapore govt...
Jul 15 2015 at 3:51 PM Updated Jul 15 2015 at 7:03 PM
Worried about a housing bubble, RBA pushes review of negative gearing tax breaks for property investors
The RBA "believes there is a case for reviewing negative gearing, but not in isolation". Mark Metcalfe
by Jacob Greber
The growing push to abolish or scale back negative gearing received a big boost when the Reserve Bank of Australia called on the government to review whether a capital gains tax break for investment property is driving too much money into housing.
In a surprising intervention in the debate over housing affordability, the Reserve Bank effectively questioned two Howard-era decisions that it argues have increased incentives for Australians to ramp up riskier housing investment at the expense of first-time buyers.
While the Reserve Bank acknowledges that negative gearing can help keep rents down, it says how it works with other tax rules "may have the effect of encouraging leveraged investment in property.
"The bank believes there is a case for reviewing negative gearing, but not in isolation," the central bank said in its submission to the federal parliament's home ownership inquiry. "It's interaction with other aspects of the tax system should be taken into account."
The call adds considerable weight to a push by a growing group of experts and business leaders who question the favourable tax treatment of housing at a time of growing community angst over affordability, particularly in Sydney, parts of which Reserve Bank governor Glenn Stevens has described as "crazy."
While affordability, measured by how much households spend of incomes on loans, has hovered between 20 and 30 per cent and remains well-below record peaks, younger buys need more of their incomes to build up a deposit, the bank says in its submission.
Politically the issue is alive, with Labor indicating over recent months that it will consider the capital gains tax discount for investors who negatively gear as it prepares its own housing affordability policy.
David Murray, a former Commonwealth Bank chief and head of the Abbott government's financial system inquiry, has called for capital gains tax and negative gearing to be looked at as part of any changes. "You have to look at them all," he said in June.
Similarly, the head of the government's audit commission, businessman Tony Shepherd has recommended lifting the capital gains tax rate to a person's income tax rate.
"I can't see any reason to treat capital gains any different from income gains," he said last month. "And I think it does in fact probably lead to a greater emphasis in some respects on negative gearing."
Others calling for a review of negative gearing include the Grattan Institute's John Daley and prominent economist Saul Eslake.
While real estate industry groups are vehemently opposed to watering down negative gearing, the Reserve Bank's submission represents the most high-level official challenge to the current system.
CAPITAL TAX BREAKS BLAMED
Reserve Bank officials have struggled this year to balance the need for additional official interest rate cuts – largely to maintain downward pressure on the Australian dollar in order to benefit the broader economy – against the threat of a property bubble.
The Reserve Bank questioned the federal government's 1999 decision to halve capital gains tax on investment properties, as well as the 2003 move that allowed for the first time super funds to borrow – both decisions taken during the John Howard's prime ministership.
Both measures are having the affect of encouraging more people to invest in property over other assets, the Reserve Bank suggests.
"Since property can usually be purchased using higher leverage than other assets that produce capital gains, property is especially affected by this feature of the tax system," the Reserve Bank said in its submission.
In addition, the bank points out that many self-managed super funds have taken advantage of the borrowing rules to speculate on property.
"At the margin, this has increased the population of potential investors," it said, adding that while the stock of housing owned by self managed funds is small, it has grown quickly – a trend that Reserve Bank officials have previously warned may be increasing risks across the financial system.
HOCKEY DEFENDS PRINCIPLE
The Australian Prudential Regulation Authority is currently actively engaged in using regulations to suppress investor buying in key parts of Sydney's market, an official market intervention unseen since the 1970s.
Treasurer Joe Hockey, who delivered a wide ranging speech on tax reform on Wednesday, echoed the Reserve Bank's concerns about how capital gains tax operates, describing it as an "in-built structural challenge."
"For example, you're allowed to negatively gear a $1 million 40-year-old unit in the middle of Melbourne, but you may not be able to negatively gear a business employing 10 people that is exporting and engaged in productive activities," Mr Hockey said.
"Do you address the issue of negative gearing on that property or the negative gearing on the business?"
Mr Hockey said a key principle was ensuring that people be able to deduct expenses of a business or investment against their primary income.
"By removing negative gearing on real estate, as some are suggesting … they are creating an exception to a standing rule in taxation law. And that is that you can deduct the cost of the loss against another form of income, that would be creating another exemption," he said.
Business Council of Australia chief executive officer Jennifer Westacott said broader tax reform meant keeping all options on the table, particularly in the lead-up to next week's federal and state leader's retreat.
