Labor has unleashed a wrecking ball aimed squarely at the property market…
Suddenly it’s on like Donkey-Kong.
Labor has opened the broadside guns on property. Seems like every day we’re seeing another big policy announcement aimed at ‘housing affordability’.
And we’re not talking chump change anymore. Most affordability policies in recent memory have been as fulfilling and nutritious as licking an envelope.
But not this time. Labor has let loose a massive wrecking ball, and it’s heading straight for the property market.
1. Negative Gearing? Gone.
CRAASH!
2. Foreign Buying? Big fines for that.
SMAAASH!
3. SMSF leverage into property? Banned.
BAAZOINGO!
4. Vacant properties? Taxed!
BAM!
That’s a big-hitting policy line up. Any one on its own might be risky. But all of them together?
Flippin look out!
No government in recent memory, maybe in the history of the world, has ever taken such an aggressive affordability package to the people. No political party has come out gunning for property in such a Rambo-esque way.
Hold on to your hats folks.
But are things really as bad as they seem?
I’m not so sure.
Partly that’s because I’m not inclined to take politicians at face-value – EVER. So when Labor says they care about housing affordability, I tend to be a little sceptical.
I also can’t imagine that any political party would want to be in the driver’s seat if the property market crashed. Can you imagine? They’d get beaten over the head with it for decades.
And that’s particularly true for Labor. The general perception is that Labor is less strong on the economy. (I don’t think that’s necessarily true. I think they tend to be about equally useless.)
But presiding over a property market crash would certainly cement that perception for Labor. They’d struggle with it for decades.
And if the market did tank, I don’t think “But we fixed affordability for you. You should be thanking us!” is really going to fly with the electorate.
(Voters tend to be ungrateful like that.)
So there’s really nothing to be gained by being the party that brought down the housing market. Nothing at all.
So my assumption would be that Labor is looking for something that sounds big and impressive, while carefully avoiding doing anything that might influence the market in a meaningful way. (You’ll be surprised how far this rule of thumb will get you in assessing political risk.)
I call it the Sounds Good, Mostly Useless hypothesis. Let’s test it out.
1. Vacant Property Tax
The Victorian government just introduced something like this, and Labor wants to take it national.
The trouble with this is how you measure it. Some people have used water-usage to identify empty homes – but if the government tried that, it’d be pretty easy to game – just set a timer on the tap in the kitchen.
The Victorian system is self-reporting. (Good luck with that!)
It also sounds like the taxes are pretty small change. I’ve heard someone say that to a Chinese buyer, a new apartment is worth 20% more than a “used” one. So unless you’re talking about something that gives 20% a nudge (they’re not), I don’t see it moving the dial all that much.
Assessment: Sounds good, mostly useless.
2. More Fines for Foreign Buyers
Labor wants to double the screening fees on foreign investment and double the fines imposed on foreign investors who illegally purchase residential property.
The fees themselves are pretty small, so doubling a piffle is a pifflepiffle. Just a cost of doing business.
Doubling the fines is also a good idea, but Australia’s enforcement of the rules is pretty piss-weak, even after we beefed up the regime a year or so ago.
Look at the numbers. Since the new regime kicked in, the ATO has issued 388 fines worth more than $2m. That sounds impressive, until you realise it’s only about $5,000 on average.
Again, for foreign investors, it’s just a small cost of doing business.
Assessment: Sounds good, mostly useless.
3. Ban on SMSF leverage
Like a lot of Labor’s policies, this one has good intellectual cover, and one was on the key recommendations of the Murray Inquiry into the financial sector a few years ago.
SMSF leverage into property has been growing rapidly since it started in the latter years of the Howard government, and SMSFs looked set to become a major player in the market.
But it’s been growing rapidly from zero, and hasn’t had time to get all that far.
In my world, I know a lot of people using SMSFs to buy property, so it’s easy to forget that SMSF buying is still tiny – just 0.18% of the market. Getting rid of it is hardly going to move mountains.
This is still a pretty serious move, but it’s more about removing a source of future demand, rather than existing demand.
