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Table of ContentsExecutive Summary ......................................................................................................... 3
1. Context ............................................................................................................................... 6
2. Long Term Housing & Rental Prices in Australia ....................................................... 10
3. Impacts of Negative Gearing & CGT on Price & Rental Levels ............................ 20
4. Impacts of Proposed Changes to Negative Gearing & the CGT Discount ........ 32
5. Residential Market Downturn ....................................................................................... 39
6.
Appendix 1 ...................................................................................................................... 42
7. Appendix 2 ...................................................................................................................... 43
8. Appendix 3 ...................................................................................................................... 45
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1.
The ALP proposal to permit negative gearing of
wage income only on new buildings and to reduce
the Capital Gains Tax discount from 50% to 25% will
have three major short term to medium term
impacts.
2.
Over the next decade it will reduce by over 1
million, the number of negative gearing landlords.
This will directly impact on 45% of the 2.25 million
renting households. It will increase rents by 8.8% for
these negatively geared dwellings.
3. Second it will remove 205,000 dwellings from the
rental housing supply stock. Given the current
historically high levels of housing stress (50% of lower
income households were assessed as being in stress
by the ABS (in 2014) and 55% are currently
estimated for 2016 that waiting lists for public
housing are also at historically high levels (150,000
households), an immediate increase in social
housing will be required to replace low income
rental stock.
4. Third it will create a ‘resale price cliff’. Our detailed
study of the Melbourne CBD / Docklands /
Southbank resale of ‘off the plan’ apartments
reveals on average currently a 12 % loss. Around
20% of the sales had losses ranging between 20%
and 40%. Reducing the CGT discount would result
in losses in the order of 17% to 20% for off the plan
purchases driven by an inability of the first owner to
sell to a negative gearing landlord. Two thirds of
apartments are investor owned. Apartment sales
activity levels have reduced between 30% and 40%
in Sydney, Perth and Brisbane and median
apartment prices are dropping in all CBD’s.
5.
The proposed ALP policy change will cost a similar
amount as the revenue it collects and in addition
cost renters an additional $1.7 billion per annum in
rental costs. Direct expenditures for a modest
mitigation of the impacts on low income renting
households are:
• $2.5 billion per annum capital costs for social
housing due to the reduction in rental dwellings
acknowledging the historically high 150,000
people on public housing waiting lists
• $0.4 billion in operating costs to support the
additional social housing
• $0.4 billion per annum in Commonwealth
Rental Assistance acknowledging historically
high 50.1% of low income households in
housing stress.
The total cost to the economy is therefore $5 billion
per annum with $3.3 billion direct expenditure from
government. This compares to the average per
annum revenue estimated by the Parliamentary
Business Office of $3.2 b illion per annum, resulting
from implementation of the ALP policy framework
6. In addition to the direct costs a wide range of
indirect costs should be considered in the
assessment of the ALP proposed policy framework.
These include:
Higher new dwelling prices in areas with limited
new build opportunities
More focus on properties which can deliver
high capital gains (high end of market) to
compensate for the reduction in the CGT
discount
Higher levels of rental stress for low income
renters, as higher income renters ‘crowd out’
lower income renters seeking to reduce their
rental costs
_Executive Summary
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Lower income rental households forced out of
established areas with jobs, facilities and public
transport to move to outer fringe areas in new
dwellings with no jobs, public transport or
facilities
Increased levels of social dysfunction on the
urban fringe
Increased carbon footprint for low income
renters as affordable private rental stock in
established areas shifts to the urban fringe.
Established house prices are estimated to decline
overall by 3% to 4%.
7.
The ALP policy change forecasts 25,000 additional jobs. No new jobs will be created because in the
long run demand and supply of new dwellings is
influenced by real disposal income, population
growth, employment and mortgage rates. The ALP
proposed negative gearing / Capital Gains Tax
discount will result in a similar total housing supply to
the current policy setting.
8.
Property markets in Australia are at different phases
of the economic cycle. Within 24 months,according to the Australian Construction Industry
Forum key markets of Sydney and Melbourne will
contract by approximately 10%.Sales volumes will
contract by 25% to 35% from 2015, rents will
increase by 1.0% to 3.0% per annum and median
dwelling price increases will moderate from 4% to
6% per annum.
9.
The ALP proposed policy change will create marketchaos because it is undefined and will be difficult
to pol ice. For example, is a refurbished building
(e.g. a former office block) for residential purposes
a new building? When is renovating a dwelling a
new building? Further, financial institutions and
valuers will take a conservative approach to the
‘resale price cliff’ anticipating that resales to
positively geared entities only will significantly
reduce the potential buyer market. This will mean
lower loan to value ratios i.e. increased deposits,
mortgage insurance etc and more equity from
purchasers.
10. Considering the following factors:
Australia is in the ‘unwind’ period from the
biggest residential boom in Australian
history
Significant contraction in credit to
domestic investors has already led to a
dramatic drop in investor loans
Significant contraction in credit to overseas
investors has already occurred
The imminent contraction in the residential
construction activity
Reductions in median prices forapartments has occurred in Sydney,
Melbourne, Brisbane and Perth and market
conditions in regional areas continue to
soften
Pressure on banking shares and banking
profits is increasing
The distortionary impact of the proposed
policy changes is likely to be significant
Market confusion on behalf of both developers
and purchasers, risks to market stability and
volatility in the short term, suggest that retention of
the current negative gearing / CGT discount is the
most rational policy position.
11.
The Henry Tax Review (Australia’s Future Tax System,
2010) the last comprehensive analysis into the
reform of negative gearing / CGT discount
recommended that no change be made until
housing supply issues were addressed because of
the likely negative impacts on housing supply. This
policy position, which advocated elimination of
stamp duty and reforms to land tax, remains the
most comprehensive analysis of the best tax mix for
land and resources. The most recent views of the
RBA support the Henry Tax Review proposition. The
RBA stated in its 2015 Submission to the Inquiry on
Home Ownership that, ‘The Bank believes that
there is a case for reviewing negative gearing, but
not in isolation. Its interaction with other aspects of
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the tax system should be taken into account’ (p.
23).
12. Negative gearing and the CGT 50% discount has
been the foundation of the new Australian Housing
Model, supplying private rental dwellings to
substitute for the real reductions in expenditure on
public housing.
Subsidised home ownership (no CGT) Affordable housing provision by the privatesector with direct Commonwealth RentalAssistance(CRA) to consumers
Reduced direct social housing provision Increased management of social housingthrough community housing organisations.
Policy makers proposing to change the negative
gearing rules and reduce the CGT discount have a
very short memory.
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_1. Context
1.
This study analyses the impacts of negativegearing and the capital gains tax (CGT) discountin relation to the key objectives set for this policysetting and the implications of the current CGTpolicy setting i.e. a 50% discount.
2.
A Recent study by the Grattan Institute (HotProperty: Negative Gearing and Capital GainsTax Reform, 2016) focused on the ‘beneficiaries’ of the CGT discount, and failed to assess theeconomic benefits of the current policy setting.This omission led the Grattan Institute to thewrong conclusion i.e. that removing or reducingthe CGT discount would provide ‘saving’ togovernment. In reality, such a change willgenerate no revenue to Government and cost
renters $1.7 billion per annum.
3. These commentators failed to recognise that theincrease in supply of rental housing induced postthe 1999 introduction of the 50% CGT discountreduced housing stress for low income renters byover 25% prior to the GFC (2007) in a periodwhere the supply of public housing was reducedsignificantly and demand for housing increaseddramatically to support the mining constructionboom.
4. The Ralph Inquiry (1999) recommended the 50%discount to stimulate capital markets, in fact, the
first sentence after the recommendation in theRalph report (page 598) states: “The Review’ s recommendations for capital gains taxation are
designed to enliven and invigorate the
Australian Equities markets, to stimulate greaterparticipation by individuals”. The primaryobjective for the recommended change was toincrease capital investment in nominated assetcategories including land and buildings.
5. The Reserve Bank of Australia (2003) in a
submission to the inquiry into First Home Ownership(Productivity Commission, 2014) set someintellectual foundations for the Henry Tax Reviewin terms of neutralising treatment between assetclasses. In 2015 the RBA confirmed that negativegearing / CGT policy should be integrated withother tax efficiency and tax mix considerations.