"It will require a level of bipartisanship we have not seen for a long time, and for state and territory governments to sign up to achieving the optimal tax system for the country while making their own tax arrangements more competitive," she said.
FIRST-TIME BUYERS HURT
The Reserve Bank's submission highlights that Australia's tax system effectively disadvantages renters over owners, particularly those with little or no debt.
While mortgage interest repayments cannot be deducted – as is the case in countries such as the US – taxpayers are not subject to taxation on so-called "imputed rent," which is what a homeowner would pay if they were renting their home. This exists in Switzerland, and has the effect of reducing home ownership rates, the Reserve Bank said.
The bank concludes its submission by suggesting the current tax system is effectively cutting first-time buyers out of the market.
"Given the value Australian (and other) households place on home ownership, policy should not unduly advantage property investors at the expense of prospective owner-occupier home buyers.
"Financial stability considerations would suggest that tax and regulatory frameworks should avoid encouraging over-leveraging into property, whether by owner-occupiers or investors."
Negative gearing allows investors to reduce their taxable income from wages by deducting expenses incurred from owning an investment property, including interest payments, and then only pay 50 per cent tax when the capital gains are realised.
Jul 16 2015 at 6:16 PM Updated Jul 16 2015 at 6:16 PM
The property market is hotter this winter than last year, with homes in both Sydney and Melbourne selling quicker than ever
Not all homes draw as much interest as former PM Julia Gillard's Altona house did in 2013, but selling times have shrunk to record lows in the sellers' markets of Sydney and Melbourne. Pat Scala
by Michael Bleby
Houses are selling faster than ever. In April, Sydney homes sold an average 26 days after listing, down from 31 days the previous May. In Melbourne, the figure was down to 32 days from 43 a year ago, according to figures from CoreLogic, which said April was the most recent month for which data was available.
The data is for private treaty sales only, which still account for more than two-thirds of all home sales in the two largest cities. Sydney currently has 17,282 properties in total listed for sale, nearly 13 per cent below the number a year ago, CoreLogic numbers show.
"You've got lots of demand and interest rates are very low, making it very attract to buy, but you don't have enough product coming available for resale," CoreLogic research analyst Cameron Kusher. "It is reasonable to expect that homes will continue to sell relatively quickly over the coming months."
"Based on the last six months, that's only two months' worth of supply for sale."
Melbourne, with 26,987 homes listed for sale, also has fewer – almost 11 per cent fewer than at the same time last year.
There are signs of a slowdown to come. Sydney's auction clearance rate slid further at the weekend, pointing the way to a gentle slowdown in the pace of house price increases, in the face of reduced affordability and increased numbers of auction listings.
Even with fewer homes up for sale, auction numbers are surging as more sellers opt for that method of sale over private treaty. Last week Sydney held 791 auctions, 36 per cent more than the 580 held in the same week last year.
Melbourne held 655 auctions, fewer than the 674 of a year ago, and that is expected jump to 759 this week, CoreLogic says.
As the rising popularity of auctions shows, the attractions for vendors are clear. Separate figures from Fairfax Media-owned Domain Group show that in the private treaty market the so-called discount rate – the discount vendors give buyers on their initial asking price – is low.
Sydney's discount rate touched 5 per cent in February. It has since risen to 5.5 per cent in May, but remains at a decade-plus low. Melbourne's discount rate is higher – at 5.7 per cent – but shows no sign of turning up.
"These are historically low discount rates, which shows an unprecedented sellers' market where they don't have to discount as much," Domain senior economist Andrew Wilson said.
Surge in apartments numbers, despite undersupply in Sydney
THE AUSTRALIAN JULY 17, 2015 12:00AM
Rosanne Barrett
Reporter
Brisbane
Apartment supply is set to double in 2017. Source: TheAustralian
A significant lack of new apartments in Sydney has hidden a looming glut in Melbourne and Brisbane, as the number of units set for completion across Australia surges to 40,000 a year within three years.
In a UBS research paper released yesterday, “Apartment supply: a ripple or a tidal wave”, the investment bank finds unit completions in complexes of more than 100 will double from 20,029 in 2016 to 40,441 the following year and 39,134 in 2018.
While pre-sales remain at record highs, UBS raises the issue of settlement risk if there are changes to bank valuations or loan-to-valuation caps, or impacts on foreign buyers.
“The cumulative undersupply of housing nationally is driven by the severe under-build in NSW for more than a decade and masks the potential growing oversupply in other markets, particularly Victoria and Queensland,” the report says. “Unit completions (will) double in 2017 and remain elevated, consistent with the UBS view that we are experiencing a stronger for longer housing cycle, driven by a record low cash rate.”
