The biggest topics of conversation in the property market this month are negative gearing and how this impacts on the property market, and real national home values in relation to their peak prices. Let’s look at both of these topics now.
Negative gearing, in its simplest form, enables property investors to deduct any losses incurred by their investment property from their taxable income. These losses typically include any mortgage and maintenance costs.
Way back in September of 1985, and again in 1987, laws that related to negative gearing were changed. Negative geared interest expenses were restricted by the government with investors only able to claim interest expenses on rental income, and not on other income. These changes saw a rent rise occur in capital cities by 21.8 percent over 1985 to 1987.
Over this time, increases in rent were most pronounced in Sydney at 26.1 percent, whereas rental rises in Sydney during the two years prior to the changes in law was just 17 percent. Thus, rental growth was substantially more after the changes were introduced. Another change that was noted after the introduction of the new negative gearing laws was the number of investment loans that were taken out. According to the Australian Bureau of Statistics (ABS), after September of 1987, investment loans jumped by 41.5 percent.
Today, those in favour of changing or removing negative gearing laws say that this, should occur because housing is an unproductive asset, and the government can save by abolishing these laws. But, is this truly the case? Let’s look at the data.
While the majority of Australians own or are purchasing their own home, approximately 30 percent of Australians rent. Therefore, if investors don’t purchase homes as assets, for rent, then the government will be responsible for providing these residents with shelter. This, in turn, will mean that the costs of housing will become taxpayer responsibility.
According to the ABS, between July 1983 and October 2012, 4,355,266 dwellings were approved in the private sector, whereas only 228,843 were approved in the public sector. Therefore, over the last 29-years only 5 percent of dwelling approvals have been public.
In the last census, conducted in October 2012, of the homes occupied 29.6 percent were rental investment properties. Based on this, it could be said that without private sector investment that 29.6 percent of dwelling approvals would have to be covered by the public sector in order to provide enough rental accommodation. Over 12-months this would equate to 43,684 dwelling approvals. Now if we consider that today’s nationwide median home price is $386,000, then it would cost the government $16,861,900,480 to buy these properties. Of course, this figure includes the purchase of land as well as the home, so if the government use their own land, then this cost would be less.
During the 2009-10 financial year, negative gearing deductions totalled $4.8 billion. Based on the figures used previously, for the government to break even they would have to build those 43,684 dwellings for $110,000 each. But if the cost of $386,000 per home is accurate, then the government would only be able to build 12,461 homes or just 8.4 percent of the total public sector home building approvals made over the last 12-months.
In conclusion, it can be said that if the nation relied solely on public housing to provide homes for those Australians who rent then there would be a significant shortfall in public housing. Plus, the costs of public housing is significantly higher than what the government is currently paying in negative gearing benefits. Therefore, these factors make it highly unlikely that negative gearing will be removed as many are suggesting.
The Consumer Price Index (CPI) or inflation data was recently released by the ABS for June 2015 quarter. The rate of CPI was 0.7 percent over the quarter and was 1.5 percent for the year to June 2015. In comparison, home values in capital cities rose by 9.8 percent over 12-months to June 2015. Current data indicates that growth in Sydney and Melbourne is significantly higher than the current rate of inflation, whereas other capital cities are growing just above the rate of inflation, or are falling below it.
According to CoreLogic RP Data, over the last 5-years, real home growth values in Sydney were 4.5 percent per annum (pa), Melbourne 0.9 percent pa, Brisbane -2.4 percent pa, Hobart -3.5 percent pa, and Darwin -3.2 percent pa.
Over the past decade, Hobart is the only city to have recorded ongoing losses of -1 percent pa, whereas real rises have been recorded in other capital cities:
• Adelaide 1 percent pa.
• Brisbane 0.9 percent pa.
• Canberra 1.2 pa.
• Darwin 4 percent pa.
• Melbourne percent 3.8 pa.
• Perth 2.8 percent pa.
• Sydney 2.6 percent pa.
Another way to look at real value growth in home prices is to look at the quarter in the year when homes prices peaked, and to then see where these home prices sit in today’s market in relation to that peak.
|Nationwide Real Value Growth in Home Prices|
|City||Year of Peak||Today’s Market Price compared to peak as %|
|Melbourne||September 2010||+1.8 / bottomed at -14.5|
|Brisbane||March 2005||-13 / bottomed at -17.8|
|Adelaide||June 2010||-8 / bottomed at -11.8|
|Perth||September 2007||-12 / bottomed at -16.2|
|Hobart||December 2007||-19.3 / bottomed at -21.7|
|Darwin||September 2010||-17.8 / bottomed at -20.5|
|Canberra||June 2010||-7.2 / bottomed at -10.6|
Source: CoreLogic RP Data
Based on this data, housing bubbles are clearly being witnessed in Sydney and Melbourne. Other markets have hit their bottoms, and are being to regain momentum.
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