It's mainly a been a week of furious tax debate. Admittedly it's been quite a few years since I was employed in a tax position of any note, and even longer since I sat my tax exams. No matter, for almost everyone in Australia is a tax expert, and nearly all of us are in agreement that someone needs to pay more tax...just as long as it isn't us!
Higher stamp duty levies, land tax, income tax, capital gains tax, imputed rental charges, corporation taxes, and superannuation taxes are just a handful of the tolls and contributions being demanded by the baying mob. We are suddenly all sure loving the idea of higher taxes!
A couple of things I can recall from studying tax, particularly with regards to the interdependent sectors of the housing market, are that firstly it's far easier to tweak tax rates and sections of the tax legislation than it is to rip them up entirely, and secondly most modelling and scenario analysis falls over miserably because it fails to account accurately for behavioural change triggered by new tax legislation.
Record residential construction boom
It's a well worn argument that investors don't add to the dwelling stock, but if you've ever worked in the development space you'll know that developers don't
What creates new supply is declining financing costs, rising demand in aggregate, and thus rising prices, and as this cycle has progressed we have been getting all of these in spades, particularly resulting in a surge of new units, townhouses & apartments, which in turn has already cooled these parts of the housing market naturally.
The strongest prices gains have been seen in Sydney and Melbourne and these cities have played host to the bulk of the supply response, though a combination of rising prices, low interest rates and, let's be blunt about this, a fresh market of Chinese mainland buyers of new apartments, has seen construction activity increase sharply in Brisbane and elsewhere too.
Only a couple of years after the system was apparently busted (which would allegedly march us into a recession) residential construction activity hit its highest ever level. So much for negative gearing restricting the dwelling stock - it's the greatest residential construction boom on record!
As for whether falling demand from investors would lead to rents rising, logically the answer is obviously "yes" as rental supply diminishes, for not all renters want to buy, and many could not afford to do so without borrowing the full purchase price and associated closing costs, a dynamic regulators have been nervously edging away from ever since the financial crisis.
Unfortunately I don't have much hard Australian-based evidence upon which to base this assertion, since there have only been two instances where rents have spiked in Australia over the 33 years of available data, but one might reasonably expect that these coincided with downturns in investor activity.
While there may conceptually be a very loose relationship between inflation and rental price growth, at best it is a link bound by a mile-long rubber band. I've never once come across a landlord adjusting rents for the growth in price of a tub of ice cream, or a dozen eggs, or a packet of smokes, the price of having a root canal, or whatever. It's an absurd notion, really.
Typically rental price growth is simply one function of the wider property market cycle, specifically supply (the number and type of rentals available for lease) and demand (the volume of renters in the market, and the product collectively in demand from them), although household income growth does indirectly play its part.
Moreover, the property markets of today aren't readily comparable unless population growth is dialled back, since in the major markets of Sydney and Melbourne absolute population growth is much higher. Victoria's population grew by 42,781 in 1985, for example, but has been tracking at around 2.5 times that level recently.
Mostly old ground. But what about more recently when annualised rental growth soared to 8.4 per cent in December 2008? Was there also a dip in investment lending then which led to the rental supply shortage and some wretched rent increases in parts of Sydney and elsewhere?
Again, clearly yes, the figures show that investor lending all but halved from $10.1 billion in June 2007 to just $5.1 billion by January 2009, coinciding exactly with the spike in rents as investors deserted the market, spooked by the onset of the global financial crisis and various predictions of a crash by market commentators.
As you can see in the chart below, investor lending rebounded strongly from the month of February 2009, which was the month within which Kevin Rudd announced his famous $42 billion stimulus package, and rental growth quickly cooled again.
At the end of the above chart, we can see that monthly investor lending has recently fallen from a peak of $15.5 billion in June 2015 to $12.6 billion by December. Despite this pullback, which was driven by APRA's interventionary measures, I actually don't see strong rental growth returning any time soon for a few reasons.
There may also be some small impacts from subtle shifts in rental practices such as the growth of Air B&B, although these will surely be less influential than the key trends.
It's worth noting that the introduction of the capital gains tax discount did not halve tax payable as is frequently implied, rather it replaced the old indexation of the cost base system which ran from 1985 and was not discontinued until 1999, inflicting a searing pain upon tax exam students and preparers of tax returns alike.
Capital gains tax (CGT) is a crappy tax, especially when it does not account for inflation, effectively a punitive double taxation of savings which discourages investment. The optimal rate of CGT is zero. In any case new housing is already one of the most heavily taxed commodities there is.
Indeed this already happens to buyers of new properties today, albeit to a less dramatic extent, which is why in the absence of homebuyer grants for new builds developers often sell to self-managed super funds lured by tax incentives and bad advice from accountants, or to foreign buyers. Chris Bowen's assertion that buying new property is not "in any sense" more risky than buying established is discredited by all available research.
Most of the debate this week has really been about intergenerational equity rather than budget repair, which is sensible, but perhaps overlooks the high level of supply of construction in the pipeline.
In my opinion changing negative gearing rules - which after all, is a timing difference rather than a genuine tax concession - would generate close to zero additional tax revenue after behavioural change, reduced stamp duty excise and soaring public housing costs are accounted for. In any event, net rental losses have declined since even in nominal terms in 2008, while net rental profits have increased by well over 50 per cent.
Looking back towards the CBD from Boggo Road, cranes everywhere:
All part of a record construction boom in full swing.