6. The RBA submission highlighted that whilehousing prices had increased due the significantinterest rate cuts, rental vacancies had alsoincreased significantly and real rents were stableor declining post the 1999 Ralph Inquiryintroduction of the 50% CGT discount.
7. The ‘stimulating effects’ of the Ralph Inquirysignificantly improved rental affordability from 1999until the chaos of the 2007 boom and 2008 ‘bust’ i.e. the GFC. In this period the number of lowincome renters in housing stress declined by over25% i.e. renters paying more than 30% of grosshousehold income on rent (Australian Institute ofHealth and Welfare). This outcome was achievedin parallel with significant reductions in the supplyof public housing.
8. ACOSS (2015) and the Grattan Institute (2016)utilised similar methodologies to assess the impactof negative gearing and CGT discount. Thesemethodologies did not assess the costs andbenefits of the CGT, rather their studies simplysought to ostracise high income individuals, hencethe identification of the direct beneficiaries of theCGT discount from ATO records without forexample analysing the benefits to low incomerenters.
9. The findings that most of the tax benefitaccrued to high income individuals was to beexpected because of their wealth and access tocapital. The broader spectrum of lower incomeindividuals negatively gearing and utilising the CGTdiscount was the real news.
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The last comprehensive study of the issue, theHenry Tax Review, Australia’s Future Tax System(2010) recommended that no change be made tothe CGT 50% discount until:
Stamp Duty is removed Land tax is reformed Housing supply issues are addressed due topotential impacts on housing supply
In addition, the Henry Tax Review supported acontinued CGT discount which improved neutralitybetween asset classes (i.e. property / shares / cash)and positively geared investors in property i.e.investors with high levels of equity. The Henry Tax Review recommendations refinedthe CGT discount recommendations from the 1999Ralph inquiry which introduced the 50% CGTdiscount to replace the complex indexationconcession which applied previously.
TABLE 1: HOME OWNERSHIP RATES FOR AUSTRALIANHOUSEHOLDS 1976-2011
Source: ABS Census, AHURI (2014)
The stimulatory effect of the 50% CGT discount canbe clearly observed in the context of the long termsupply of rental housing in Australia. The overall
trend increase in rental housing supply can beobserved between 2001 and 2011. The increase insupply of rental dwellings can almost be entirelyexplained by market entry from negative gearinglandlords as per table 1.
The stimulus effects of the CGT discountaccordingly are almost wholly responsible for:
A 25% reduction in the number of low incomeearning households paying over 30% of their
gross household income in rent from 2000/01to 2007/08, however after this period the rateof dwelling construction was unable to matchdemand and household income increasesparticularly for lowest ranges did not matchrental price increases to 2011/2012. After thisperiod low wage increases (the lowest postwar) did not match rental increases andrental affordability deteriorated to 2016 (55%of low income households assessed as paygreater than 30% gross household income).
TABLE 2: PROPORTION OF LOW INCOME
HOUSEHOLDS SPENDING MORE THEN 30% OF GROSSINCOME ON HOUSING COSTS
Significant downward pressure on rentallevels for all renters due to significant increasein supply.
Negative Gearing and the CGT discount arecritical elements of the new Australian Housing
Model which can be summarised as:
Subsidised home ownership (no CGT) Affordable housing provision by the pr ivatesector with direct Commonwealth RentalAssistance(CRA) to consumers Reduced direct social housing provision Increased management of social housingthrough community housing organisations.
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TABLE 3: EXPENDITURE ON HOUSING ASSISTANCE – AUSTRALIA, 1980 TO 2010
Source: J Yates, Évaluating social and affordable housing reform in Australia: Lessons to be learned fromhistory*, International Journal of Housing Policy, Vol. 134, No2, 2013, p.115
The economic benefits of using private capital togenerate affordable rental housing are direct (as inthe case of lower rents) and indirect in the case of
reduced government expenditure on socialhousing and the opportunity to redirectexpenditure.
Even with induced effects of private rental housingdue to the CGT discount the Reform of FederationWhite Paper (Issues Paper 2, Appendix A 2014)argues that there is “ A lack of affordable private
rental housing for low-income earners — particularlyin the major cities — has led to an increase in thenumber of people living in marginal rentalaccommodation, such as caravans, boardinghouses and motels (R Goodman et al., Theexperience of marginal rental housing in Australia,AHURI Final Report No. 210, Australian Housing andUrban Research Institute, Melbourne, 2013, p. 8).
While on the rise since the 1990s (Goodman et al.,p. 35.) , demand for marginal rental housing hasbeen exacerbated by the impact of the globalfinancial crisis (Goodman et al., p. 8.). Marginalhousing tenancies are often poorly regulated and
highly controlled by landlords, resulting in greaterinsecurity and disempowerment for tenants (Goodman et al., p. 2)”
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The direct provision of social housing still requires parallelCommonwealth Rental Assistance (CRA) to achieveaffordable rental outcomes.
McKell Institute / ACOSS / Gratton Institute utilised thesame technique to analyse impacts on renters ofremoving the CGT discount by observing the impacton rent in the two year period (1985-1987) when thededuction to labour income was removed by theHawke Government.
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The McKell / ACOSS / Grattan Institute impactanalysis is technically misplaced because rentalmarkets cannot adjust in a two year period.Grattan acknowledge the need for anadjustment period in their analysis of the CGTdiscount on housing prices. A key learning fromthe McKell / ACOSS / Grattan technique is thatimpact analysis must have regard to actualconditions in individual rental markets i.e.between 1985 and 1987 rents in Perth and Sydneyincreased due to boom conditions and rents inother major capital cities remained stable ordropped.
Data from the Australian Institute of Health andWelfare indicates that from mid-2000 to mid-2007
rental stress for low income households reducedby 25%.
This data is supported by analysis in thereform of Federation White Paper (2014) onhousing which indicates a steep decline in rentalstress up to 2007 and a significant increase to2011.
From an economic perspective analysts agreethat long term policy settings which influencedemand and supply have a far more significantimpact on housing prices and rentals. In terms oflongitudinal studies, Stapledon and the RBA haveproduced analysis which indicates that demandand supply factors are far more significant thanfactors such as negative gearing and the CGTdiscount in influencing housing and rental prices.
For analysis of the CGT impacts five timeframes should
be considered:
1985 – 1987 – Housing CGT change todeductibility of Capital Gains from labourincome1988 – 1994 – Post stock market crash andinterest rate reduction from 10% to 6%1995 – 2006 – Population growth. Introduction ofGST. Interest rates decreased from 10% to 6%CGT 50% discount introduced.2007-2010 – GFC chaos period2011 – 2016 – Post GFC housing boom withinterest rates reducing from 5% to 1.75%. In 2015from 2011 to 2010 credit tightening on investors/ SMSF’s / foreign investors and increased LVR’s
for owner occupier ’s significantly coolingmarket. Some markets (e.g. Melbourne, Perthand Brisbane CBD apartments) are significantlyreducing in value. Banks withdrawing FIRBfunding.
This study focuses on:
The long term determinants of housing pricesand rental levelsAnalysis of the period from 1999 to 2006 inrelation to stable economic conditionsAnalysis post 2011 and the introduction of ultra-low interest rates.
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2_ Long term Housing andRental Prices in Australia
2.1_ Introduction
The beginning of the modern era of Australianhouse price and rental change is widelyconsidered to be 1955 (RBA Aug 2014, p.33)
Since that time, house price growth has oscillatedaround a real long term growth rate of 3% perannum and a quality adjusted growth rate of 2.2-2.5% per annum.
Though this long-term trend has remainedconsistent, the cause of house price growth overtime is more complex, being an outcome of
multiple interacting supply and demand sidefactors.
An analysis by Peter Abelson et al (2005) found that“real house prices are related significantly andpositively to real income and to the rate of inflationas represented by the consumer price index” and“are also related significantly and negatively to theunemployment rate, mortgage rates, equity prices,and the housing stock ”(p.1). The changes in thesekey demand and supply factors over time are thecause of housing price change.
Additionally, the study found no “significantrelationships between house prices and income
per capita, real or nominal interest rates, or realrental rates.” (Abelson 2005, p.12).
