Was the Budget Good For Property Investors? – Ed Chan

Now that the dust has settled on the recent Federal Budget it’s probably a good time to review it and discuss the good, the bad and the ugly for property investors.

No matter your political persuasion, we have had throughout our history good and bad governments from both sides of politics.

The Fraser government was an example of a very poor Liberal government and the Hawke/Keating government is an example of an outstanding Labor government.

Whilst we know that a Liberal government tends to create the wealth and a Labor government tends to distribute the wealth (and sometimes puts us into debt in doing so).

There has only ever been one Labor Government (Hawke/Keating) who have ever run a surplus budget and only for one year in the last 30 years.

The Elecorate usually gets it right

However I believe the Electorate have always got it right in the long run by electing alternating Labor and Liberal Governments and thus ensuring that the pendulum has not swung too far right or left.

Whenever the pendulum has swung too far either way, it elects the correct government to bring the balance back between the “creation of wealth” and the “distribution of wealth” to ensure we have, at the end of the day, one of the best countries in the world to live in and the envy of many nations on earth.

However the pendulum had indeed swung too far and the Electorate voted in a new Liberal Government to fix the problem and rebuild the wealth we have lost in the last 6 years.

Here are some facts to consider:

Currently our Debt is sitting at $320 billion Net.

When Howard took over from Keating back in 1996 he inherited a Net Debt of $105 billion, so we are 3 times worst off now than when Howard took office in 1996 from a debt point of view.

Since the Global Financial Crisis, and despite an unprecedented resources boom, our government debt has not only tripled but has grown faster than debt in Europe where many countries endured a full blown economic disaster.

This means if Joe Hockey wants to rein in and pay down this debt without increasing taxes the government is going to have to limit its spending.

Our economy has also been growing at below its medium-term trend rate of about 3 per cent a year, which is the rate that keeps unemployment steady, and the economic forecasts from the RBA suggest that the economy will remain sluggish while unemployment rates are slowly edging higher.

At the same time our relatively expensive Australian dollar is stifling tourism, manufacturing and non-mining exports.

Howard sold off assets such as Telstra and CBA in an attempt to pay off Labor’s debt but Abbott has not indicated selling off any assets although he did say the budget was the beginning and not the end and there is still more pain to come.

As we all know, it took 10 years for the Howard government to pay off the debt and when Rudd took office in 2007, he inherited a country with $20 billion “cash in the bank.”

In other words we were in a very healthy financial position to weather any storm such as the GFC which occurred in 2008.

We are currently paying off $12 billion a year in interest payments or $1 billion per month which could have gone back into the economy into such things as schools and hospitals etc.

Even though the current debt is much higher than when Howard took office, the measures the current government have taken in the Budget, is much softer than what the Howard or the Keating government implemented in their first budget, despite the reactions so far.

Whilst we are constantly told that our debt is small when compared to other countries (and generally by those who put us into this debt position), they argue that our AAA rating means we do not have a budget problem.

I simply cannot buy this argument.

For me what is troubling is the trajectory that we are on.

We were on a trend towards $670 billion in debt and totally unsustainable.

This was dangerous territory because without acknowledgement we had a problem, the previous government was not even looking for a solution.

We are also told that the debt was necessary because we needed to stimulate the economy to ensure that people kept their jobs during the GFC.

I think most people accepted that we needed to stimulate the economy but I think most people were upset by the waste, inefficiency and poor implementation that not only led to 4 young men losing their lives but leaving our children with a debt larger than it needed to be.

We could have spent half the money for double the stimulus and effect and not put our young men in harm’s way if things were managed much, much better.

As one’s debt levels increases, one’s Net Wealth diminishes. In other words we were becoming poorer as a nation, as our debt was rising.

The Electorate has got it right again.

As such I believe the Electorate once again got it right, that the pendulum had swung too far to the left and we witnessed a new Liberal government elected to once again rebuild the wealth that we had lost over the last 6 years.

The first step in rebuilding our wealth is by getting the budget under control.

Once the wealth has been rebuilt, the electorate will again vote in a Labor government to distribute that wealth (as we saw with Rudd being elected and the removal of Howard) and thus keep our country in a state of harmony where the poor and disadvantaged are looked after and the top 1% continue to pay more than 50% of the countries taxes.

And the cycle repeats and the proof that it works is that we are not only one of the wealthiest countries in the world but we have in most parts, a harmonious and peaceful society with most people experiencing a decent standard of living.