UBS analyst and co-author Grant McCasker said the previous building dearth in Sydney was due largely to planning policies, but there was a rapid increase in units in Melbourne and Brisbane.
“People know there is supply coming through,” he said. “We’re not saying it is a potential risk at this point.”
The report notes unlisted developers have 60-70 per cent of market share. It also points to listed developers with substantial residential businesses — Mirvac and Lend Lease — trading at an “unwarranted discount”.
Economic researcher BIS Shrapnel residential property senior manager Angie Zigomanis said demand would remain strong in NSW over the medium term, while in Melbourne rents were already stagnant and oversupply in Brisbane could hit from next year.
“In the last couple of years when we talk about a national undersupply figure, NSW has dominated compared to the other states,” he said. “When we look at the national figures it ignores the vagaries of the local markets.”
Listed developer Stockland, which the UBS report rates as neutral, is increasingly broadening its focus across the residential sector.
Chief executive Mark Steinert said new supply was critical for affordability, considering the anticipated population growth. “Every market in Australia is at a different point in the property cycle, but in all conditions and all markets, Stockland maintains its focus on the development and delivery of affordable homes,” he said. Lend Lease and Mirvac declined to comment.
The UBS report finds this property cycle the strongest ever, with record building approvals, strong commencements and double-digit house-price growth.
It says there was a notable skew to medium/high density housing.
It finds developments in Sydney are spread across the inner city, from Zetland, Waterloo, Forest Lodge and Millers Point, which will provide a buffer to the market in the event of a correction.
In NSW, completions are set to rise to 11,600 in 2017 and 14,000 in 2018. In Melbourne, where 11,700 units will be finished in 2017, most of the apartments are concentrated in the CBD, Docklands and Southbank.
More than 9000 apartments will be completed in Brisbane in 2017 — up from 3000 in 2016.
RBA’s confused case against negative gearing
BUSINESS SPECTATOR JULY 17, 2015 10:22AM
Adam Carr
Business Spectator columnist
Sydney
In its submission to the House of Representatives on home ownership, the Reserve Bank states that “there is a case for reviewing negative gearing, but not in isolation”.
It seems the RBA would also like to remove capital gains tax concessions available to investors.
What is not clear is why the RBA has made this recommendation. Nowhere in its submission does it make a case, or even present sound arguments, as to why the government should follow this advice.
In fact, when read correctly, the submission does the exact opposite.
Generally, arguments to scrap negative gearing and lift capital gains tax on housing are based on one major concern: surging house prices. Breaking that down into its component parts though, it’s then alleged that these price gains have induced a deterioration in housing affordability and, perhaps, financial stability. Bizarrely, the RBA’s own research shows why both of these are false.
The RBA’s submission instead provides no evidence that housing affordability is a problem. If anything it shows affordability at its best in decades. Yet if affordability was such a serious issue, then there would be some evidence of a price-induced decline in home ownership.
Instead the RBA finds: “The aggregate home ownership rate in Australia has been broadly steady since the 1960s. Prior to that date, the rate was much lower.”
So despite the surge in house prices, the rate of home ownership has been steady at about 70 per cent for nearly 60 years.
True, the bank does provide some evidence of compositional changes within that aggregate rate, especially by age group, with the RBA noting the “reduced propensity of younger households to be homeowners”.
Now, while on the common wisdom lower rates of home ownership among the young reflect affordability issues, the submission doesn’t make this case. As the RBA notes, house prices to incomes are high. Yet this is not the correct measure to look at in determining housing affordability. That’s because, as the bank goes on to explain, price-to-income ratios are high because of the “structural downward shift in consumer price inflation and thus nominal interest rates”.
Instead the RBA finds that “housing ‘affordability’, measured as the share of average household income required to service a loan on a median-priced dwelling, has continued to cycle between 20 and 30 per cent, and is currently well below previous peaks”.
So in other words, housing is still very affordable.
From there, the RBA’s submission becomes confused, and the bank does suggest that housing accessibility may have become harder. So for instance, the bank notes that rising prices have made it more difficult to raise a sufficient deposit (as a proportion of income) than in the past. Yet the RBA also notes that this has probably been offset, to some degree, by the higher loan-value ratios available to first home buyers. The bank then concludes that the effect of the former outweighs the latter, and that “the net effect of all the forces described above has probably been to delay or prevent home purchase in some cases”.