TABLE 4: REAL (2014) DWELLING PRICES
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2_ Long term Housing and
Rental Prices in Australia
2.2_ Introduction (cont.)
The insignificance of rental yield is of particularnote as it points to one of the most fundamentalchanges to the housing market over the period – housing investment shifted focus to earningthrough capital gains, essentially treating housingstock as if it were an asset.
However, while housing prices took off as
speculative investment in property grew inpopularity and as household wealth and incomewere also increasing over the period, rentsremained relatively flat, as demand for rentalsincreased but the availability of rental dwellingsincreased faster, driven by property investors.
TABLE 5: RELATIVE & RENTAL HOUSE PRICE MOVEMENTS
The Graphs below show that while rents havefollowed economic conditions over the past 20years real house price growth grew more quickly.
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TABLE 6: EFFECTS OF THE MINING BOOM ON HOUSEHOLD INCOME
2_ Long term Housing and
Rental Prices in Australia
2.3_ Short-term Disruption, Long-term Change:
Effects of the Mining boom - Demand
The mining construction boom had major effectson the entire Australian economy not just a fewmining terms.
In its Research Discussion Paper “The Effect of theMining Boom on the Australian Economy” (August
2014), the RBA discusses in detail what it believes tobe the overall impact of the ‘Mining ConstructionBoom’ on various metrics, notably on page 15where it identifies that as of 2013:
The population is 1% higher reflecting theresponse of net migration flows to relative
job opportunities Employment is 3% higher reflecting higherreal wages as well as job opportunities Real consumer wages 6% higher, and that Household disposable income 13% higherreflecting historically high levels of terms oftrade and national income.
Based on a counterfactual analysis i.e. what wouldhave occurred if the mining construction boom didnot happen
It is important to underline that the RBA believesthat several of the key factors that determinehousing prices have been disrupted since the mid2000’s, and that this disruption may have caused aone-off permanent change in long term houseprices, driven by an expansion of the entireAustralian economy.
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TABLE 7: EFFECTS OF THE MINING BOOM ON CONSUMER PRICES – SELECTED COMPONENTS
TABLE 8: EFFECTS OF THE MINING BOOM ON UNEMPLOYMENT
2_ Long term Housing andRental Prices in Australia
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TABLE 9: HOUSING VACANCY & RENTS
2_ Long term Housing and
Rental Prices in Australia
2.4_ Short-term Disruption, Long-term Change:
Effects of the Mining boom - Supply
While demand-side changes have perhaps playeda larger role in housing market expansion since theGFC, supply in the market has proven relativelyinelastic to this ‘surge of demand’ (p19. RBA Aug2014 The Effects of the Mining Boom on the
Australian Economy). Accordingly the mining boomwas impacting real rental prices and vacancies in
the entire Australian economy.
This has had the secondary effect of keeping rentalvacancy rates much lower than they would havebeen without the mining boom.
The RBA also points out that this lack of a supply sideresponse to demand has led to rapidly rising rentalprices in line with economic conditions.
The RBA also accounts for the impacts of high rentsand house prices on suppliers, stating that“Although high rents and house prices encouragehousing construction, these effects are more thanoffset by higher interest rates after 2009”. (p19. RBAAug 2014)
Thus even though demand was strong “the supplyof housing contracted compounding thedownward pressure on vacancies and upwardpressure on rents.” (p19. RBA Aug 2014)
The paper estimates that “without the miningboom, the vacancy rate would barely have fallenbelow 2% during 2006/07 and rents would haveroughly kept pace with inflation”
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TABLE 11: HOUSING PRICE INDICES 1970-2003
TABLE 12: STAPLEDON
TABLE 13: REAL (2014) DWELLING PRICES
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2_ History of Negative Gearing and
capital Gains Tax
Abelson (2004, p. 9) argues “Home owners were exemptfrom capital gains tax (CGT) throughout the period.Investors were also exempt from CGT up to 1985 whenthe government introduced a CGT on real gains forinvestors. In September 1999 the government replacedthis CGT with a tax of 50% of the nominal gain. Manypeople, including the Productivity Commission (2004),perceived the change in 1999 to be a further subsidy toinvestors.
Actually, when the nominal gain is more than twicethe real gain (as often happens), the new CGTincreases the tax liability. ! Investors were allowedfull negative gearing rights throughout the period,except between August 1985 and September 1987,when negative gearing was disallowed andinvestors had to carry forward losses. Rentalinvestment declined in this period”. Further Abelson(P.12 argued) (The study) found no significant
relationships between house prices and income percapita, real or nominal interest rates, or real rentalrates.”
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TABLE 16: REPAYMENTS ON NEW HOUSING LOANS
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1.
The relationship between housing prices and
rental levels in Australia d iverges in different
time periods due to different economic
conditions, different taxation and investment
frameworks, different investor objectives and
differing renter preferences.
2.
Rental levels in Australia are primarily driven by
the supply of rental stock available and the
ability of renters to pay. Investors determine the
stock of rental housing available. Consumers
(renters) determine ability to pay via the
amount of rent they are willing to pay. Rental
levels are an input, though not a particularly
significant input into housing prices in Australia,
unlike the international experience. In Australia
investors primarily seek capital gains. As rents
are determined by the dynamics of demand
and supply not the returns that owners are
seeking.
3.
Rental levels in Australia post 1980’s tracked
with CPI (and below) until the mining
construction boom. Investment housing is anasset with its own investment attraction and
investment criteria compared with other asset
classes as already demonstrated in section 2 of
this report. The housing supply in Australia is
relatively inelastic in relation to demand to
1 The CGT discount was set at 50%, replacing the formerframework which indexed values. The Ralph proposalintended to stimulate investment and to create certainty
TABLE 17: HOUSING PRICES TO INCOME
supply i.e. is not responsive to changes in
demand and hence rental levels can spike
quickly given that the available pool of rental
dwellings cannot expand quickly.
4. Post the 1999 Ralph Inquiry change to the
Capital Gains Tax discount1, the number of
investors negatively geared increased and the
number of positively geared investors remained
relatively stable. It is reasonable to assume that
the long run increase in rental (investor) stock
was stimulated by the 50% CGT discount given
the take up of negative gearing and parallel
3_Impacts of Negative Gearing and
Capital Gains Tax Discount on Price andRental Levels
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expansion of rental stock. This is an important
fact because the supply of rental housing
increased from 20% to 25% of total housing
stock from 1991 to 2006. Rental yields declined
substantially and vacancy rates remained
steady through this period.
5.
The significant increase in total rental stock
occurred in parallel with the Ralph Inquiry 1999
CGT discount change but the trend supporting
increased landlords negatively gearing was
well established in the early 1990’s. This
indicates that increasing wealth, increasing
demand and changing consumer preferences
were more important in stimulating supply and
demand than the 1999 introduction of the 50%
discount alone.
6. The rental stock supply response
accommodated real demand over the period.
As the demographic impacts of the mining
construction boom receded, the number of
people negatively gearing residential property
flattened out by 2014 (see table 20).
7. The supply of rental housing was an important
contributor to the mining construction boom.
Without the incentive for a significant supply,
partly induced by the 50% CGT discount,
important housing requirements in resource
areas such as the Pilbara and Bowen Basin
would not have been fulfilled. The public sector
failed to produce housing when it was required
and rentals of $1,500 per week for a 3 bedroom
dwelling were common in the Pilbara.
8.
Capital cities also required apartments for
miners and support workers as well as
international students. As the RBA (June, 2014)
analysis has indicated the 2004-2010 mining
construction boom is the largest in Australian
history, yet the Australian housing model
underpinned by negative gearing was almost
able to cope. RBA counterfactual analysis (i.e.
what would have occurred without the mining
boom), suggests rental levels would have
tracked the CPI if the boom had not occurred.
(Downes P. Effect of the Mining Boom on the
Australian Economy, June, 2014 RBA)
9. Unpacking rental housing supply from 1996 to
2006, then to 2011 indicates that the new
Australian Housing Model is working well by
world standards in terms of generating
affordable rental levels. The percentage of
households under housing stress i.e. paying
more than 30% of gross household income in
rent reduced by 25% in the early period. This
remarkable outcome was caused by an
increase in low income housing stock and asignificant increase in household income. This
outcome is documented by the Australian
institute of Health and Welfare and by Yates
(2004). Between 1996 and 2001, the income
circumstances of private renter households
improved considerably, thereby bettering their
overall ability to pay for housing (2004, p38).
