1. NG scrapped - investor buyer demand diminishes as the expected "after tax / after funding" returns fall 2. Property prices initially fall - probably back below 2011/2012 - maybe even lower. Bears cheer. 3. Supply begins to slow back to 2011/2012 levels which will detract c$30bn from the economy or 1.7% of GDP 5. Less supply with same pop growth places pressure on rents 6. RBA drops interest rates to re-stimulate the economy & housing. 7. The after tax / after funding return normalises again, and house prices rise.
End Result? 1. A bit of house price volatility, but prices back at or above replacement cost 2. Much lower interest rates for savers.
Great of owner occupiers (lower mortgage rates) Indifferent for investors (so long as they are long term investors), as prices move back to equilibrium Bad for savers with much lower savings rates
I agree with that, but I think that the extent of prices changes at step 2 would be less, and thus slightly less at step 3 and 4 as well.
The reason I say that is that rates are very low at the moment and so many investors who would have expected to be still negatively geared have become positively geared. In addition the tax deductions above the rental income level are not lost they are carried forward. Well educated investors know that and should be able to accommodate it in their cashflow. They will still get that deduction but in a later year.
If we ever see extremely high interest rates again the NG will be sorely missed by exposed investors and that could make the market quite unstable.
Any expressed market opinion is my own and is not to be taken as financial advice
1. NG scrapped - investor buyer demand diminishes as the expected "after tax / after funding" returns fall 2. Property prices initially fall - probably back below 2011/2012 - maybe even lower. Bears cheer. 3. Supply begins to slow back to 2011/2012 levels which will detract c$30bn from the economy or 1.7% of GDP 5. Less supply with same pop growth places pressure on rents 6. RBA drops interest rates to re-stimulate the economy & housing. 7. The after tax / after funding return normalises again, and house prices rise.
End Result? 1. A bit of house price volatility, but prices back at or above replacement cost 2. Much lower interest rates for savers.
Great of owner occupiers (lower mortgage rates) Indifferent for investors (so long as they are long term investors), as prices move back to equilibrium Bad for savers with much lower savings rates
Less supply?
The whole point is that NG isn't adding to supply.
Investors buy the houses we already have.
Anyway, I think its worth a shot.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?
The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly. Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
What do you think would happen if NG is wound back?
My guess is that it will be changed to applly to new builds only... - increase supply a little bit, if any - prices would not drop as the denial and delusion is still too strong - rents would not rise as they are limited by wages growth - the politicains can feel happy knowing they are not effecting their IP,s while still appearing to do something - most of the current IP boom is people seeking yeild as equites still seem too risky and term deposits are so low
Lower house prices means less supply. Suppliers aint gunna build more houses if the selling price falls. They'll build less. Some builders (especially of apartments) are investors. The loss of negative gearing will increase their costs. Therefore less reason to build and supply.
Supply is dictated by the supply cost (building + taxes and charges) versus selling price. Removing Negative Gearing (ie increasing government taxation of housing) can have no positive effect on supply - only a negative effect by lowering selling prices for builders and increasing costs for those building for investment (and yes there are investors who build).
1. NG scrapped - investor buyer demand diminishes as the expected "after tax / after funding" returns fall 2. Property prices initially fall - probably back below 2011/2012 - maybe even lower. Bears cheer. 3. Supply begins to slow back to 2011/2012 levels which will detract c$30bn from the economy or 1.7% of GDP 5. Less supply with same pop growth places pressure on rents 6. RBA drops interest rates to re-stimulate the economy & housing. 7. The after tax / after funding return normalises again, and house prices rise.
End Result? 1. A bit of house price volatility, but prices back at or above replacement cost 2. Much lower interest rates for savers.
Great of owner occupiers (lower mortgage rates) Indifferent for investors (so long as they are long term investors), as prices move back to equilibrium Bad for savers with much lower savings rates
I agree, except I'm not sure prices would drop very much and not for long.
I ran the numbers and fund that the yield on an investment property would have to increase only by about 25 basis points to counteract the effects of quarantining of NG even at 80% LVR in terms of total return over 10 years. For those who have multiple IPs and are forced to operate at 60% LVR and lower, the impact is even less. In other words, the regulations would be providing a small barrier to entry for new entrants to the business but not do much else.
I'd expect a small lemming effect as dumb people think the world has ended, accompanied by some buying activity from opportunists and then a permanent increase in yields of about 10-15 basis points funded by increased rents.
Above-median property would be completely unaffected.
In places with shrinking populations and hence no need for new supply, the effect would be much stronger. Look out Gladstone and Moranbah.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
Lower house prices means less supply. Suppliers aint gunna build more houses if the selling price falls. They'll build less. Some builders (especially of apartments) are investors. The loss of negative gearing will increase their costs. Therefore less reason to build and supply.
Supply is dictated by the supply cost (building + taxes and charges) versus selling price. Removing Negative Gearing (ie increasing government taxation of housing) can have no positive effect on supply - only a negative effect by lowering selling prices for builders and increasing costs for those building for investment (and yes there are investors who build).
I am well aware of B_B's "replacement cost" thesis.
House prices can fall below replacement cost.
Also the replacement cost of housing is full of variable costs.
The largest among them is the price of land.
He doesn't accept that the price or value of land is a variable and that's where we end the discussion.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?
The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly. Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
I am well aware of B_B's "replacement cost" thesis.
House prices can fall below replacement cost.
Also the replacement cost of housing is full of variable costs.
The largest among them is the price of land.
He doesn't accept that the price or value of land is a variable and that's where we end the discussion.
Englobo land is quite variable. In Sydney it can range from $25-$100 per sqm, but SFA in the scheme of final total dwelling cost. Land production costs (which bears seem to think = 0) can vary only to the extend wages and taxes vary. Wages are sticky, and governments seem in no rush to reduce the taxes on production. The risk is these costs will continue to increase over time.
The idea that land prices are 100% variable and fall with the market, magically keeping supply constant, is a MacroBusiness wet dream not supported any any evidence.
By contrast, all i am saying is if prices fall back to 2011/2012 levels, supply would probably move back to 2011/2012 levels. I do not see how that can be controversial.
Nobody thinks land prices are 100% variable but when the price of an inner city dwelling falls from $1.2M to $1M, I'll give you a tip, it's not because construction costs have fallen.
So what was the replacement cost when the house was worth $1.2M? And what was the replacement cost when the price fell to $1M?
Nobody thinks land prices are 100% variable but when the price of an inner city dwelling falls from $1.2M to $1M, I'll give you a tip, it's not because construction costs have fallen.
Agree - its because the market PRICE has fallen. I'm not sure who you are debating with here?
Quote:
So what was the replacement cost when the house was worth $1.2M? And what was the replacement cost when the price fell to $1M?
The same as if the PRICE was $10M or $1. (Note: price, cost and worth (or value) are three very different things - it be less confusing if you stop interchanging the terms)
Prices trend around cost over time. Sometime above, sometimes below. Best way to visualise it is via the diagram below.
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