There are more interesting articles, commentaries and analyst reports on the Web every week than anyone could read in a month.
Each Saturday morning I like to share some of the ones I’ve read during the week.
The weekend will be over before you know it, so enjoy some weekend reading.
AHURI modelling shows negative gearing reforms could save $1.7 billion without hurting poorer investors
What do the negative gearing reforms really mean – and how will they affect the poorer investors?
This article on Domain.com.au looks at the statistics you need to know and the realities for investors.
Reforming negative gearing could save the federal government $1.7 billion without hurting “mum and dad investors”, according to our new modelling, by focusing tax deductions on investors with smaller property portfolios and removing them for richer investors.
Negative gearing allows investors to claim a tax deduction if their rental income is less than their expenses.
It cost the federal government A$3.04 billion in 2013-14, according to our calculations.
This potentially makes the housing market less stable and crowds out first home buyers.
But using data on the distribution of property and incomes makes it possible to differentiate between poorer and wealthier investors, allowing the government to target reforms to cushion the blow for investors on lower incomes.
Targeted negative gearing reform
In our example, investors in the bottom half of the income and property distributions could be allowed to claim tax deductions for all allowable rental expenses. Those in the 51st–75th income percentiles could deduct 50 per cent of those expenses, while negative gearing would be eliminated for those in the top 25% of incomes.
Our modelling of this scenario shows this would save the federal government $1.7 billion, or 57.3 per cent of the current cost to the budget, each year.
If negative gearing deductions were limited based on property values, the saving would be $1.5 billion (or 48.3 per cent).
Given this reform would be less likely to hurt poorer investors, they would be less likely to withdraw from the rental market than if negative gearing was eliminated.
This would also mitigate the impact of negative gearing reform on renters.
Our modelling does not focus on the impact negative gearing reform might have on the housing market, house prices, rents, or how investors might respond, but our modelling does show the impact of changing who can claim negative gearing deductions, as well as capping it at different levels.
Who benefits from capital gains tax?
Our research also identified that the capital gains tax discount has been a significant factor in the growth of negative gearing since 1999, as investors are able to claim a rental loss but do not pay full tax on later capital gains.
Home owners who also own at least one rental property receive the highest capital gains tax benefits.
Our analysis showed this group has an average property portfolio valued at over $730,000.
These home owners also have an average taxable income of $82,000 per person, which is more than 250 per cent of the average taxable income of renters ($31,000).
We modelled some alternative capital gains tax scenarios reducing the discount – which would increase the tax payable on net capital gains. Our calculations show that reducing the discount would lead to higher income earners paying more capital gains tax.
This would reduce the difference between the tax payable by higher and lower income rental investors, and therefore reduce inequities in the current system.
Investors aged over 55 or who aren’t in the labour market (those who are unemployed, retired or not working) benefit the least from negative gearing.
We need to change the way we tax housing to create a more equitable and sustainable housing market. But this needs to be done (and communicated to investors) in a way that limits the risk of a shock to the market if investors exit the housing market.
Policymakers have been reluctant to change the fundamental settings of the tax system, but our modelling shows it can be done in a way that limits the impact on poorer investors.
The main limitation on this reform is behavioural, determining how investors will react to the effects of tax changes.
Housing reform is complex, involving a range of market factors as well as the tax drivers.
Read the full article here
Approvals remain elevated
It looks like a good week for building approvals – particularly in Sydney and Melbourne.
Melbourne leads approvals
It’s a massive week of news, so let’s quickly summarise building approvals.
High demand for apartments in Melbourne continues, while Sydney unit approvals continue to retrace.
Note that Brisbane attached approvals have now levelled out, another indicator that the bottom of the market is now nearly in (the crowd is always a day late, and often years late – but we’ll now see more townhouses & duplexes and fewer high-rise apartments being approved now).
House approvals were also strong in Melbourne, while Perth’s detached housing also appears to be very close to the bottom of the cycle, with reports of a strong lift in rental demand by REA Group.
Read the full article here
Non-bank lenders attracting investors
With lending criteria continuously tightening, it would seem a new wave of lenders is making their mark on the market.
According to the an article on Business Insider non-bank lenders are on the rise – the question remains though, how will this affect the property market?