10. The affordable rental housing supply situation
(Reynolds, Yates, 2014) in 2011, after the largest
trade episode in Australian history was still
remarkably robust. Estimating the rental supply
for quintiles 1 and 2 (i.e. the lowest 40% of
household incomes) the authors concluded,
‘using what is in effect a cumulative shortage
of affordable and available stock for Q1 and
Q2 households, there was a surplus of
affordable dwellings nationwide of 174,000 in
2011, significantly down from 260,000 in 2006’.The new Australian Housing Model was clearly
working, however benefits did not accrue to
the lowest income households because
affordable dwellings were being occupied by
higher income households.
11. From 2011 to 2016 rental levels increases were
modest and tracking CPI, but they were
however higher then wage price increases.
Together with a post GFC increase inunemployment housing stress for low income
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rental households increased significantly so that
by 2016 around 55% of low income rental
households are in rental stress.
12. Negative gearing and the CGT 50% discount
were important policy settings underpinning
growth in the supply of rental dwellings and
moderating growth in rental levels. Given that
the 2004-2011 trade episode was the most
significant in Australian history the rental market
operated exceptionally well.
13. The new Australian Housing Model was
successful inducing the supply of private rental
housing as the supply of public rental housing
contracted.
14. Rental stress for low income households
reduced dramatically to 2006 but due to the
mining construction boom impacts on the
entire Australian economy re-emerged, by
2011 low income rental stress requires targeted
policies to find solutions. Yates (2004 and 2014)
suggests government direct investment
developing a market to enable institutional
investment (p.49) or rental regulation and/or a
reduced CGT discount. Eliminating negative
gearing would significantly increase
expenditure requirements on social housing or
increase tax expenditure on low income
housing. Neither of these budgetary costs have
been assessed in estimation of the net budget
costs of changing negative gearing / CGT
discount as recommended by the ALP.
15. The significant positive impacts of negative
gearing / CGT discount are not calculated in
terms of the supply of rental housing and lower
rental costs, despite the fact that this is clearly
influenced by the current policy setting. The
ALP proposed policy change does not factor in
the costs associated with higher private rentals
reduced rental stock and housing
displacement.
16. The approach utilised by McKell / ACOSS /
Grattan has not been to assess the major rental
benefits in current policy setting, in particular
the 25% reduction in housing stress for low
income households to 2006. Rather each of
these analysts has (strangely) analysed rental
impacts from 1985 to 1987, when the Hawke
Government restricted negative gearing so
that rental losses could not be used to reduce
tax payable on labour income, then reversed
the decision. Clearly rental supply and rental
levels have almost no chance of responding to
a change in tax parameters in 24 months. The
graph utilised by Grattan is reproduced below.
TABLE 18: RENTS DID NOT RISE WHEN NEGATIVE
GEARING WAS REMOVED
The key objective of these analysts is to
demonstrate that negative gearing / CGT
discount has no impact on the supply of rental
housing and the price of rent. This proposition is
at odds with the facts. As the graphs indicate
rents in capital cities moved in disparate
directions. This outcome was to be expected
because demand and supply factors
significantly outweigh any impacts of negative
gearing / CGT discount. This should have
informed the current ALP proposal which is to
be implemented at a time when residential
markets are contracting significantly and most
CBD and Inner apartment markets are in
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serious decline in terms of sales activity and
price. (see Table 24)
17. The Grattan Institute argues in relation to the
period 1985 to 1987, ‘Beyond these historical
lessons , economic theory and empirical
research show that negative gearing and/or
increasing taxes on capital gains does not
change rents much’ (p.34, 2016). This is at odds
with the facts. The Grattan Institute analysis of
the impact of CGT discount argues that almost
100% of the increase in rental dwelling numbers
was caused by the CGT discount. Data
analysing the period 1996-2006, i.e. pre the
peak of the boom and the ensuing GFCdemonstrates that rental housing supply
increased and rental levels remained around
CPI. The Grattan proposition is put in the
negative i.e. removal of negative gearing /
CGT discount will not reduce the number of
rental properties (p.34). This proposition (without
evidence) is at odds with the long run
evidence of the impacts of the 50% CGT
discount which has contributed to a significant
increase in rental stock induced by (as Grattanindicates) an increase in negatively geared
properties almost wholly induced by the 50%
CGT discount.
18. Grattan turn to ‘special pleading’ for their case
against the negative gearing / CGT discount.
This includes the (incorrect) statement that
negative gearing reduces rates of home
ownership (p.6, Grattan 2016) and made it
harder for owner occupiers to afford to buy
homes (p.27, Grattan 2016). In fact home
ownership remained relatively constant (68%)
and private rental dwellings substituted for the
reduction in public rental dwellings.
19. Assessing long term rental trends and likely
impacts of taxation on rental levels (Stapledon,
Abelson, RBA) analysis leads to the conclusion
that negative gearing / CGT discount has led
to a significant increase in rental housing
supply, supported by a change in consumer
preferences (at higher income levels) to rent
dwellings. This reflected significant increases in
labour mobility, differing personal relationship
preferences and structures, family breakdown,
increased income for young professionals and
increased preferences to live in CBD’s / Inner
areas which increased human capital via
increased job opportunity and increased
educational opportunity. These significant
benefits are reflected in very high levels of
labour productivity in inner areas of the CBD.
This needs to be considered against the tax
expenditure generated by negative gearingCGT discount.
20. Ongoing growth in highly productive services
export industries such as student housing and
tourism require the ongoing increase in supply
of inner city apartments. Detailed analysis by
Dr. Peter Brain indicates that growth in the
central city needs to keep pace with capital
cities to maintain productivity levels (ACOLA,
2015). Important niche markets such as student
housing are in part dr iven by negative gearing.
TABLE 19: NET IMMIGRATION
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TABLE 20: NUMBER OF LANDLORDS BY TYPE OF GEARING, 1994-2014
Positive gearing definition: Mortgage costs < rental income
Negative gearing definition: Rental income < mortgage costs, Government refunds
disparity from taxable income
Source: Grattan Institute (2016)
TABLE 21 & 22: RENTAL VACANCY & RENTAL GROWTH
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TABLE 23: ANNUAL GROWTH IN REAL RENTS - AUSTRALIA
21.
Since the post 2008-09 economic shocks, rentalvacancy rates have risen marginally (RBA 2014a,
graph 3) but, at around 2 % in 2016, whereas 3
years old include up to date data still below
what is generally regarded in Australia as a
market clearing rate (of 3%).
22. Over time, the cost of living in Australia has
increased. This uncontroversial statement is not
often viewed by the average Australian as a
problem directly affecting their wellbeing or
their lifestyle. However, a recent releasepublished by the Australian Bureau of Statistics
sparked both concern and debate when it
released its most recent update to its regular.
The ABS Wage Price Index showed that, in the
December 2015 quarter, Australia had endured
its lowest growth in wages since they began
recording it. Unfortunately, this new data was
just the most recent episode of a longer
downturn in wage price growth.
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TABLE 24: QUARTERLY CHANGES, TREND, TOTAL HOURLY RATES OF PAY EXCLUDING BONUSES
Source: ABS Cat. 6345.0, December 2015
To put this in the context of the housing and rental markets,data from the ABS (Cat. 4130, 2015) shows that since theGFC, real rental costs have spiked dramatically, displayinggrowth rates well above long-term trends – and the abilityof lower income household to keep up.
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TABLE 25: REAL RENTAL COSTS OVER TIME (2013 / 2014 AUD)
TABLE 26: PROPORTION OF LOW INCOME HOUSEHOLDS EXPERIENCING HOUSING STRESS
Source: ABS Cat. 4130, MacroPlan Estimates
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In the summary of its findings, the Rental AffordabilityIndex Release Report (Nov 2015) stated that “householdsfalling into the lowest 40% of income consistently faceseverely and extremely unaffordable rents”, going on topoint out that this “is the case in all regions of Australia – including all cities and all regional areas”. What thiseffectively means is that rising rents and dropping wagegrowth is having a serious impact at the margins, forcingsome people to pay as much as 60% of their earningstowards housing.
