short memory alternative title – shortened memory

8/16/2019 Short Memory Alternative Title – Shortened Memory

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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



2.3_ 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



2.4_ 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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P a g e | 23

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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P a g e | 24

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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25/50

P a g e | 25

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.


26/50

P a g e | 26

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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P a g e | 27

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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28/50

P a g e | 28

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)


29/50

P a g e | 29

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


30/50

P a g e | 30

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


31/50

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32/50

P a g e | 32

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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P a g e | 33

‘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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P a g e | 37

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


38/50

P a g e | 38

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 Dec RESIDENTIAL 147 $447,0002013 Mar RESIDENTIAL 169 $510,000









2015 Jun RESIDENTIAL 112 $495,0002015 Sep RESIDENTIAL 94 $470,000




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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 JunRes Company Share Unit (within multi-storeyDev) 1178 $517,000



2013 Mar Res Company Share Unit (within multi-storeyDev) 1092 $505,000






2014 Sep

Res Company Sha

short memory alternative title – shortened memory

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