Assessment: Sounds good, mostly useless.
4. Ban on Negative Gearing
This is also a pretty radical reshaping of the market, but the thing to remember is that the change is grand-fathered. That is, if you had a negatively geared property before Labor brings their changes in, you get to keep negatively gearing it and claiming your deductions.
So again, this is about shaping future demand, rather than the market today. And even in theory, it’s not clear where the adjustment will be made. It could be in the relationship between rents and prices, it could be in the way people structure their finance (most people who negatively gear are wealthy enough to get creative with their financing).
The market will evolve, but it is certainly not clear to me that it’s going to have a big, or even noticeable impact on prices in the short term.
Assessment: Sounds good, mostly useless.
So look, while it all might sound a bit scary, I think most of Labor’s policy is in line with the Sounds Good, Mostly Useless theory of political science.
And that’s not an accident. You can be certain that Labor is being very careful about tipping the apple-cart, while very carefully choosing messaging that maximises voter-impact.
That’s politics for you.
But from where I sit, I don’t see any skies falling in.
What do you think? Mostly useless?
Mark Baker says
As usual, governments like to be seen to be doing something rather than actually doing something.
Jan says
Mark – absolutely spot on!
Richard Miller says
Some time ago I jumped on my political soapbox and discussed this very issue. Housing affordability to those entering the market is a dream come true…..for those with a mortgage on a property it’s an absolute nightmare…..yes that’s the MAJORITY of us…..but let’s appease the MINORITY…..that’s what we do!
Consider this….average Mum & Dad living in their comfortable 3 bedroom home, still have a mortgage but nothing unmanageable. They have some equity in their home which gives them peace of mind that they can borrow against this equity for home improvements, unforeseen expenses, even a holiday. The value of their home exceeds what they owe….everything is in order!
Then labor step in and take steps to reduce the value of their house…..wiping some / all of the equity or worse still reducing the value to a point below that of the remaining mortgage (this is very much a possibility if you’ve just purchased a property!)…..the result of people owing more than a property is worth has been seen time and time again (Remember the U.S. sub-prime property collapse)
It’s clear to me that housing affordability is something that has to be addressed, but not by reducing values. First home buyers should be given tax concessions to assist them in saving a deposit (A Government funded salary sacrifice where tax free dollars are put into trust (with standard interest payable) solely for the purpose of saving a deposit….withdrawal of that money for anything other than payment of a deposit on a legal realestate purchase results in tax ordinarily payable being withheld…..I know it’s so f’n simple…..)
So what do I think will happen?…..I know we’ll still be discussing this long into the future, one way or another…..either with continued discussion regarding fixes or new discussions surrounding foreclosures and Labor’s imbecilic actions!
I’d like to think I’m wrong….In Australia we didn’t see much of the real impact of the GFC & associated property foreclosures but travel to America or Europe and you’ll see just how Badly plummeting house prices will impact us all!
kiwicaz says
Whats up with this stupid labour party.
If they really think that attacking investors in the housing market is going to help the housing affordability then they have rocks in their heads.
Take investment out of the housing market and new builds would slow or even stop, loss of GST revenue on materials, loss of PAYG from laid off workers, not just from the property industry but all the support industries, and an increase in welfare payments.
That will help balance the budget…NOT
What will they tax to cover the losses from stamp duty and capital gains tax once the property market slows or even stops
brett duck says
I lived through the Labour recession we had to have 1991 and look forward to all the buying opportunities that their ill thought out policies will bring when the property market once again collapses like it did in 1991. Let history repeat !