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TABLE 27: HOME OWNERSHIP RATE
This worrying trend is corroborated by ABS data – in its2015 release ‘Housing Occupancy and Costs, 2013-14’
(cat. 4130) it depicts a significant increase in lower
income households paying over 30% of their income
on housing costs since 2007/08. This is particularly
noteworthy given that over the period the ABS has
recorded this statistic, it had until recently remained in
a narrow band between 39% and 45%, and had been
trending down in the long term.
MacroPlan estimates that since 2013/14, the growth in
this metric has remained consistent, which means that
55% of low income households are paying more than
30% of their income towards housing costs.
RBA Key house price metrics (put in a footnote):
In ‘Is Housing Overvalued?’ (2015) the RBA
‘decomposes housing values into contributions
from rents, interest rates, expected
appreciation and other factors’ (p.1), though
they note that ‘given that the supply of
housing is fixed in the short run, prices are
determined by how much buyers are willing to
pay’(p.1)
Source: Table 11, Abelson et al (2005), Table 12,Stapledon (2012)
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23.
After 2010 there was a spike in rental levels amidthe chaos of the GFC. Rental vacancy rates
stabilised by 2016 and were beginning to
increase. This is reflected in the reduced level of
inner city apartment rental growth (which
despite being influenced by increasing numbers
of international students) demonstrated the
impact of the increasing supply of apartments.
24.
By late 2015 and early 2016 the combination oftightening credit standards (APRA) and reduced
credit to SMSF’s for residential investment, credit
growth to residential investors dropped to a 10
year low (excluding the GFC).
TABLE 28: HOUSING CREDIT GROWTH
25. Inner City apartment prices increased
dramatically post 2011 reflecting on asset
allocation preference for investors post GFC in
conjunction with a significant change in
consumer preferences to live in apartments,
and strong CBD / Inner jobs growth (health,
tertiary education, tourism) This growth in
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demand outstripped supply until 2015 (see
Appendix 3) and both sale prices and rental
levels are dropping in real terms.
TABLE 29: INNER CITY APARTMENTS
Source: Financial Stability Review – April 2016
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1. A number of reform models have been
proposed for negative gearing and the capital
gains tax discount.
2.
The Henry Tax Review (Australia’s Future Tax
System, 2010) recommended a comprehensive
set of reforms to improve housing affordability.
Henry found, though the reviews proposed
reforms to taxes, in particular Stamp Duty and
land tax, could play significant roles in
addressing housing affordability, other policies
are likely to have a move pronounced impact
on the responsiveness of housing supply’.
(Australia’ s Future Tax System, Final Report E4-3,
1.3)
3.
The key policies recommended by the HenryTax Review in relation to land and resources
taxes were:
Removal of Stamp Duties
Broadening of Land Tax
Reform of the CGT discount to reduce
deductibility of 100% of net income from
property investment to 60% and reduction
of the capital gains discount from 50% to
40%.
4. The Henry Review set the key objectives of the
reform package to improve housing
affordability, responsiveness of supply and to
tax rental investment in a way more consistent
with other forms of investment. The ‘package’
of reforms approach was a critical element of
the proposed policy reform. Critically the Henry
Review argued
‘….changing the taxation of investment
properties could have an adverse impact in
the short to medium term on the housing
market. As such reducing net rental losses and
capital gains concessions may in the short term
reduce residential property investment. In a
market facing supply constraints, the reforms
could place further pressure on the availability
of an affordable rental accommodation within
the private rental market. These reforms should
only be adopted following reforms to the
supply of housing and reforms to housing
assistant’. (Authors underlining, AFTS, 2010 E4-3,
p2)
5.
Three most recent reform agendas have been
proposed changes for negative gearing and
the capital gains tax in isolation.
6.
The McKell Institute, Grattan Institute and
Australian Labour Party have all mistakenly
relied on a ‘Robin Hood economics’ approach
i.e. taking from the ‘rich’ and giving to the
‘poor ’ to tax reform, rather than focusing on
tax efficiency. This type of approach as the
Henry Tax Review (2010) indicated is likely to
cause significant short term impacts on housing
and rental levels. In 2015, the RBA also argues
that change to negative gearing / CGT
discount should not occur in isolation from
other taxes.
7. The failure of McKell, Grattan and the ALP to
argue for the broader policy context is
surprising. The Grattan 2015 Property Taxes
report recommends a broad based property
levy to be implemented by the states to collect
$7 billion annually. Grattan note that (p4, 2015)
4_ Impacts of Proposed Changes toNegative Gearing and the Capital Gains
Discount on House Prices and Rental Levels
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‘The Commonwealth Treasury’ nominates
Stamp Duty as Australia’s least efficient tax. The
proposed broadly based property tax ‘might’
provide a pathway for eventual’ abolition of
State Stamp duties (2015, p.4) and should have
formed part of the Grattan (2016) proposal to
change negative gearing / CGT d iscount.
TABLE 31: PROPERTY TAXES ARE ONE OF THE FEW
‘GROWTH TAXES’
TABLE 32: SOME TAXES DRAG LESS ON
ECONOMIC GROWTH THAN OTHERS
2 Grattan (2015 Game-Changers p.67 modelled the impact ofreplacing Stamp Duty with land tax and estimated a GDP
Further Grattan argue that stamp duty reform is
a ‘game changer ’ (2015 p.33-35 and p.67
Game-Changers: Economic Reform priorities
for Australia), yet negative gearing / CGT
discount was not2 identified as a game-
changer.
8. Instead of proposing a widely acknowledged
requirement for comprehensive reform McKell,
Grattan and the ALP focus on the tax
‘beneficiaries’ i.e. the income profile and
extent of tax benefit accruing to each income
level. The Ralph Inquiry objective (1999) was to
stimulate capital expenditure. The surprise in
the analysis of is not the fact that those withcapital will spend it to secure a capital gain as
anticipated by Ralph. The real surprise is the
large number of individuals around the $80,000
income level taking advantage of the
discount.
9. The Grattan Institute reform proposal is as
follows:
Reduce the CGT discount for individualsand trusts to 25%
o Phase in a 25% discount over five years
through reducing the value of the CGT
discount by 5 percentage points each
year
Limit negative gearing. Quarantine passive
investment losses so they can only be
written off against other investment income
o Do not allow losses on passive
investments to be written off against
unrelated labour (wage and salary)
income.
o Allow losses on passive investment to be
written off against all current year and
future positive investment income,
including interest, rental income and
capital gains.
increase of $5M. The criteria for game-changers (p.62) are thesize of the opportunity and confidence in change.
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o Continue to allow losses from
unincorporated business – sole traders
and partnerships – to be written off
against wage and salary income,
subject to current restrictions.
o Do not create other exceptions such as
allowing the write-off of losses up to a
limit, on one or two properties, or on new
properties.
o Phase in over five years by reducing the
proportion of losses that can be written
off against wage and salary by twenty
percentage points each year.
In the longer term, aim to align the tax
treatment across different types of savingso Reduce taxes on other savings income
such as net rental income and bank
deposits so as to align with the tax
treatment of capital gains
o Reduce and target the tax incentives for
superannuation in line with the
recommendations in Grattan’s Super Tax
targeting report
Grattan estimate that in implementing their reform:
Reducing the capital gains discount would
raise about $3.7 billion per annum
Non deductibility of investment income is
estimated to raise $2 billion per annum
reducing it to $1.6 billion
Grattan do not estimate costs of their
proposed reforms in terms of additional
rental levels, additional Commonwealth
Rental Assistance stress, additional
expenditure on social housing due to a
reduced rental pool, the cost of social
dislocation, the impact of moving
households from rental liked areas with
jobs, public transport, schools and
community facilities and so on.
Grattan estimate a small reduction (2%) in
house prices. This could be considered a
negligible contribution to affordability. In
the short term no impact on rent isforecast and no estimate of long term
impact on rent is estimated despite
acknowledging that (p.34, footnote 111) a
sharp increase in rentals could occur in
the short term. Given that over 1 million
negative gearing landlords must exit over
the next ten years as the ground furthered
properties become positively geared and
as landlords buy new stock significant
impacts on private rental levels is assured.