So was the budget good for property investors?

The good news is that the Federal budget pretty much left property investors alone.

Whilst there was a push by some towards eliminating negative gearing to save claims of $13 billion dollars a year we did not see negative gearing touched.

Whilst most commentators who have supported the push for eliminating negative gearing have argued that the government is losing $13 billion in revenue per annum and therefore negative gearing should be abolished.

This is simply misrepresenting the facts.

Whilst taxpayers have claimed $13 billion in losses in their tax returns the actual revenue forgone by the government is calculated at their individual tax rates. Thus at an average tax rate of 35% the lost revenue is only $4.5 billion.

So the government has not lost $13 billion dollars by allowing negative gearing but rather $4.5 billion is the actual dollars forgone.

Public housing provided by the government only accounts for around 4% of investment properties. The other 96% of housing is provided by the private investor.

Should they disincentivise property investment by removing negative gearing we would see the government having to shoulder the weight of providing a much larger percentage of housing for tenants.

This would in effect cost the government much more than the $4.5 billion dollars a year in revenue forgone due to negative gearing.

In fact it would cost the government in the hundreds of billions to provide public housing.

You may recall that the Keating government attempted to remove negative gearing in the eighties but reversed their decision when the queues for public housing doubled.

So, thank goodness there was some clear thinking shown around negative gearing in this budget

However negative gearing is only one piece of the jigsaw puzzle…

When it comes to the property market, many other factors such as jobs, interest rates, confidence, supply etc. have far greater effect on the property market than negative gearing.

We need to have a growing economy which leads to increased revenues for the government as businesses do well and able to hire more people and with more jobs, our standard of living is improved. This will ensure the property market is stable and continue to grow steadily.

Supply is a very important factor as successive governments have not provided the policies to generate more supply.

Let’s have a look at the changes that could have a direct impact on the property market:

1. The First home buyer savings accounts were eliminated.
These were established to assist first home buyers in saving for a deposit and at the end of 2013 there were 46,000 savings accounts opened.

2. The National Rental Affordability Schemes has been eliminated.
This was set up to help low income earners by giving them a 20% discount on rental by offering rebate incentives to property investors on new properties. Around 15,000 properties were built under the scheme.

3. The Budget has had a negative impact on market sentiment.
And there is a direct correlation between market sentiment and the property market. Consumer sentiment is lower than what it was prior to the election and this will keep interest rates low for a longer period.

As the mining boom only provided around 2% of employment and represented only around 4% of the economy and as it transitions into Production from a construction phase, we need to stimulate the other 96% of the economy that provides the majority of our economic growth and job prospects.

We have never supported property investments in mining towns despite the great rents and as the mining boom subsides many more people will be stuck with properties in mining towns that they cannot sell. We will continue to see these properties drop in value.

There were tax cuts of 1.5% for companies (except big companies) which is an incentive for Companies to invest more and hire more people which should increase economic activity and reduce the unemployment rate.

However we have probably seen the middle class shoulder a large percentage of fixing the budget with the elimination of many family tax benefits, whilst the wealthy has been asked to pay a 2% levy on income above $180,000.

The 2% levy did not go far enough I thought.

Whilst the budget is attempting to put a cap on the trajectory of our debt problem…

I believe they have a long way to go in getting the balance right between austerity and keeping the economy going because what ultimately will get our country back to a healthy financial position is a growing economy.

They still have to get the support of the other parties and by the way the dialogue is at the moment I think Abbott will have his hands full in convincing the others that this is a Budget in the national interest.

Or that we should put the national interest ahead of self-interest as long as there are safety nets for the poor.

He was unable to convince the Greens and the in dependants in the previous election to support him in forming government and Gillard won the battle in that contest but ultimately lost the war.

So I am not sure how good Abbott is in negotiating outcomes. I suspect not so good.

Of course:

Only through a strong economy can we have a strong country and only through a strong country can we look after the poor and disadvantaged and provide the opportunities for the average Australian to strive for a better standard of living for themselves and their families.

 



Want more of this type of information?


Ed Chan

About

Ed is a founding partner of Chan and Naylor accountants and a leading property tax specialist. He has co-authored 3 best selling books. As a seasoned property investor he shares his unique understanding of the relationship between property investment and tax. Visit www.Chan-Naylor.com.au


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