Alarmingly, the RBA provides no evidence of this in its submission. Indeed some sentences later, the RBA contradicts that line of reasoning by noting that the decline in homeownership among the young actually started in the 80s, with most of the fall occurring well before ensuing house price booms. Perhaps this is why the RBA can only claim that price-driven affordability — as an explanation for falling homeownership rates — is only ‘plausible’. The RBA can’t even say it’s likely, just plausible.
It’s unfortunate that the key argument in favour of scrapping negative gearing and lifting CGT rests on an opinion that is only ‘plausible’, especially as there are much more likely factors driving lower home ownership among younger households. The RBA discusses these in some detail yet appears to downplay their significance. The bank fails to present them as a rebuttal to concerns of a price-driven decline in affordability — which is what they are — merely noting they are ‘also important’.
Given that falling rates of ownership were observed before strong price growth, demographic change and consumer preferences must be much more reasonable arguments to explain lower ownership rates than price growth. Some of these changes include the tendency toward later marriage, higher divorces rates and the desire among younger households to live in the comparatively more expensive inner city areas.
The RBA is on safer ground when it comes to financial stability and the submission makes the case that negative gearing, in conjunction with capital gains tax breaks, “may have the effect of encouraging leveraged investment in property”. What the submission doesn’t do, is make the case as to why this is undesirable, especially when price-induced affordability is clearly not driving lower home ownership rates.
Indeed, the evidence provided by the RBA in its submission makes it very clear that financial stability isn’t, in fact, under threat. Instead, the RBA finds that gearing among investors and owner occupiers is predominately held by higher income earners “who are well placed to service their debt”, given that a large proportion are ahead on debt repayments and that debt servicing ratios are otherwise low.
Against that backdrop, it’s difficult to determine the RBA’s primary motivation in calling for a “review” of negative gearing and an increase in capital gains tax. The debate is an emotional one, certainly, often infused with a high degree of political philosophy. Given the confused interplay between the bank’s data and its recommendations, it’s hard not to conclude that the submission is more heavily influenced by those more subjective influences rather than any hard analytical rigour.
(15-07-2015, 11:20 PM)greengiraffe Wrote: [ -> ]Aussie policy makers just like to talk... talk is free... until then still more talk unlike that of Singapore govt...
Jul 15 2015 at 3:51 PM Updated Jul 15 2015 at 7:03 PM
Worried about a housing bubble, RBA pushes review of negative gearing tax breaks for property investors
The RBA "believes there is a case for reviewing negative gearing, but not in isolation". Mark Metcalfe
by Jacob Greber
The growing push to abolish or scale back negative gearing received a big boost when the Reserve Bank of Australia called on the government to review whether a capital gains tax break for investment property is driving too much money into housing.
In a surprising intervention in the debate over housing affordability, the Reserve Bank effectively questioned two Howard-era decisions that it argues have increased incentives for Australians to ramp up riskier housing investment at the expense of first-time buyers.
While the Reserve Bank acknowledges that negative gearing can help keep rents down, it says how it works with other tax rules "may have the effect of encouraging leveraged investment in property.
"The bank believes there is a case for reviewing negative gearing, but not in isolation," the central bank said in its submission to the federal parliament's home ownership inquiry. "It's interaction with other aspects of the tax system should be taken into account."
The call adds considerable weight to a push by a growing group of experts and business leaders who question the favourable tax treatment of housing at a time of growing community angst over affordability, particularly in Sydney, parts of which Reserve Bank governor Glenn Stevens has described as "crazy."
While affordability, measured by how much households spend of incomes on loans, has hovered between 20 and 30 per cent and remains well-below record peaks, younger buys need more of their incomes to build up a deposit, the bank says in its submission.
Politically the issue is alive, with Labor indicating over recent months that it will consider the capital gains tax discount for investors who negatively gear as it prepares its own housing affordability policy.
David Murray, a former Commonwealth Bank chief and head of the Abbott government's financial system inquiry, has called for capital gains tax and negative gearing to be looked at as part of any changes. "You have to look at them all," he said in June.
Similarly, the head of the government's audit commission, businessman Tony Shepherd has recommended lifting the capital gains tax rate to a person's income tax rate.
"I can't see any reason to treat capital gains any different from income gains," he said last month. "And I think it does in fact probably lead to a greater emphasis in some respects on negative gearing."
Others calling for a review of negative gearing include the Grattan Institute's John Daley and prominent economist Saul Eslake.
While real estate industry groups are vehemently opposed to watering down negative gearing, the Reserve Bank's submission represents the most high-level official challenge to the current system.