Applying Abelson + Joyeux parameters (10%
increase in tax on rental incomes would lead to a 7
percent increase in rents) to Grattan ((2016) Box 6
p.32 Calculations) theoretically short term rents
would increase by 4.5% to 5.5%. We note that the
Grattan arithmetic appears incorrect and that
MacroPlan calculations utilising a discounted cash
flow model and all Grattan parameters suggests
that future return would be 8.7% lower (versus 6.3%
p.32). Further the Grattan analysis and arithmetic
relating average return to average price of 2.2%
excludes established dwellings (70% of the
number). In reality if the Grattan assumption are
correct the weighted average price decrease of
rental dwellings would be 6.7%.
10. Grattan acknowledge the Henry Tax Review
but fails to acknowledge the risks identified in
that work in relation to short term impacts on
housing supply and rental levels. Grattan do
not analyse the current negative state of the
residential markets, significant reductions in the
price of apartments in CBD’s and the imminent
reduction in residential construction activity.
Grattan argues that ‘There is little evidence
that negative gearing has the socially desirable
outcome of reducing rents…’(p.27 2016).
11. The ALP reform proposal is specifically rejected
by Grattan, who argue that (p.2) restricting
negative gearing to new properties would
improve the current regime, but would leave
too many problems in place and introduce
unnecessary distortions.
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12. The ALP proposal is as follows:
Negative Gearing
Labor will limit negative gearing to new housing
from 1 July 2017. All investments made before
this date will not be affected by this change
and will be fully grandfathered.
This will mean that taxpayers from 1 July 2017
will continue to be able to deduct net rental
losses against their wage income, providing the
losses come from newly constructed housing.
From 1 July 2017 losses from new investments in
shares and existing properties can still be used
to offset investment income tax liabilities. These
losses can also continue to be carried forward
to offset the f inal capital gain on the
investment.
Capital Gains Tax
Labor will halve the capital gains discount for
all assets purchased after 1 July 2017. This will
reduce the capital gains tax discount for assetsthat are held longer than 12 months from the
current 50% to 25%.
All investments made before this date will not
be affected by this change and will be fully
grandfathered.
This means that from 1 July 2017:
Negative gearing of labour income will
only apply to new dwellings
The Capital gains tax discount for new
dwellings will reduce from 50% to 25%
13. According to the ALP policy document the
Parliamentary Budget Office ‘…..assumes that
following the changes, negatively geared
investment in new dwellings will almost double
(download 7/5/2016 ALP Positive Plan to Help
3 There are no reliable estimates of the actual number ofnegatively geared dwellings actually constructed annually.
Housing Affordability3). The PBO has not
published this analysis. According to the ALP
document the PBO estimate improves budget
revenue by $565 million over the forward
estimates (i.e. to 2018-19) and $32.1 billion over
a decade. Further the ALP document suggests
that ‘….independent analysis from the McKell
Institute estimates that these policy settings
would result in an additional 25,000 jobs. (ALP,
7/5/2016 p.13).
14. The ALP policy framework is similar to the
McKell (2015) scenario 4 (p. 9) which (p. 28)
suggests that a ‘plausible 10% increase’ in the
185,000 homes currently required and overallthis would add $45 billion to GDP. This is a
misunderstanding of supply and demand
versus tenure. No new jobs will be generated
because as this study has demonstrated total
dwelling numbers depend on a demand /
supply balance in the long run.
15. The McKell (2015) study attributed budget
benefit is $29.3 billion compared with the ALP
policy of $32.1 billion.
16. The key facts to assess in terms of economic
impacts are as follows:
Timing
The introduction of the new negative gearing
provisions and CGT discount reduction is initiated
on 1 July 2017. The Parliamentary Budget Office
analysis indicates minimal budget revenue impact
by July 2018, yet significant price impacts for off the
plan (OTP) purchases would occur from July 2016 if
the ALP were elected. It is critical to understand
current market conditions to assess short term
impacts on the housing market given that the
Australian housing market has peaked and is
deteriorating.
Impacts
This is explained in detail by the RBA (2015) Submission to theInquiry into Home Ownership p. 17-21.
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Lack of ALP policy specification (what is defined as
new?) will create market indecision.
Market instability post July 2016 will occur as
investors seek to understand the resale price of
existing assets that have been negatively geared
and the impact of ‘off the plan’ purchases that
have been committed but not yet settled. For
example Melbourne CBD apartment pr ices have
already dropped by 12% on average on the first
resale. The loss increases to 17% for FIRB purchasers.
The market distortions created by focusing policy
on ‘new’ dwellings is likely to follow three phases.
Initially investor demand will soften as both investors
and financiers seek to understand price impacts on
the first resale. It is likely that credit will tighten(higher LVR requirements) as financiers seek to
avoid ‘negative equity’ outcomes. The second
phase will occur when the impacts of resales
pursuant to the new policy actually occurs. The
third phase will occur when a new market
equilibrium is established and a new market
structure evolves.
17. The key points to make are that the proposed
policy changes will have a negligible impacton housing affordability and will accentuate
the steep decline in residential construction
already underway. This means that no
additional jobs will be created in the short term
(or long term). In addition rents will rise.
18. It is l ikely that ‘chaotic’ marketplace conditions
will prevail as the proposed ALP policy is
specified, financiers understand likely resale
price movements and some investors transfer
purchasing from established to new dwellings.
Given the sharp reductions in ‘off the plan’
resale values market adjustments and
stabilisation will occur slowly.
( This is based on the Wood + Ong (2011) research whichshows that a typical landlord would have a 47% probability(p.29) of retaining a property over a 4 year period. It also
accords with the work of Seelig Et.al. (2009) that indicates ahigh degree of investment irrationality is exhibited by privaterental landlords.
19. The shift in the public sector from direct
provision of public housing to Commonwealth
Rental Assistance for private renters became
an increasingly important issue in mid-1980’s.
This puts into context the perceived problems
with Hawke Government elimination of
negative gearing against wage income and
the view (partly true) that this policy change
had caused a rental crisis.
20. The proposed ALP negative gearing / CGT
discount policy framework will have major
economic and equity impacts on low income
renter households.
21. The reduction in the number of landlords
negative gearing and utilising the 50% discount
for wage income under the current framework
of retention and purchase will, based on Wood
and Ong research (2011)4 reduce from 1.3
million to 287,000 within 10 years i.e. over 1
million less negative gearing landlords. . Utilising
Grattan institute assumptions, based on 80%
negative gearing and 47% marginal tax rate
with 3% nominal income return and 5% nominal
capital gain, properties typically become
positively geared in approximately 12 years.
22. This reduction in negative gearing landlords
represents just under half of the 2.25 million
renting households in 2013/14 (ABS).
23. Based on estimates of Abelson & Joyeux (2006)
that a 10% increase in costs will lead to a 7.0%
increase in rents then rents for 1.01 million
dwellings will increase over this period before a
new equilibrium in a highly distorted market is
reached.5 In total based on the Abelson &
5 Utilising for consistency the Grattan Table 1 calculations, thepro rata drop in returns for negatively geared properties isaround 12.6% and 6.8% for positively geared properties. This
implies a 8.8% increase in rentals for negatively gearedproperties
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Joyeux calculation rents rise by 8.8% for
negatively geared properties. This equates to
$1720 per dwelling or $1.7 billion per annum.
24. In addition to the real rental losses there will be
a requirement to build additional social
housing. Based on the Abelson and Joyeux
(2006) estimates a 9.1% reduction in the supply
of rental dwellings will occur. This would
translate into 205,000 dwellings being removed
from the low income rental housing stock. The
ALP proposal retains negative gearing / 25%
CGT discount for new dwellings which will
moderate this impact. It is however, particularly
having regard to the extreme levels of housingstress and historically high waiting lists for public
housing to assume that at least 50,000
additional dwellings for public rental be
provided (16% increase). This would equate to
$2.5 billion per annum over 10 years in capital
costs. According to the Productivity
Commission6 this will add $0.4 billion per annum
in operating costs.
25. In addition Commonwealth Rent Assistance
should be adjusted on a one-off basis by 8.8%
(Currently $4.4 billion per annum). This would
add $400 million per annum to achieve
minimum housing equity outcomes.
