I can totally see the reason that people in their 40's and 50's look to property as an investment, but it's the effect of them collectively with this 'hunt for yield' that's forcing a lot of people into risky investments i.e. stocks and property. The effect of this is to create a feedback loop whereby people buy more property and pay more money for it, banks make more money from larger loans and hand out larger dividends, investors get bigger dividends and throw more money into property. It creates a completely lopsided and unstable economy.
It has created a speculative economy, one in which people have put aside prudence in favor of yield, as you say. At back of it I believe is the nineteen eighties promise that superannuation would allow future generations to retire at ever younger ages and to retire very wealthy. It was a dream, nothing more A dream based on the high interest rates that were present at the time. Now it is in the nations psychi that to retire at 55 with a massive income stream is a birthright. As long as you can assemble the assets under your name the government and the banks will do the rest, will keep them safe because your future is Australia's future.
When superannuation failed to deliver the promise people went looking elsewhere to have it fulfilled and there was no shortage of propaganda and incentives to lure them into residential property investment. Personally I believe neither the government nor the banks were the slightest bit interested in whether millions of Australians could achieve a well funded retirement. All they were concerned about when they engineered the Investment property mania worldwide was their own income and the continuation of the global debt cycle that requires ever larger amounts of debt to repay the interest on the previous debt.
I doubt many property portfolios are sound enough to weather a real downturn in the economy, and those that do will probably not turn out to be the pot of gold the investors believed them to be. They will give them a decent old age pension equivalent but they will have to work for it like the generations before them had to. The days of agents managing and subcontractors repairing will go and the work will be left to the holders of property as they try to maintain their yields.
Being a landlord is a decent profession, it's just not a path to riches unless you bought at the right time and have a very large portfolio. A lot can happen in the next 20 years, a lot has happened in the past 10.
I'm a little confused by your calculations. The NPV of one dollar, right now, is one dollar. If the tax is saved by the investor today, they receive the full value of that dollar today. If it is deferred until they dispose, the NPV decreases, no? That is, if I pay $1B less in tax this year, I can put that $1B into some other investment and earn a return, whereas if I defer the tax credit to sometime in the future (at disposal), I have lost the time value of money. And the inverse applies to the Treasury.
Yes. We agree I think. If I have a tax deduction of $1B today and I can claim it against other income today, its NPV (and hence loss to the tax man) is $1B. On the other hand if I were to defer it to some time down the track then that deduction would be worth less on an NPV basis and hence the drain on tax receipts would be less.
So in my case I was saying there is probably somewhere about $2.3B of tax not paid in each year because of rental losses. If losses on rentals were quarantined, the owners would not lose the tax deductions entirely, rather they would be deferred. The gain to the tax man in quarantining is not the full amount but the difference in NPV of the deductions between now and whenever they are deferred to. My wild guess is that quarantining rental losses would benefit treasury by somewhere between $0.5B and $1B per year, but it is only a guess.
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Not just the tax man, but renters as well. I have been earning risk free returns on my cash that I save by renting (ok, sovereign risk, but w/e), while those kind property investors have been taking a loss AND a risk. Once the transition from public to private housing is complete, it wouldn't surprise me if there is some kind of rent control introduced, or at a minimum, the government pulls the props out from under the market they made.
Agree entirely on the first bit. To me, the whole OO vs investor thing can be seen more as an OO vs. renter thing. Almost any policy you can think of (other than increasing supply perhaps) that makes it easier to be an owner will work against renters. If all renters eventually transitioned into being owners, then that is not a problem at all. But the most vulnerable people probably have no hope of ever being buyers, so they take it in the shorts.
Unlike many of the bulls and bears on the forum, I don't see a great deal of evidence of there being huge excess risk adjusted returns being reaped by long-term PIs as a general group. In fact I think it is slightly in the other direction, with the caveat that the smarter operators perform quite a bit better than the noobs. The rental market is pretty efficient across the cycle, and any policy change that makes investing in rental property less profitable will over time result in yields being pushed up, mainly to the detriment of renters, and vice versa. PIs are trapped in their investment in the short term, but not in the long term.
