This Housing Downturn is Over

Tax slug on income and profits second-highest in world

From AFR today:

"Australia has the second-highest tax slug on personal income and business profits combined out of 34 of the world's leading economies, new figures show, renewing pressure on the Morrison government to embark on substantial tax reform to stimulate the soft economy.."

"Combining taxes on personal income and business profits, Australia raised 58.8 per cent of total federal and state government revenue from these sources, well above the OECD average of 34 per cent.."

And finally..

"Property taxes in Australia, chiefly state stamp duty and land tax, were about 10 per cent of tax revenue – above the average of 5.8 per cent average..."

So those screaming socialists blaming property investors for all the ills need to have a reality check and should instead be thanking property owners & investors in keeping our budget in black, reducing burden on the government to provide low-cost housing to renters and effectively helping the government subsidise the housing for renters in paying taxes through their eye balls with almost double the rate of tax take vs the average tax rate across 34 leading economies.

 

So what here is being taxed below average? GST? Inheritance?

 

Mainly the gst revenue at around half (a bit over) vs the average of OECD + Aus does not have estate/ inheritance tax which I believe half of OECD countries have in some form.

 

I'm sure you don't need to be told that property taxes are dependent on property value? So we'd expect to see a country with inflated property prices (and that has very little economic complexity) make up a higher percentage of tax revenue. Meaning a government would need to keep supporting this market to maintain its cash cow. So I think I'd be careful about throwing the S word around.

 

mate, not sure if people call you "Teflon Tim" by any chance...?

All data, logic, stats, accuracy, context, validated info or what you have... Nothing sticks! Because of that teflon-coating which unfortunately serves as an armour-plating against any source of info that contradicts your skewed view of looking at Property Investment in general and Prop Investors in particular.

Having an argument with you is akin to trying to convince rabid flat-earthers into believing earth is in-fact somewhat round and throwing every bit of info to demonstrate or trying to argue with conspiracy theorists about that moon-landing never happening on and it's all a Hollywood/ CIA conspiracy!

Don't want to chase my own tail on a circular argument with you but the info is there in black and white for everyone to see..

Back to the thread now ..
How is the weekly Corelogic numbers looking vs last fri @wombat777 - Looking at the data, I would think the growth rate would be similar to last week?

 

That's a long way to say "I can't address your point".

 

The chance that unemployment goes to 8% without a significant housing correction is zero. WA has had housing falls that many property watchers said were basically impossible. That's despite a relatively strong economy elsewhere meaning government spending was high, a significant fall in the AUD and unemployment only going to about 6.5%. House prices were never anywhere near as crazy as Sydney either. If NSW unemployment goes to 8% then a 20% drop in median prices would be the absolute best outcome (and would likely see the AUD well below 50c). You just don't get an unemployment rate that high without a massive impact on household budgets across society and likely widespread panic over the possibility of losing your job.

The problem with construction is that so many of the jobs have been in building units which is where the real boom has been. There's been nothing to suggest new build apartment prices are going up hence nobody is going to plan on building new ones which can be seen in approval data. There's no way this can be made up for in houses alone. There's also a huge lead time on these things and approvals over the last 12 months means big job losses in the sector are locked in over the next 6 months.

 

Sorry I am over exaggerating when I say 8-9% and using tarocash as an example/ genuine question, I'm more trying to understand the impact to property because people stop shopping at David jones and other discretional spend retail outlets. I would understand panic/sentimate having an impact.

 

New data/ noise suggests to the contrary- Things are on the mend and fast.. just as surprising and fast the turnaround was for property, we will see this evidenced in new construction picking up in coming months:

Property developers say investors are back

"Dwelling investment fell by 9.6 per cent over the past year, but developers say investor activity has already picked up and may point to a recovery if the volume of loans and building approvals improve..."

"...Capio has sold 80 per cent of the Paramount development project in Eastwood and 50 per cent of the Rosella project in Wahroonga. The projects are set for completion by the end of 2020 and the first quarter of 2021, respectively..."

"In November, the residential construction industry marked its 19th consecutive month of contraction. But the RBA deputy governor Guy Debelle said in the same month that he expected construction to pick up towards the end of 2020.."