26. Costs to be directly borne can be summarised
as follows7:
$1.7 billion per annum in additional rental
costs$2.5 billion capital costs per annum in
additional social housing due to the
reduction in rental dwelling numbers and
acknowledging the historically high
160,000 people on public housing
waiting lists (AIHW, 2014)
7 A ten year time for market equilibrium to be re-established isassumed. Given the distortionary nature of proposed ALPpolicy Framework particularly in relation to resales of new
$0.4 billion per annum in operating costs
to support the additional social housing8
$0.4 billion per annum in Commonwealth
Rental Assistance acknowledging the
historically high levels of rental stress (50.1
% of low income households (2013/14)
using the new ABS definition) and the
criticality of an equitable housing
outcome.
27. In total $5.0 billion in costs would be generated
for the Australian economy with $3.3 billion
direct expenditure from the Australian
Government.
This compares to the average $3.2 billion per
annum revenue estimated by the Parliamentary
Budget Office.
28. The costs of market instability and market
distortions will be high compared to the
estimated average revenue impact. The PBO
revenue estimates exclude:
Higher rental levels paid by low income
renters
Higher dwelling prices in areas with
limited new build opportunities as owner
occupiers compete with a larger pool of
negative gearing landlords seeking new
dwellings
Even more focus on properties which are
likely to generate a capital gain due to
the lower CGT discount. This is l ikely to
attract investment in higher quality
properties in deep markets. The major
impact will be smaller markets, and
regional areas which have a shallow
pool of buyers where impacts will be
accentuated
Higher levels of rental stress for low
income renters as higher income renters
‘crowd out’ lower income renters for
property purchased after July 1, 2017 this i s a reasonable
assumption.8 2015 Report on Government Services 17.26 The annualoperation costs per dwelling is $8101
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lower rent dwellings. This will occur at a
time of extreme housing stress and will
generate demand for increased levels of
social housing and significant increases
in Commonwealth Rent Assistance
Geographically, lower income
households will be forced to shift from
established areas with jobs, facilities and
public transport to outer fringe areas with
lower rent new housing. This situation is
likely to be untenable and generate
demand for better located public
housing.
Increased levels of social dysfunction on
the urban fringeIncreased carbon footprint for low
income and renters as affordable private
rental stock which is negative geared is
increasingly located on the urban fringe.
29. The real budget costs of the ALP policy
platform are significantly higher than the
revenue gains.
30. The claimed increase in construction
employment of 25,000 jobs is incorrect. Job loss
will occur in the short term as the Australian
Industry Forum forecasts indicate (see
Appendix 2). In the medium to long term
demand and supply conditions will dictate
housing completions. This means that total
employment in the residential sector can only
be ‘brought forward’ by taxes and incentives.
For example First Home Owner Scheme
incentives have largely been abandoned
because that cause short term spikes in
demand and price but in the medium term
demand from owner occupiers and renters is
driven by population growth and household
formation.
31.
The proposed ALP negative gearing / CGT
discount should have had regard to the Henry
Tax Review, the RBA and the Grattan Institute
recommendations in that:
Reforms to negative gearing / CGT
discount can cause short term
reductions in residential property
investment. In a market facing supply
constraints, reforms could place further
pressure on the availability of affordable
rental accommodation within the
private rental market. Those reforms
therefore should only be adopted
following reforms to the supply of housing
and reforms to housing assistance (p. 2/3
E4-3 Australia’s Future Tax System 2010)
and RBA (2015 Submission to the Inquiryinto Home Ownership p. 23). This is
precisely the situation in Australia today –
the ABS broad definition of low income
households in stress is historically high at
just over 50% of low income households.
Grattan absolutely cautioned against
restricting negative gearing to new
properties which although they argue
would ‘improve the current regime’,
because nevertheless it would leave toomany problems in place and introduce
unnecessary distortions (Hot Property,
2016 p. 2)
32. It is likely that residential market chaos will be
created by the proposed ALP negative
gearing / CGT policy framework over the next
24-36 months. Given the current contractionary
phase of residential markets occurring in
parallel with historically high levels of rental
stress and historically high public housing
waiting lists there is a high probability that the
proposed negative gearing / CGT discount
policy framework will be quickly discarded by
the ALP when the severity of the impacts are
understood. This is consistent with the
experience of the Hawke Government reforms
which lasted only from 1985 to 1987.
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1.
The residential construction market is
influenced by a number of demand and
supply factors. In the long run Stapledon has
demonstrated that the relationship between
growth in adult population (which drives
household formation) and growth in housing
stock has a strong relationship and can help
explain many housing boom and busts.
Stapledon (2012) makes the point that,
‘housing downturns have frequently preceded
and ‘been a major cause of recessions’.
(Stapledon, N. Trends and Cycles in House
Prices, 2012 Australian Economic History
Review). This relationship is documented in
Table 29 which indicates that the rate of
growth in adult population and dwelling stock
is converging.
2.
The current cyclical position of the Australian
economy can be described as fragile. For
example Stapledon has concluded that ‘the
two key cycles in Australian housing are the
boom-bust cycle of the 1880’s and 1890’s and
the boom of the late 1990’s and 2000’s. In the
latter cycle, real house prices rose by 88 % in
Sydney and 161% in Melbourne compared with
32 and 64%, respectively in the 1880’s. The
1890’s saw price declines of 36% and 51% in the
two markets and sharp decline in housing
activity, a depression in the broader economy
and a major banking crisis. By contrast, the falls
in the 2000’s were slight and temporary as the
boost to the economy from the resources
boom, which began in the mid 2000’s,
appeared to offset the Global Financial Crisis
of 2008’. (Stapledon 2012, p. 294)
3.
In 2016 we have a combination of factors inplace:
Reducing population growth rates
Significant reduction in investor purchasing
of dwellings
Ultra-low interest rates
Dwelling completions forecast to contract
in the next 12 to 24 months
Major reductions in lending to overseas
investors
Sales periods for new inner city apartmentsextending significantly
Median prices in CBD apartments in
Sydney, Melbourne, Brisbane and Perth
declining
Banking sector profits and shares are under
pressure
5_ The Residential Market Downturn
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TABLE 33: Annual growth rates in adult population and housing stock
Source: Stapledon, Housing Related Data, Adult population is persons 20+ years.
4.
The forecast contraction in residential
construction by the Australian Construction
Industry Forum is based on the current policy
mix for negative gearing and CGT discount
currently in place. The new policy mix
proposed by the ALP will not have a significant
impact on this contraction because in terms of
total dwelling construction domestic residential
investment purchases are likely to track down
from 35% to 25% as a result of more stringent
credit requirements. The more significant
decline in owner occupier demand will
continue to drive contraction in residential
dwelling construction.
5.
The Australian Construction Industry Forum
(May 12, 2016) is forecasting a 5% reduction in
total residential construction to 2018/19 and a
10% reduction in apartments/units (i.e. New
Other Residential). Sydney and Melbourne are
both forecast to experience contractions in
residential building of 5% to 10%. This is
particularly significant because Sydney and
Melbourne are the meter of growth in the
exportable ‘services’ sectors i.e. tourism,
international education, fintech, medical
technology, information technology and
professional services.
6.
The ALP negative gearing / CGT discount will
create significant disruption in the market due
to the ‘off the plan’ apartment ‘resale cliff’.
Retailed analysis of genuine resales in
Melbourne CBD, Southbank and Docklands
utilising resales for apartments within towers
predominantly less than three years old
indicates that the first resale on average is 12%
below the ‘off the plan’ price. A large
percentage of the sales (around 20%) are 15%
to 25% lower than the ‘off the plan’ price. This
means that a very high percentage of equity
(the initial deposit) is wiped out thus exposing
financial institutions to losses if prices further
reduce. (see Appendix 1)
7.
Focusing negative gearing / CGT discount on
new dwelling construction will accentuate the
‘resale price cliff’ as on the one hand negative
gearing investors seek new stock, thus pushing
up prices. On resale these dwellings will be sold
into a market which cannot negatively gear.
Depending on gearing assumptions this would
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increase the ‘resale price cliff’ by a further 5%
to 8% over the current average loss for off the
plan sales i.e. the ‘resale price cliff’ would be of
the order of 17% to 20%.