So what would happen if your scenario of the privatisation of the rental market being completed and then rent controls being introduced? My guess is that people would stop entering the market as PIs. As people retired and cashed out illiquid assets for liquid assets or in the limit passed rentals on to their children, the rental stock would be sold off and move into the hands of OOs, possibly at a lower price point than would otherwise be the case. This would represent new supply for OOs and depress new builds, and at the same time cause the rental market to get tighter and tighter. If supply cannot be made at an economic price point, then supply will dry up. In a city with stable population this might be manageable, but it would bring on horrible hardships in growing cities, and the hardships would strike the people with least money. So I am kinda hoping your scenario does not come to pass.
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Well, here is hoping. I never really had any plans to buy property in Australia anyway, and the longer this government sponsored 'boom' goes on, the cheaper rent will be relative to increases in my income. One day they will probably pull the supports and leave the middle class holding the bag (to mix my metaphors), and it might even be cheaper to buy than rent, so I will do the economically rational thing. If I am still here, that is.
I think the thing that will bite you is that, while renting will probably, over the cycle, maintain its relationship vis a vis buying for the median dwelling (if you think a bit, then you can see that every time the relationship changes, market forces will bring it back into line and that line should not change too much, viewed across the cycle, if policy remains constant). The problem is that in a growing city the median moves outwards. i.e. you will have to keep moving to less desirable locations in order to maintain your status quo. In a shrinking city your strategy would be totally rational. In Sydney I am not so sure it is.
Just looking at Brisbane you see that it can move quite fast. When I was a kid in the early 70s my grandparents lived on 3 acres in Sunnybank, which is 14k from the CBD. These days if you want room for a pony, about the closest suburbs are Moggil or Samford or the like which are 25k from the CBD and I expect Moggill to be cut up into small blocks in the next 5 years. Dunno about Samford. There are probably some decent sized blocks left in the Cleveland Redland-Bay area which is 30k out. I also note that these pockets are all served terribly by transport - no train and very congested small twisty roads. If you want decent access to the CBD (which Sunnybank has now and had then by train) then you are looking at Caboolture which is 50k out.
Biting the bullet and buying - most of the time - results in a short-term disadvantage but it does let you anchor your location against the tide of receding median location. I hate to think what my grandparent's home would be worth now. In 1972 it would probably have rented for about $70-$100/wk which could have been afforded (just) on an a high-level professional salary but if it still existed now at average Brisbane yields it would be more like $15k-20k/week. Only a drug lord could afford it. Or to think of it another way, if the land on which your current dwelling stands gets rezoned under you, it is a potential disaster if you are renting but a potential windfall if you own.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
yes i agree, why give anyone a refund on anything, the government should just take all our money. that way they will have all the funding they ever need and won't need to do a budget taking into account the nett income they get, nett and gross will be the same!
If they axed NG we wouldn't have a budget issue, but leeches like you are too stupid and addicted, so they cut funding to unimportant things like hospitals etc...
After a bubble has burst, no one denies that it existed. But before it does, the popular refrain is that though bubbles existed elsewhere in the world, “there’s no bubble here”. So housing bubbles are admitted to have existed in Japan, the USA, Spain and Ireland – because they’ve already burst.
If they axed NG we wouldn't have a budget issue, but leeches like you are too stupid and addicted, so they cut funding to unimportant things like hospitals etc...
Yes it would be a negative gearing zombie apocalypse !!
Agree entirely on the first bit. To me, the whole OO vs investor thing can be seen more as an OO vs. renter thing. Almost any policy you can think of (other than increasing supply perhaps) that makes it easier to be an owner will work against renters. If all renters eventually transitioned into being owners, then that is not a problem at all. But the most vulnerable people probably have no hope of ever being buyers, so they take it in the shorts.
Before the mother-of-all property booms in the US, nearly all housing was positively geared. The only reason you would rent is because your credit rating was too poor to finance a purchase. And in this environment, the Schiller index pretty much tracked inflation, but after depreciation and costs, the capital gain was in real terms, negative. For this reason, property investment was a flow, not a stock investment. The rent was supposed to cover the interest and provide a return (which increased as the principal was paid down).