I have engaged builders for my own 2 build projects in Melbourne and both of them are already complaining of their expectation of dwindling tradies next year from a vast surplus just a few months ago. The construction is picking up fast after a lag and this will be evidenced in data over Q1 next year.

 

I agree with most of what you posted but I disagree about unemployment. Perth didn't need anything like 8% unemployment for its housing collapse. That happened with no global issues, a relatively strong economy in the rest of Australia and a fast falling AUD. Perth isn't anything like the worst case scenario.

We know from construction data that layoffs are happening and will continue for a while (at least 12 months) in that industry. That employs around 10% of people in Sydney (it's 9.1% Australia wide and clearly higher in Sydney given the recent construction boom). That's likely to lead to at least a 1% increase in unemployment in NSW on its own as the boom unwinds. At the same time another big employer in retail is getting smashed.

Perth's downturn occurred with a 3.5% rise in unemployment. With construction and retail losses guaranteed in the next 12 months I don't see how we don't get at least an increase of 1.5% in unemployment in NSW in that time. Does the economy survive that intact without the impact of those job losses causing a cascade of issues? Maybe but the risk is overwhelmingly to the downside.

 

I think the construction industry is in for a rude shock leading into 2020 for the residential high rise area. It will be felt all round that is for a certain.
Getting smash is a bit harsh words to describe it. But it will be a challenging times ahead.
Rising unemployment is something unavoidable.

 

Really? October had literally the worst year on year investor credit growth rate since records began back in 1977.

Credit growth in the doldrums despite property rebound

Do we believe the developers whose job is to convince people to buy their properties or the published statistics on this?

As for construction building approvals were down 8.1% for the month of October which was released earlier this week. They were forecast to only be down 1%. It's massively underperforming against very low expectations. Construction work lags approvals so the idea that it's going to take off any time soon is laughable.

 

One of my builders has more work than he can handle for years ahead. My town planner is also inundated with projects and other small project managing roles for clients.

The world will continue just fine I promise. Time some take a chill pill....or a thousand.

 

@Woodjda agree, don't need anywhere near 8% - that's crazy high. In Sydney, i don't think it will breach 6% (probably nationally too).

IMO on the ground, people feel confident enough in their jobs & the economy. They've just driven Sydney house prices up 10-20% in 6 months (in inner regions, once the data plays out). Of course this indicator is pretty poor though.

Construction is definitely in for a slowdown as projects complete & new projects take long lag times to respond to price signals. Developers weren't going out there purchasing sites and doing the legwork for their next steps in 2018...so we'll feel a big slowdown associated with that lack of activity then. They were more likely to be closing doors and shedding staff. We'll see that now as their projects complete and their pipelines are emptier than usual. Volatility in prices & ability to settle really hurts developers, whose inventory values move all over the place & cant be cleared.

Nonetheless,IMO, there'll be a developer increase again in 2021/2022 in Sydney again. Developers respond to price & demand signals, as well as cost signals (rate cuts). Project profitability is back, confidence of completions is back, and development should pick up again. I look for sites regularly & have a general interest in this market, the values of good quality 'easy approval (CDC sites)' or 'approved & shovel ready' has shot up already (possibly a bit more than the rest of Sydney). Everyone wants a piece of this again. Buying in this market now is very tricky. The developer newbies, small little players, the builders, the larger development groups, etc. This is the precursor to approvals, activity, etc - over the next 12 months, should pick up again.

 

This is the story among most developers I know on the ground today. IMO this will begin to appear in the macro data in ~12 months.

It feels like developer FOMO at the moment. Its a lower risk projection now for developers to go out there and take risk:
- Clear stock: they have far more comfort that their stock will actually sell today.
- Have positive movements on their inventory: price signals suggest rises, not falls. Helps project profitability.

It appears that they're out there in droves hunting that actual land that they will get approvals for and develop over time. Very long lag times, so unemployment will rise in the sector and there'll be a big slowdown overall. It should just yoyo around similar to price growth data, albeit 12 months lagged.

 

Precisely this.

 

Small sample size I know, but investor here, and I purchased in the last two months and am engaging in value add to the property.

 

I agree with you on most of this. I think where we disagree is what happens over the next 12-18 months in the mean time. I think the risk of widespread job losses in the next 6-12 months is really high. Again today we've seen the AIG construction index come out for November with terrible figures. In particular the employment sub-index showed a big fall which suggests big job losses occurring that haven't made it into the unemployment data yet.