CAPITAL TAX BREAKS BLAMED
Reserve Bank officials have struggled this year to balance the need for additional official interest rate cuts – largely to maintain downward pressure on the Australian dollar in order to benefit the broader economy – against the threat of a property bubble.
The Reserve Bank questioned the federal government's 1999 decision to halve capital gains tax on investment properties, as well as the 2003 move that allowed for the first time super funds to borrow – both decisions taken during the John Howard's prime ministership.
Both measures are having the affect of encouraging more people to invest in property over other assets, the Reserve Bank suggests.
"Since property can usually be purchased using higher leverage than other assets that produce capital gains, property is especially affected by this feature of the tax system," the Reserve Bank said in its submission.
In addition, the bank points out that many self-managed super funds have taken advantage of the borrowing rules to speculate on property.
"At the margin, this has increased the population of potential investors," it said, adding that while the stock of housing owned by self managed funds is small, it has grown quickly – a trend that Reserve Bank officials have previously warned may be increasing risks across the financial system.
HOCKEY DEFENDS PRINCIPLE
The Australian Prudential Regulation Authority is currently actively engaged in using regulations to suppress investor buying in key parts of Sydney's market, an official market intervention unseen since the 1970s.
Treasurer Joe Hockey, who delivered a wide ranging speech on tax reform on Wednesday, echoed the Reserve Bank's concerns about how capital gains tax operates, describing it as an "in-built structural challenge."
"For example, you're allowed to negatively gear a $1 million 40-year-old unit in the middle of Melbourne, but you may not be able to negatively gear a business employing 10 people that is exporting and engaged in productive activities," Mr Hockey said.
"Do you address the issue of negative gearing on that property or the negative gearing on the business?"
Mr Hockey said a key principle was ensuring that people be able to deduct expenses of a business or investment against their primary income.
"By removing negative gearing on real estate, as some are suggesting … they are creating an exception to a standing rule in taxation law. And that is that you can deduct the cost of the loss against another form of income, that would be creating another exemption," he said.
Business Council of Australia chief executive officer Jennifer Westacott said broader tax reform meant keeping all options on the table, particularly in the lead-up to next week's federal and state leader's retreat.
"It will require a level of bipartisanship we have not seen for a long time, and for state and territory governments to sign up to achieving the optimal tax system for the country while making their own tax arrangements more competitive," she said.
FIRST-TIME BUYERS HURT
The Reserve Bank's submission highlights that Australia's tax system effectively disadvantages renters over owners, particularly those with little or no debt.
While mortgage interest repayments cannot be deducted – as is the case in countries such as the US – taxpayers are not subject to taxation on so-called "imputed rent," which is what a homeowner would pay if they were renting their home. This exists in Switzerland, and has the effect of reducing home ownership rates, the Reserve Bank said.
The bank concludes its submission by suggesting the current tax system is effectively cutting first-time buyers out of the market.
"Given the value Australian (and other) households place on home ownership, policy should not unduly advantage property investors at the expense of prospective owner-occupier home buyers.
"Financial stability considerations would suggest that tax and regulatory frameworks should avoid encouraging over-leveraging into property, whether by owner-occupiers or investors."
Negative gearing allows investors to reduce their taxable income from wages by deducting expenses incurred from owning an investment property, including interest payments, and then only pay 50 per cent tax when the capital gains are realised.
Tax reform spotlight turns to capital gains on property
JAMES KIRBY THE AUSTRALIAN JULY 18, 2015 12:00AM
Any investor with interests in residential property needs to be across the changing debate on tax breaks: opposition to the capital gains treatment of property and allowance of negative gearing has reached a crescendo, with the Reserve Bank openly criticising the tax regime this week.
Calls for changes to how investors can benefit from both the financing of property and, importantly, the selling of property are widespread. Cries of “foul” are coming from every conceivable corner, including unlikely sources: ANZ Bank chief executive Mike Smith, for example.
Put simply, the argument goes that the favourable treatment of residential property investment excludes first-home buyers, hampers the building of new homes and encourages speculation. And, of course, all of those criticisms are absolutely true.
Joe Hockey has responded with typical bluster and lack of clarity to this rising tide of angst over stronger house prices, suggesting the government will not make changes to negative gearing (the ability to claim any loss you make on running an investment property against your taxable income).
The Treasurer offers three key lines of defence for his position:
● The principle behind negative gearing is sound — the owners of assets should be able to write off expenses in their wealth-building activities.
● Negative gearing is not just for property, it can be used for other assets as well, such as shares.
● Most of those 1.3 million investors negatively gearing property are not rich; 900,000 of them declare an income of less than $80,000 a year.