Lawrence Anderson says
I would still worry these actions by Labour could affect the market quite dramatically. Just as buyers will scramble into an over heated market, Buyers will stop buying in a falling market tipping the market over.
ron goddard says
hi jonno,
ANYTHING politicians say or do(?) is worse than useless. they win a popularity poll and worry forever more about the popularity.or ratings as given by even more useless opinion polls.
that…is the price of democracy. it is one of the mysteries of civilisation (western style) as to why prices need to keep rising. one answer is that the buying in and out costs associated with the said prices adds to the numbers and then needs more financing in an ever increasing spiral. so we have a merrygo round. and he/she who hops off before the crash can buy back more cheaper, later lol.(sorry about that, its my always answer to dumbies). but the critical factor is the ratio of wages/salary to price of a house/home(?). years ago the nab factored in a ratio of 4:1 that is if a man (yes when men were men) had an annual salary of say $4,000 he could afford a $16,000 home in oz. his take home pay was then about $3,700..tax $300..yes really!! tax component was about 7% of his gross income. little wonder that people could afford a house in those far off days. i know that because in my area of operation, and it was an upmarket area even then the average price was $22,000 but over the hill in a less salubrious area was $16,000. now one needs two incomes plus all sorts of gerrymandering to ‘buy’ (?) a house or apartment or whatever amid the scramble to get the 4:1 ratio. have we come a long way? yes..bloody downhill lol. so to answer your question jonno it would need the wisdom of solomon plus the guts of caesar to change anything at all. and you well know the power (joke) of our politicians. they are merely mouthpieces for the tall poppies of the uncivil service.
cheers, ron
oh b.t.w. ever heard of alaska..the american airforce base was rendered useless by the russins a few days ago. something about an article in ‘vanity fair’ about russians being medieval and their lives not worth living. this upset pres. putin so much he ordered his eastern forces to knock out the alaskan airbase and anymore stuff like that from the said ‘vanity fair’ and the whole of usa will be knocked out : without power. and that is something that the generals etc. of usa are scared of. so it may be a warning for us, as we are ‘allies’ of uncle sam!
Desmond Lau says
Perhaps the government should let first home buyer claim interest payments on their purchase. This will level the playing field.
Alan Rodwell says
Hi Desmond, the only (potential) effective place to (put) take your direction forward is in writing to your local area politician – and or for your otherwise preferred Commonwealth Polly member for Parliament and keep the heat up High … follow up .. with your widest number of signed up/ on with you local folks – even put it up on Facebook etc any other equal links …etc … expand that all over the spaces you have access to …. get the numbers through the roof and then walk in the local polly office and hand over the results -. blow the lid off the the idea – go GET it done!
Roger says
Sorry Desmond but don`t you think a huge cash hand out like that would only increase demand and prices even further
Desmond Lau says
Perhaps slightly however this could be the best way to address the disadvantage without changing the rules of the game. First home buyers are a small and shrinking portion of the market due to uneven playing field.
Lindsay Stewart says
I’m no economist, but the way I see it, most of those strategies if implemented would only serve to reduce supply. Investors would buy less properties, therefore builders/developers would build less – reduced supply would then increase demand as our population is still increasing…therefore again increasing the prices of the commodity
Further the ban on negative gearing would simply drive rent prices through the roof as investors would look to recoup the losses from the tenants…therefore making renting unaffordable as well as owning…a lovely conundrum for our youth…
Guy Manton says
None of those assumptions ate based on economics. Scrapping negative gearing cant drive up rent prices ( rental prices arnt cost based, hence the crumby yields in oz. Everyone charges as much rent as they can for their property and negative gearing has no effect on market rental rates) reducing supply doesnt increase demand. They are independent variables. The adjust comes from their crossover point. Builders and developers still need work. The difference is our spare capital goes to spec on existing properties as opposed to building new ones, as theres limited cg in new developments and greenfields, and again oz property market has net yield similar to term deposits so unless you can get cg theres no money in property here.
Albert_Waldron says
Sorry Guy but the comment – “reducing supply doesn’t increase demand”.. If there is one property to rent and two people who need a house what do you think happens? They just agree that one family will live in a tent instead?
With more properties for rent, landlords will start lower rents to get tenants, then genuine investors start to realize that with the rental yields dropping they need to be paying less for the properties to get a decent return. Property Investing is about yield which is made up of two things cash-flow so you can hold onto the property and capital growth for profit. Take away the cash-flow and all of the sudden it gets a lot harder to hold onto a property while you wait for the capital growth.