Under the US system, I personally would have been a lot better off. I could have easily afforded a house on my salary, and there would be no incentive for me to rent. The bottom decile of society in the US system were much worse off than in Australia, and you can see the difference in diverging wealth disparity between the two countries as a result of that. While I would have been personally better off in the US system, I prefer to live and raise children in a country where I don't have to worry about the social consequences of wealth disparity in a country so well armed. So in one sense, I am thankful for the property investors to take all that risk to provide social housing, as negatively geared properties need capital gains to attract investment, and capital gains are always at risk, no matter how much the RBA and government put the rest of the economy in peril to support them.
The flip side of that is that I will never purchase in Australia while I am working. In the last 15 years, my salary has tripled, my rent has doubled, and houses and newly built apartments have almost quadrupled in the area I live in. It makes no economic sense for me to purchase, other than as a hedge against inflation. Even then, I see my life in terms of flow, not stock, so I am making the (perhaps dangerous) assumption that my rising income will beat out inflation at any rate. If inflation is high, I can always move out of cash and into an indexed fund (which tend to track inflation or even beat it).
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Unlike many of the bulls and bears on the forum, I don't see a great deal of evidence of there being huge excess risk adjusted returns being reaped by long-term PIs as a general group. In fact I think it is slightly in the other direction, with the caveat that the smarter operators perform quite a bit better than the noobs. The rental market is pretty efficient across the cycle, and any policy change that makes investing in rental property less profitable will over time result in yields being pushed up, mainly to the detriment of renters, and vice versa. PIs are trapped in their investment in the short term, but not in the long term.
I agree. The exception is perhaps periods like 1997-2003 and 2008-2009 where short term gains were very attractive to those good at speculating or timing the market. What is even more curious is the high degree of ownership in Australia. It must be for philosophical reasons rather than financial. I'm not sure if most Australians have mentally graduated from the agrarian age, so they think owning land is very important. Personally I've found that there is nearly always someone ready to rent almost anything to you, including farmland. Again, flow vs stock.
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So what would happen if your scenario of the privatisation of the rental market being completed and then rent controls being introduced? My guess is that people would stop entering the market as PIs. As people retired and cashed out illiquid assets for liquid assets or in the limit passed rentals on to their children, the rental stock would be sold off and move into the hands of OOs, possibly at a lower price point than would otherwise be the case. This would represent new supply for OOs and depress new builds, and at the same time cause the rental market to get tighter and tighter. If supply cannot be made at an economic price point, then supply will dry up.
I think at which point a lot of renters like myself would become OOs, if simply for economically rational reasons, reducing rental demand which would mitigate the tightening of the rental market somewhat. I agree though, it would hurt those at the socio-economic bottom rung the most.
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In a city with stable population this might be manageable, but it would bring on horrible hardships in growing cities, and the hardships would strike the people with least money. So I am kinda hoping your scenario does not come to pass.
We could do this now without ill effects if we simply halved our immigration intake. The natural birth rate is low enough that without immigration this would be completely manageable, and actually beneficial for our society and our economy. I notice that many of the most ardent property bulls on this forum are immigrants, and I think they understand the effect that immigration has on their chosen investment vehicle.
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I think the thing that will bite you is that, while renting will probably, over the cycle, maintain its relationship vis a vis buying for the median dwelling (if you think a bit, then you can see that every time the relationship changes, market forces will bring it back into line and that line should not change too much, viewed across the cycle, if policy remains constant). The problem is that in a growing city the median moves outwards. i.e. you will have to keep moving to less desirable locations in order to maintain your status quo. In a shrinking city your strategy would be totally rational. In Sydney I am not so sure it is.
If I worked for the public service, I would agree. However, my salary has risen a lot faster than AWE in the last 15 years, and I believe I am still at least 5 years away from peak earnings, so I fully expect that I will easily keep up with rent increases, but the chance of ownership will get further and further away. There is always the morbid reality of inheritance, which in my personal case will be substantial (assuming there is no TEOWAWKI in the financial markets), but I haven't planned my life around that eventuality, and have no intention of doing so.