Meanwhile, the economy finds itself heavily dependent on the building industry — particularly apartment building at this stage in the cycle. In turn that means state governments are dependent on stamp duty and a huge swathe of economic activity from builders to home furnishers to mortgage sellers will be jeopardised if the hottest part of the economy is rattled in any way.
From an investment point of view the story is quite different. The outstanding issue here is: what are the terms you can purchase or sell property? And will rentals and prices move higher in a reliable manner?
Certainly, the Treasurer’s argument that negative gearing is a principle matters very little — the tax system is awash with exceptions to principles and changing the tax treatment around residential property would hardly be unprecedented. The Keating government attempted but ultimately failed to change the negative gearing regime, while in Britain just last week the Conservative government severely cut back the tax advantages of its version of negative gearing.
As for the fact share investors also may negatively gear shares, this argument is of greatly diminished significance since the volume of share investors who “gear” has substantially evaporated since the GFC.
Separately, the argument that a large number of people “gear” property and most of them are not rich is surely a political issue rather than an economic point. Just now the truth is that even if more than a million people engage in negatively gearing property, it has rarely been such a poor proposition. The rock-bottom mortgage rates of less than 5 per cent mean that for most people there is precious little expenses to claim against their salary.
In the residential property market under these conditions it’s not about rental income or negative gearing, it’s about capital appreciation. Rentals are going nowhere. Despite rising prices in many cities, rental yields are stuck between 3 per cent in the middle of the larger cities to 4.5 per cent in regional areas. What’s more, there is evidence that rents are not just flat but falling: the SQM Research weekly rental report for the week ending July 12 shows a year-on-year drop in rental yields in Perth and Darwin with signals of softness on a monthly basis in every city except Sydney and Brisbane.
If the money being made in residential property is from capital appreciation then the tax that matters most to property investors is not the allowances of negative gearing but the framework for capital gains tax. (Investors must pay CGT on the sale of properties, but if they hold the property for more than a year the tax is halved.) In other words, capital gains is the sweet spot for tax purposes on property profits.
So it’s not the RBA’s statement on negative gearing that should worry property investors as much as its observation that Australia’s tax system is “relatively generous to small investors” because capital gains are taxed at concessional rates.
And though Hockey has explicitly ruled out changes to negative gearing, on capital gains tax he has said only that he would be “reluctant” to change anything ... the spotlight surely turns to CGT.
It doesn’t tax the brain to see why negative gearing is so popular
THE AUSTRALIAN JULY 18, 2015 12:00AM
Adam Creighton
Economics Correspondent
Sydney
Rental income losses. Source: TheAustralian
My accountant was in my ear this week, again encouraging me to negatively gear an investment property to optimise my finances. It’s tax time and the Reserve Bank had put the controversial practice back on to the front page.
As an economist with little tax training, I had dismissed the idea for years: deliberately running an investment at a loss to save on tax simply seemed absurd.
But as bracket creep pushes more Australians into higher tax brackets the practice understandably is becoming more popular and appealing. Top-rate income taxpayers can choose to pay 49c in every dollar of extra income in tax, with zero benefit — unless they derive some joy from subsidising government bloat and waste.
Or they can make investment losses that are reduced to 51c in the dollar and enjoy significant upside benefit — ultimate capital gains since 1999 are taxed with a 50 per cent discount.
The share of taxpayers with one or more investment properties has increased from 12 per cent to 15 per cent across the past decade, but the proportion who are declaring losses on these has risen from a half to two-thirds. Such losses totalled $5.4 billion (or about $4300 for each negatively geared landlord) in financial year 2013, implying forgone revenue of more than $2 billion.
In an environment of haemorrhaging public finances and exploding house prices in Sydney and Melbourne, the practice has come under scrutiny once again, with intelligent critics lining up for and against it. The Reserve Bank weighed into the debate this week, arguing there was “a case for reviewing negative gearing, but not in isolation”.
Despite the recent animus directed at it, negative gearing probably has little to do with the recent increase in house prices in Australia. This, as Peter Costello said this week, has stemmed from the fall in interest rates, which is occurring worldwide and across all types of assets. Lower interest rates mean households can borrow more, while income from housing becomes more attractive relative to government bonds and bank accounts. These factors, along with zoning and density restrictions, and local government approval procedures, have a much bigger impact on the trajectory of house prices.
Negative gearing isn’t a policy and it isn’t unique to housing. It is the colloquial expression given to an application of a longstanding tax principle — around since federal income tax emerged in 1915 — that taxpayers can deduct the cost of investments against their income, including, crucially, wage and salary income. The practice is applied mainly to housing because banks won’t lend as generously for more volatile shares.