Construction jobs slide as orders dip: PCI

Maybe there's something that holds is up through the next 12 months but I don't really see what it is. The private sector is already in recession with construction and retail entering really tough periods. If everything holds together well enough for 12 months then construction might pick up and we'll be ok but from what I can see we're walking a heck of a narrow tight rope to get there.

 

Yes I also agree, there'll be a slowdown. The part that I don't agree with is 'how bad its going to get'. This is mainly because I believe in the power of all the actions the regulators have taken will filter through to activity slowly. Ironically, the actions taken are precisely why the housing market has taken off & will likely continue to do so.

I don't think any activity increase from the regulator actions will be fast though. The sectors involved means it makes sense for it to be a slow response to changes:

• Construction; super slow given lag times in projects & lack of housing stock to develop/buy at the end of a trough period in prices.
• Consumption; wealth impact of falling prices drags sentiment and consumption activity in two major capitals. If there were no falls, than the wealth impact would play out faster. A lot of the increased consumption comes via credit. Credit is based on asset valuations. Asset valuations lag asset price growth...hence the wealth impact is lagged.

This is how the economic and housing narrative may play out:

- 2018/2019: House prices tumbles at fastest rate in 30 years, household wealth tumbles, wealth impact across Sydney and Melbourne drive private sector consumption slowdown.

- Late 2018 & 2019: RBA dilly dallies, citing strong employment figures & momentum in employment market as a means to not cut rates further, justified by their business liaison work, they don't follow standard economic theory that unemployment figures will rise eventually (all lead indicators pointed to a slowdown in activity, etc).

- H1 2019: Economy slows sharply because of the above. RBA a little stuck, given their desire not to intervene in Australia's political cycle.

- H2 2019: Regulators spook and react strongly. RBA reacts super slowly and cuts rates three times. Fed's give tax cuts early. States go and introduce further infrastructure. APRA promotes leverage. This thread begins stating all of this will meaning Australia's biggest housing slowdown in 30 years is over.

- H2 2019: House prices begin to take-off. Naturally, the actions taken spur house prices first before they translate into higher economic activity. This is where we are at the moment.

- H1 2020: Economy begins to respond to big stimulus measures, albeit too slowly. Data doesn't show it yet, as it lags (reasons above). RBA doesn't appreciate the first two points above, freaks out and responds by cutting 2 more times. Housing market has just had a fuse lit under it. Feds respond with some stimulus.

- H2 2020: People & businesses feel more confident. Balance sheets are +200k and consumption begins to grow again. Unemployment peak has hit, with the momentum trending back down again. Sydney & Melbourne House prices hit new peak. It'll be 5-10% over previous peaks by year end 2020 if H1 2020 comments above play out. No signs of a slowdown.

- H1 2021: Economic data picks up. Best growth quarters in 3 years. House prices are already 25-30% higher in major capitals.

New debt problems begin to emerge associated with a large spike in debt/prices, the debt cycle begins to turn the other way again. IMO, if the above does happen, and the RBA moves again, Sydney and Melbourne will experience double digit price growth comfortably.

In time, we'll review this all and recognise a couple mistakes were made by regulators:

1. It all begun by overreaching in 2017/18 and interfering a bit too much & spooking credit participants from doing business (fear is bad for business, no credit = no growth). Actions were certainly required, but they've mis-underestimated the unintended consequences of regulatory interventions.
2. They were too slow to cut interest rates in the first place. Economic momentum is lost by the time they begin their actions. By waiting 6 months, they need to fire more bullets as slowdown in activity seeps in.
3. They set the benchmarks way too high (unemployment near full), freak out that their actions aren't working as a result, so they cut again in 2020 & spur a massive housing boom.

^^^ is random nerd talk from Treasury days. The cafe in the Treasury building is full of econcrats chatting away about something like the above.

 

Hi Redom,

I've been closely following your posts and find all your commentary very valuable.

What is your view on the Brisbane house prices in the coming years? You are obviously very bullish when it comes to Sydney and Melbourne but I'd be interested to hear your thoughts about Brisbane.

Thanks