Financial institutions as a result will increase
loan to value ratios to 25% to 30% to reduce
exposure to potential losses. This will reduce
demand for negative gearing in due to lack of
capital available to make a deposit and also
reduce the benefit of negative gearing due to
lower losses to write off and also due to the
CGT discount being reduced to 25%.
8.
Apartment markets throughout Australia havedeclined dramatically in the number of sales
(e.g. Sydney down 46%, Brisbane down 38%,
Perth down 46%) and median prices have
turned negative (see Appendix 3). Sydney had
the first monthly median price drop in eleven
quarters in March 2016, and year on year,
median prices are down 11% in Brisbane from
the peak (September 2014) and down 29% in
Perth from the peak (June 2013, see Appendix
3). Apartment markets could be described asbeing in the early stages of ‘bust’ conditions.
9. The ALP proposed policy framework would
create chaos in the Melbourne, Sydney,
Brisbane and Perth apartment markets.
Considering the following factors:
The historically significant top end nature of
the residential price cycle
The pending contraction in the residential
construction sector
Significant contraction in credit to investors
Significant contraction in credit to overseas
investors
Pressure on banking shares and bankingprofits
Market confusion from developers and
purchasers.
Risks to market stability and volatility in the short
term are significantly higher changing the
current policy setting rather than remaining
with the current policy setting.
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Appendix 2Residential Building Forecasts
Source: Australian Construction Industry Forum May 2016
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ACIF RESIDNETIAL CONSTRUCTION FORECASTS MAY 2016
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Appendix 3
Sales Activity Levels and Median Price Movements Sydney, Brisbane, Perth and Melbourne:
CBD & Inner Area (2011 – 2016)
Source: Core Logic
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City of Sydney
Year Period Land UseNumber ofSales
MedianSale
Mar-11 2011 Mar RESIDENTIAL STRATA UNITS 1478 $585,000Jun-11 2011 Jun RESIDENTIAL STRATA UNITS 1784 $577,100Sep-11 2011 Sep RESIDENTIAL STRATA UNITS 1633 $580,000Dec-11 2011 Dec RESIDENTIAL STRATA UNITS 1773 $575,000Mar-12 2012 Mar RESIDENTIAL STRATA UNITS 1145 $600,000Jun-12 2012 Jun RESIDENTIAL STRATA UNITS 2045 $595,000
Sep-12 2012 Sep RESIDENTIAL STRATA UNITS 1414 $615,000Dec-12 2012 Dec RESIDENTIAL STRATA UNITS 1851 $630,000Mar-13 2013 Mar RESIDENTIAL STRATA UNITS 1595 $623,000Jun-13 2013 Jun RESIDENTIAL STRATA UNITS 1853 $650,000Sep-13 2013 Sep RESIDENTIAL STRATA UNITS 2397 $690,000Dec-13 2013 Dec RESIDENTIAL STRATA UNITS 1988 $681,000Mar-14 2014 Mar RESIDENTIAL STRATA UNITS 1596 $695,000Jun-14 2014 Jun RESIDENTIAL STRATA UNITS 1548 $700,000Sep-14 2014 Sep RESIDENTIAL STRATA UNITS 1563 $738,500Dec-14 2014 Dec RESIDENTIAL STRATA UNITS 1579 $745,000Mar-15 2015 Mar RESIDENTIAL STRATA UNITS 1441 $770,000Jun-15 2015 Jun RESIDENTIAL STRATA UNITS 1465 $810,000Sep-15 2015 Sep RESIDENTIAL STRATA UNITS 1483 $832,000
Dec-15 2015 Dec RESIDENTIAL STRATA UNITS 1197 $825,000Mar-16 2016 Mar RESIDENTIAL STRATA UNITS 784 $785,000
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Inner Brisbane
Year Period Land UseNumber ofSales Median Sale
2011 Mar BUILDING UNITS (PRIMARY USE ONLY) 360 $445,2502011 Jun BUILDING UNITS (PRIMARY USE ONLY) 500 $441,1252011 Sep BUILDING UNITS (PRIMARY USE ONLY) 442 $442,2502011 Dec BUILDING UNITS (PRIMARY USE ONLY) 554 $418,2202012 Mar BUILDING UNITS (PRIMARY USE ONLY) 544 $427,2502012 Jun BUILDING UNITS (PRIMARY USE ONLY) 597 $453,5002012 Sep BUILDING UNITS (PRIMARY USE ONLY) 648 $455,000
2012 Dec BUILDING UNITS (PRIMARY USE ONLY) 579 $449,0002013 Mar BUILDING UNITS (PRIMARY USE ONLY) 559 $456,5002013 Jun BUILDING UNITS (PRIMARY USE ONLY) 750 $460,7502013 Sep BUILDING UNITS (PRIMARY USE ONLY) 842 $463,7502013 Dec BUILDING UNITS (PRIMARY USE ONLY) 726 $479,5002014 Mar BUILDING UNITS (PRIMARY USE ONLY) 628 $499,5002014 Jun BUILDING UNITS (PRIMARY USE ONLY) 678 $514,9502014 Sep BUILDING UNITS (PRIMARY USE ONLY) 678 $515,0002014 Dec BUILDING UNITS (PRIMARY USE ONLY) 496 $483,7502015 Mar BUILDING UNITS (PRIMARY USE ONLY) 500 $480,0002015 Jun BUILDING UNITS (PRIMARY USE ONLY) 541 $499,0002015 Sep BUILDING UNITS (PRIMARY USE ONLY) 517 $495,0002015 Dec BUILDING UNITS (PRIMARY USE ONLY) 488 $473,5002016 Mar BUILDING UNITS (PRIMARY USE ONLY) 310 $458,750
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Inner Perth
Year Period Land Use Number of Sales Median Sale
2011 Mar RESIDENTIAL 129 $465,000
2011 Jun RESIDENTIAL 150 $453,000
2011 Sep RESIDENTIAL 122 $440,000
2011 Dec RESIDENTIAL 123 $425,000
2012 Mar RESIDENTIAL 163 $449,000
2012 Jun RESIDENTIAL 145 $455,000
2012 Sep RESIDENTIAL 140 $460,000
2012 Dec RESIDENTIAL 147 $447,0002013 Mar RESIDENTIAL 169 $510,000
2013 Jun RESIDENTIAL 216 $632,500
2013 Sep RESIDENTIAL 149 $475,000
2013 Dec RESIDENTIAL 160 $540,000
2014 Mar RESIDENTIAL 143 $501,250
2014 Jun RESIDENTIAL 146 $500,000
2014 Sep RESIDENTIAL 156 $492,500
2014 Dec RESIDENTIAL 137 $500,000
2015 Mar RESIDENTIAL 150 $540,000
2015 Jun RESIDENTIAL 112 $495,0002015 Sep RESIDENTIAL 94 $470,000
2015 Dec RESIDENTIAL 86 $501,000
2016 Mar RESIDENTIAL 82 $491,500
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Inner Melbourne
Year Period Land UseNumber ofSales
MedianSale
2011 MarRes Company Share Unit (within multi-storeyDev) 1009 $490,000
2011 Jun
Res Company Share Unit (within multi-storey
Dev) 1305 $515,000
2011 SepRes Company Share Unit (within multi-storeyDev) 1569 $511,000
2011 DecRes Company Share Unit (within multi-storeyDev) 1357 $487,000
2012 MarRes Company Share Unit (within multi-storeyDev) 991 $511,000
2012 JunRes Company Share Unit (within multi-storeyDev) 1178 $517,000
2012 SepRes Company Share Unit (within multi-storeyDev) 1132 $486,250
2012 DecRes Company Share Unit (within multi-storeyDev) 1067 $502,000
2013 Mar Res Company Share Unit (within multi-storeyDev) 1092 $505,000
2013 JunRes Company Share Unit (within multi-storeyDev) 1271 $505,000
2013 SepRes Company Share Unit (within multi-storeyDev) 1175 $508,000
2013 DecRes Company Share Unit (within multi-storeyDev) 1053 $500,000
2014 MarRes Company Share Unit (within multi-storeyDev) 882 $498,000
2014 JunRes Company Share Unit (within multi-storeyDev) 1127 $529,000
2014 Sep
Res Company Sha