No one is suggesting households and businesses shouldn’t be able to deduct investment costs from their investment income. The issue is whether losses beyond investment revenue can be deducted against wage and salary income, and whether this guides the most sensible allocation of savings. Australia, Canada and New Zealand are unusual in this regard. Most countries are closer to the practice in Britain, where deductions are quarantined to the particular investment in question.
Ours is nevertheless a curious system. For instance, workers can’t deduct the cost of the train fare to and from work against their salary, but they can fully deduct unrelated (in an economic sense) costs from an investment property on the other side of the country. Of course, companies and businesses can pool their revenues and deductions but, in an Australian context, they do not receive a 50 per cent discount on ultimate capital gains.
Supporters of negative gearing argue that the forgone revenue is justified by the help the practice provides to renters and the boost to housing supply. “To the extent that negative gearing induces landlords to accept a lower rental yield than otherwise (at least while continued capital gains are expected), it may be helpful for housing affordability for tenants,” the Reserve Bank conceded this week.
In truth, it is difficult to prove or disprove these justifications. The housing markets of Australia, Canada and New Zealand are not noticeably more or less efficient or affordable than European or US ones. Indeed, Australia’s rental vacancy rate has hovered around 2 per cent and 4 per cent for 30 years, much lower than in the US and Britain, whose tax systems don’t permit negative gearing.
Even though more than 90 per cent of negatively geared properties in Australia are established rather than new dwellings, upward pressure on prices may well induce more housing supply. Indeed, the record residential building boom under way is thanks in part to the jump in prices since 2012.
Much of the present debate revolves around what happened in 1986, when the Hawke government briefly abolished negative gearing for housing (quarantining deductions, British-style). The growth rate of rents in Sydney and Perth accelerated in 1987, providing evidence landlords had tried to claw back their tax break from renters. The government quickly reversed its decision in 1988.
This isn’t a slam-dunk argument, though. Rental growth rates slowed or flatlined in the other capital cities. But the evidence from one instance is less important than the intuition: landlords who tried to claw back the tax break from renters would have been frustrated by the landlords who weren’t negatively geared and didn’t need to.
Another supporting argument, made by the Treasurer this week, is that low and middle-income earners benefit disproportionately from negative gearing. “This is a way for people on medium incomes, or even lower incomes, to be able to get into the property market, in a way that they may not be able to,” Joe Hockey said, noting more policeman than accountants and management consultants had negatively geared property (although presumably there are more of the former).
While it’s true the bulk of taxpayers with negatively geared property have taxable incomes less than $80,000 a year, this says little about their total income.
“You will find there is a surprisingly large percentage of taxpayers with taxable incomes of less than $20,000, or indeed no income at all, who are claiming rental interest deductions,” says Saul Eslake, an economist and critic of negative gearing.
“Can you seriously imagine that banks would lend money for property investment to people whose real income was that low?” he adds.
If any tax measure has much to do with the growing popularity of negative gearing, it is the change to capital gains tax. While negative gearing is 100 years old, before 1999 capital gains were taxed at taxpayers’ full marginal rate adjusted for inflation. Since then, gains for assets held longer than a year are discounted by 50 per cent. In a low-inflation environment, this entails a significant tax cut, and increased the appeal of leveraged loss-making investments.
It is not helpful to talk about negative gearing without considering how other forms of savings are taxed too. Owner-occupier housing and superannuation are taxed even more concessionally, and are, no surprise, the first and second most important stores of household wealth. Investment properties come third. While concessions are appropriate for homes and pension saving, it isn’t clear tax rates should differ so markedly for other forms of saving.
Favouring investment properties over bank deposits, say, increases the level of risk and debt in the economy. While negatively gearing property may be a rational and understandable way for me and others to minimise tax, do we want an ever-rising share of Australians in leveraged property? Lower rates of tax with fewer loopholes should be the end goal. Tax complexity is a subsidy to the better off.
The Henry review made recommendations to help fix this. All savings income — net rental income, interest income, dividends etc — would be discounted by 40 per cent before personal income tax rates applied, which would automatically help level the playing field. But both major parties have ignored it.
The government is awaiting the recommendations of (yet another) tax inquiry, which is likely to recommend something similarly sensible.
Unfortunately, it has already ruled out changes to superannuation, GST and negative gearing, so any changes are unlikely.