Non-bank lenders, Chifley Securities has benefited from the low interest rate environment with a record level of loans worth $1.87 billion for the 2017 calendar year.
It comes as the official cash rate was held steady at 1.5 per cent by the Reserve Bank of Australia on Tuesday.
It is the nineteenth consecutive month the board has left the cash rate untouched.
”The Reserve Bank’s decision to leave the official cash rate on hold was widely anticipated,” Mortgage Choice chief executive officer John Flavell said.
“The Australian economy continues to perform well, giving the Reserve Bank of Australia little reason to adjust the current monetary policy setting.”
REINSW president Leanne Pilkington said the current interest rate remains appropriate.
”The fact that the banks themselves are applying tighter lending criteria to their customers demonstrates the potential impact a rate rise too soon may have,” Ms Pilkington said.
“It’s a precarious position requiring a steady environment in the near term and under the current conditions we don’t expect any movement until 2019.”
According to Chifley Securities’ principal, Joe Morello, the second half of the 2017 year was particularly strong and saw Chifley lift its lending to property developers and investors by 15 per cent over the previous corresponding period, with a $282 million contribution by its recently launched Chifley Aggregation.
Chifley Securities allocates funding lines to finance property developments, without the major banks’ requirements of pre-sales and added security.
Its property-backed projects range from $1 million to $50 million in Sydney and Melbourne, but with lending rates.
Mr Morello said with Chinese property developers and owners also being squeezed by new foreign capital outflow restrictions being imposed by the Chinese government, this presenting a ”great opportunity for second and third tier lenders to fill the vacuum”.
”We are finding strong demand from developers who are now holding residual apartments that have not sold or settled on completion,” Mr Morello said.
”Many more apartment buyers are not settling on their off-the-plan purchases and developers across the East Coast have decided to hold the stock and rent out the apartments instead of selling them at a discount,” he added.
Mr Morello said the non-bank lending sector was gaining strong recognition amongst developers and land owners as many are now being neglected by the major banks in recent months as a result of tighter credit controls.
Chifley’s new aggregation division is finding strong demand from brokers who can no longer access funding from the major lenders for their clients and who have limited access to private lenders.
Chifley Aggregation is providing brokers access more than 135 lenders, offering greater choice than previously available in Australia.
Read the full article here
Australia’s doom prophecy déjà vu
Is the future of the property market really doomed?
In this article for Switzer, John McGrath looks at the prophesies designed to scare us, and the reality we all actually need to know.
Well, he’s back.
Harry Dent – the controversial US economic forecaster has returned to Australia to promote his latest book and sell tickets to seminars being held around the country.
And what are his predictions for our property market?
Pretty much the same as they were in 2014.
Oh, and 2011.
Dent says Australian property is “way overvalued” and we’re in the midst of a bubble that will inevitably burst.
He describes real estate as our economic “vulnerability” with price losses of 20-50% expected during what he predicts will be a second GFC that will be worse than the first.
Yep, it’s doomsday stuff all right.
In an interview on Channel 9 last week, he agreed that his 2011 and 2014 predictions of a price crash here were wrong.
He says while most of his economic predictions have come true, we’re “the exception” and it’s largely due to our strong immigration.
“Australia is one of the few countries in the developed world that has very strong demographic trends now and ahead,” he said during the TV interview.
“Your demographics is your savings grace and that is coming from very high quantity and quality of immigration.
You’ll weather (the next GFC) better than most countries but I think real estate is your vulnerability.
He goes on to say: “I predicted almost every major bubble and major turn of events in the world except for this one. (Australia) really has been the exception but a bubble can only go so far, you are way more overvalued now than you were back then, more than twice what the US is and most European countries and this global crisis, so it may just be 20%, I say 50% max, that’s the range.”
Now I’ve been in real estate for 35 years and I’m yet to see any doomsday predictions about our property market from overseas commentators come true.
Strong population growth is not the only reason we survived the GFC relatively unscathed and I believe it’s certainly not the only reason our property market will never crash like the US.
And herein lies the problem with Dent.
You can’t bring an American mindset into any analysis of the Australian property market.
I can understand why Dent would look at Sydney, in particular, and think it’s overvalued.
That’s how it might look on paper to an analyst who doesn’t understand how things work here.