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Biting the bullet and buying - most of the time - results in a short-term disadvantage but it does let you anchor your location against the tide of receding median location. I hate to think what my grandparent's home would be worth now. In 1972 it would probably have rented for about $70-$100/wk which could have been afforded (just) on an a high-level professional salary but if it still existed now at average Brisbane yields it would be more like $15k-20k/week. Only a drug lord could afford it. Or to think of it another way, if the land on which your current dwelling stands gets rezoned under you, it is a potential disaster if you are renting but a potential windfall if you own.
For most people that would be true. And I see a lot of 'rich rice farmers' in Sydney i.e. bogans who purchased in pockets of cheap areas within 15km of the CBD who are now sitting on 2-5M of property assets. (Reminds me of the rice farmers in Tokyo whose families gained title to the land in the Meiji restoration and who sold out to property developers in the late 80s for hundreds of millions). But I have no interest in being a farmer. I don't know where the winds of destiny will take me next. You yourself might never leave Asia, living out your twilight years in Chiang Mai with your Chinese wife and 8 concubines.
The way of the old world was stock, the new world is flow.
I agree. The exception is perhaps periods like 1997-2003 and 2008-2009 where short term gains were very attractive to those good at speculating or timing the market. What is even more curious is the high degree of ownership in Australia. It must be for philosophical reasons rather than financial. I'm not sure if most Australians have mentally graduated from the agrarian age, so they think owning land is very important. Personally I've found that there is nearly always someone ready to rent almost anything to you, including farmland. Again, flow vs stock.
That's why I said "long-term PIs". Flipping is a completely different strategy and you live and die by the sword in that game. Any hold time less than about 4 years has all the yield eaten by transaction costs so it is the same as (or worse than for shorter holds) buying gold or any other asset with no IRR.
There is a third strategy which is the value-add road (being a developer or a renovater or a block splitter.) If you are good at this there is real money to be made but really you are leveraging expertise and time as well as capital so you would expect a better return.
I suspect Australia has a very high degree of home ownership because:
a) Ben Chifley made a huge drive to get working-class Australians into their own homes in the 1950s. This created a fundamental shift in the way Australians see housing which still lives, despite the best efforts of the bureaucrats, tax man, regulators and councils who have shifted what should be their costs into build costs so they can spend rates on fripperies to push the cost of building entry-level dwellings out of reach of low-income people.
b) Despite what you say, which is all well-taken, I believe that over a lifetime the economics for most people still favour buying rather than renting forever. But it is a closer-run thing than it is, say, in the US.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
Yes. We agree I think. If I have a tax deduction of $1B today and I can claim it against other income today, its NPV (and hence loss to the tax man) is $1B. On the other hand if I were to defer it to some time down the track then that deduction would be worth less on an NPV basis and hence the drain on tax receipts would be less.
So in my case I was saying there is probably somewhere about $2.3B of tax not paid in each year because of rental losses. If losses on rentals were quarantined, the owners would not lose the tax deductions entirely, rather they would be deferred. The gain to the tax man in quarantining is not the full amount but the difference in NPV of the deductions between now and whenever they are deferred to. My wild guess is that quarantining rental losses would benefit treasury by somewhere between $0.5B and $1B per year, but it is only a guess.
An excellent summary and worthy of a thread of it's own.
One point though, if the losses were quarantined then they would most likely be accounted for on the sale of the property. Given that sale could generate substantial capital gains, it's quite likely that the tax loss then claimed would be at a higher marginal tax rate, so I question your estimate on that basis. It's impossible to accurately estimate future scenarios, but I've always been of the opinion that it would be close to neutral because of the change in marginal rates in the year of sale. In fact in my case I suggest that I would be better off quarantining, which I could do if I used a company as the property owner, but that unnecessarily complicates my tax structure.
Any expressed market opinion is my own and is not to be taken as financial advice
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