‘Housing market will be oversupplied now building has peaked’
THE AUSTRALIAN JULY 20, 2015 12:00AM
Kylar Loussikian
Journalist
Sydney
Turi Condon
Property Editor
Sydney
Australia’s housing market could be oversupplied within three years, with the residential building boom already at its peak, says analysis released today by economic forecaster BIS Shrapnel.
As submissions last week to the parliamentary inquiry into home ownership continued to stoke the debate on housing affordability, BIS Shrapnel found the surge in home building would lead to a “mild oversupply” by 2018.
Dwelling starts reached a record high of just more than 210,000 in the last financial year, after 16 per cent growth, according to BIS Shrapnel’s Building in Australia 2015-2030 report.
“Low interest rates have unlocked significant pent-up demand and underpinned the current boom in activity, but as population growth slows while construction activity remains strong, new supply will begin to outpace demand,” associate director Kim Hawtrey said. “This will see the national deficiency of dwellings gradually eroded and some key markets will begin to display signs of oversupply.”
The latest figures estimate housing stocks reached a nadir of 108,000 in June last year, climbing to a deficit of 85,000 by the end of the past financial year. The fall in activity would mostly be felt in the higher-density apartment market, Dr Hawtrey said.
Western Australia is expected to see the sharpest slowdown, with residential building starts forecast to fall 13 per cent in 2015-16.
In Melbourne, pockets of oversupply will cause building to slow, with starts dropping 7 per cent for Victoria, says BIS Shrapnel. NSW is the only state expected to see growth this financial year on the back of a strengthening economy and a prolonged lack of building, while dwelling starts in Queensland are expected to be flat.
On Thursday, a UBS research paper noted a significant lack of new apartments in Sydney had hidden a looming glut in Melbourne and Brisbane, with the number of apartments set for completion across Australia’s capital cities surging to 40,000 a year within three years.
Developments in Sydney are spread across the inner city, providing a buffer to the market in the event of a correction, the UBS note reads.
The latest Housing Industry Association figures, for May, released this month, show dwelling approvals remain at record highs, rising 2.4 per cent to 19,414 compared with 18,964 in April.
Jul 20 2015 at 6:12 PM Updated Jul 20 2015 at 6:12 PM
Housing surplus less of a concern than past cycles, economists say
A predicted housing glut is not a worry as alterations and additions will keep the sector busy, say economists. Reuters
by Michael Bleby
Australia's expected housing glut is less of a concern than in previous cycles because of less speculative building, and a booming alterations market which will keep spending in the sector higher, economists say.
The call by researcher BIS Shrapnel that the country's biggest-ever housing construction boom had peaked and would cause a net oversupply by 2018 did not send market-watchers running for cover.
"If you go back five, 10, 15 years ago there was more speculative building," CommSec chief economist Craig James said. "Nowadays, for a new developer or investor, the bank will require something close to 100 per cent, even more in pre-commitments before a building is allowed to go up. It does mean that the apartments and freestanding houses that get built will have an owner at the end of the day."
The net surplus in housing that reflected an oversupply in markets such as Melbourne and Perth, even as Sydney faced a deficit of about 40,000 homes, and came as little surprise. Both the Housing Industry Association and Goldman Sachs economist Tim Toohey had called a surplus. But the call came in a housing market different from before.
The Australian Construction Industry Forum's Kerry Barwise said even if new housing construction did slow, residential construction would stay strong due to a historically high level of spending on alterations and additions.
This was partly due to tight housing demand in Sydney, where many people were altering their homes rather than buy new ones, but it existed in other states as well and that would sustain spending, he said.
PEAK BEFORE FLATTENING OUT
"We're saying it's going to go up, hit that peak and then flatten out," Mr Barwise said on Monday.
But not everyone agreed with the BIS argument.
"It was just rubbish," said Brian Haratsis, the chairman of planning consultancy MacroPlan Dimasi.
Such arguments understated the effect that overseas buyers would continue to have in driving demand for housing, he said.
"What we're expecting is yields to drop, rents to stabilise and reduce and for the market to coalesce around lower returns," he said.
But after a "breather" that would let the market absorb the fact that an annual 200,000 housing starts was at a historically high supply rate, supply would pick up again, Mr Haratsis said.
"Unlike other trend predictions based on localised demand, this is not based on localised demand," he said. "We've moved from just a domestic market place to a global market place."
Mr James agreed the shift in risk from developer to owner – whether owner-occupier or investor – coupled with immigration growth and the new market of overseas buyers, meant there was less chance of a severe fall in prices.
"You've got a little bit too much supply coming on at any one point in time, but given time, it will be absorbed," he said.