He fails to take into account all the unique factors that have kept our property prices growing while also protecting our market from collapse.
One of the most important factors is the high level of prudential oversight in our banking system.
As we all know, it’s harder to get a loan for investment these days – especially on interest only terms; and that’s because APRA has identified a potential threat from high levels of investment activity and applied measures to deal with it.
We have stringent approval procedures on every new loan, such as assessing a person’s ability to make their repayments when interest rates are at the long term average of 7%-7.5% – not at today’s 4-5%.
Among other things, Dent looks at demographic trends to determine his predictions, so let’s highlight one of the most unique trends in Australia that is significant in keeping a floor under prices in all capital cities.
Australia may be ‘a land of sweeping plains’ but we have nowhere near the population spread across our country that the US does.
In fact, more than two-thirds of Australians (about 15 million people) live in a capital city and we only have eight of them.
On top of this, 8 in 10 of our migrants also choose to live in a capital city, primarily Sydney and Melbourne.
When you’re having a growing population that is very concentrated around a small group of cities – and two in particular, you’re going to have much greater stability in home values no matter how high prices go.
Additionally, in major growing cities like Sydney where urban sprawl has gone about as far as it can, we now have a chronic undersupply of new housing that is also serving as a strong foundation for ongoing growth.
On top of this, we have low unemployment, a strong and resilient economy, low interest rates, a tax system that rewards property investment and a growing market of international buyers. All of this will contribute to the ongoing growth and stability not only of Sydney and Melbourne but all of our major city markets.
Dent argues that it takes 10 times the typical income to buy a typical house in Sydney and Melbourne, which he says is unsustainable.
Well, if it’s so unsustainable, why are we currently seeing healthy auction clearance rates of 60%-70% in Sydney and Melbourne, even though both cities are at a price peak following a five year boom?
While I don’t question that there is an affordability challenge for young buyers, Dent also fails to take into account the ingenuity of Australians, not to mention our long-embedded culture and passion for property ownership.
Australians seem to find a way when they want to buy a home.
Look at the emergence of ‘rentvesting’ and the bank of mum and dad among first home buyers.
Look at how many families have adapted to apartment living over the traditional quarter acre block.
Look at the number of people swapping Sydney for Melbourne or Brisbane to achieve better affordability.
And how about the way we’ve embraced property investment through self-managed super?
Prices keep going up but we still find a way.
In today’s high tech world, with so much information available and so many people expressing opinions, it can be hard for the ordinary home buyer or investor to figure out what’s worth listening to.
My advice is to cut through the noise and take a simple lesson from history.
Read the full article here
3 Childhood Behaviours Predict Success 50 Years Later
Could your childhood behaviour affect your life as an adult?
An article on spring.org.uk looks into 3 behaviours, and their affect 50 years later.
The behaviours were linked to adult occupational success and earning more 50 years later.
Being interested in school, being a responsible student and having good reading and writing skills all predict people’s occupational success decades later, new research finds.
Even 50 years after someone had left high school, these factors still predicted if people had a more prestigious job or not.
Being a good student also predicted how much money people earned 50 years later.
Dr Marion Spengler, who led the research, said:
“Educational researchers, political scientists and economists are increasingly interested in the traits and skills that parents, teachers and schools should foster in children to enhance chances of success later in life.
Our research found that specific behaviors in high school have long-lasting effects for one’s later life.”
The study used data from 346,660 U.S. high school students first collected in 1960.
Plus 81,912 of them were followed up 11 years later and 1,952 were followed up 50 years later.
The researchers took into account all sorts of other factors like IQ, personality traits and the family’s socioeconomic status.
Dr Spengler said:
“Student characteristics and behaviors were rewarded in high school and led to higher educational attainment, which in turn was related to greater occupational prestige and income later in life
This study highlights the possibility that certain behaviors at crucial periods could have long-term consequences for a person’s life.”
Read the full article here
Weekend video: What Is The Most Dangerous Sport In The World?
SUBSCRIBE & DON'T MISS A SINGLE EPISODE OF MICHAEL YARDNEY'S PODCAST
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
NEED HELP LISTENING TO MICHAEL YARDNEY'S PODCAST FROM YOUR PHONE OR TABLET?
We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.
PREFER TO SUBSCRIBE VIA EMAIL?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.