We need to get rid of the council charges that push up the cost of developing which goes straight to the price and secondly find a fairer form of stamp duty that discourages people from downgrading their property.
Guy Manton says
So in your example demand stayed static. Regardless of the number of properties its still 2 people as you put it. They are independent. If you only have one property and 2 people then whoever has more resources gets it. If you have three properties then whichever landlord is prepared to go the lowest will get the tenant. But thats the supply curve moving in relation to demand. Not demand changing. Eco 101. Agree there is a shortfall in property, but due to favourable tax and financial law treatment over other assets its overpriced relative to its value. Weve got at least 3 years of spec sitting in the valuations at the mo. We wasted a whole round of intrest rate cuts that should of gone into consumer spending and business investment on bidding up prices on a predominantly fixed asset base. Its lunacy.
Tom says
Hey, Malcolm, whatever has happened to “Australian Values”?
Nearly all the comments in this blog are as selfish as all hell (literally) – the “ME, ME, ME” generation is alive and kicking. “To hell with the kids who want to get a start with their Family home.”
Every generation has had difficulty when getting started. I remember living on spag & tomato sauce, with the occasional fish caught off the jetty, when we first bought. Apple boxes for chairs. You name it.
We Baby Boomers had it hard, but had it good. If we tightened our belt, and bought a $30 old bomb, we got by – and had fun, knowing that the austerity was for a good cause. Later, we were able to help our kids with a deposit on their first homes, even though that often meant curtailing our own retirement nest-egg developments.
God help the kids of today and tomorrow!!!
Those parents who have managed to get their own home will be in hock all their lives, using their Superannuation payout to pay down their mortgage, leaving no leeway for assisting their kids into owning their own homes.
Meanwhile, some of the luckier ones amongst us have had the benefits of hearing Dymphna’s reasoned words of wisdom. Property ownership and investment has been a very lucrative vehicle for developing our personal security.
However, we should not get so addicted to $$$$ that we lose sight of our community and its problems.
Yes, charity begins at home, but it should not end there.
There will always inevitably be some poor souls who fall through the cracks, but if our political, legal or social structures are causing that number to explode, it is our human obligation to do something about correcting the problems.
So often, we hear, “That’s a good idea, but not in my back yard”.
A FAIR GO FOR ALL!!!
That is probably the principal “Value” which sets us Aussies apart.
Egalitarianism, “Joe’s as good as his master”, “Fair crack of the whip!” Our Aussie culture was developed by ‘have-nots’ in protest against the social structure of the old countries, where the landed gentry were entrenched at the top of society, lording it over the rest.
We are rapidly developing that undesirable European social structure.
Looking after number one is admirable, but only when nobody else is being actively disadvantaged.
“C’est la vie! Let them eat cake?”
For everybody to get a bigger slice of cake, the cake must get bigger – especially if the population is growing, (which itself is a very contentious proposition).
If the Government, representing the community at large, is going to reward investors with monetary assistance in any form, this should logically be restricted to only those investments which actually make the cake larger, not those which rob somebody else of their cake or unproportionably favour the ‘haves’. The benefit to the investor should be in proportion to the benefit to the community. Simple!!!
Tom says
I thought “Radical Responsibility” was meant to encourage us to understand and cope with not only the comfortable but also the uncomfortable aspects of our personal selves, taking responsibility for both our likes and dislikes, our beliefs and our disbeliefs, accepting praise and criticism, that with which we feel comfortable and that which makes us feel uncomfortable. To reject criticism out of hand, without understanding (deep down) what it is that makes us disagree with another’s well considered opinions indicates that one has not really accepted “Radical Responsibility” as part of one’s philosophy of life.
Airing of home truths can be salutary.
If something or someone gets under your skin, take an HONEST look inside and find out why. Security blankets are a barrier to real personal development, so we need to face up to factual reality and accept the FACTS of life, rather than the comfortable, convenient “alternative facts” (ie “lies & untruths”). Because many other people rely on the same security blanket does not guarantee its veracity. Each of us is responsible for all our actions – including providing criticism where it is warranted and praise when appropriate.