Why Australia really IS different

The same questions can be asked about the nature strips outside your house, the public library, or bridges.

There's probably a time and place and price for home ownership. But if the time and place and price means a person spends 20 years saving for a deposit (eg Hong Kong), and another 50 years paying it off, then perhaps that's a misallocation of time and human capital.

A country does not tax itself to prosperity. Neither does it do so by trading established homes, notwithstanding I'm a beneficiary of this artificial game. Prosperity is achieved by increasing the size of the pie, not by passing the same pie around.

 

In your opinion the second point is invalid, I wanted to know whether in your knowledge the rest are. I'm not trying to imply anything, simply worded badly (and apparently taken badly too). I apologise if anyone is offended.

@Omnidragon post, it addresses that the points op make are not exactly on point, or a good thing (that's how I interpret it). It doesn't say that Australia is no different or taking foreign policy would be the better way.

 

Would be very interested to know the difference between the level of debt between the two countries, would make for an interesting comparison. Private home ownership in Australia may be 67% but I'd imagine that vast majority don't actually own their home.

I think the problem is that CGT concessions go far deeper than investors. NG is only targeted at rental properties but the CGT concessions are far greater for OO than for investors (who they're still far too generous on). Investors are actually only a small part of the problem but they're the part of the problem that can be reasonably fixed (by reasonable I mean you'll be likely to remain in office if you do it), investors are essentially the low hanging fruit that you can get at easily, fixing the system will take far more but at least it would be a start.

 

Done.

Germany: household debt of 93.6% of disposable income in 2014. (Germany - OECD Data)
Australia: household debt of 199.1% of disposable income in 2013. (Australia - OECD Data)

But then,

In Australia, households on average spend 20% of their gross adjusted disposable income on keeping a roof over their heads, above the OECD average of 18%.

In Germany, households on average spend 21% of their gross adjusted disposable income on keeping a roof over their heads, above the OECD average of 18%.​

OECD Better Life Index

So Germans spend slightly more on housing than Australians.

Actually, the number who own their own home in Australia is higher than I thought.

Of all households, 31% owned their home without a mortgage, while 36% of households had a mortgage secured against their dwelling.
​

4130.0 - Housing Occupancy and Costs, 2013-14

Or go for broke and rent out your Main Residence, Negatively Geared (of course) then sell it 5 years later for a profit, 100% CGT exempt. Then you get the "benefit" of Negative Gearing and pay no tax on your profits when you sell

Instead of targeting one or two individual elements of the tax system, it seems it would be better to give the whole thing a complete overhaul. Given this would be too hard and too unpopular, NG and CGT seem like good places to start. My concern is the propsal makes a complex tax system even more complex. That said, the USA overhauled it's tax system in 1986 and over the next 20 years made over 1,500 amendments to unwind most of the reforms made. This is the risk of any new tax system, that any reforms will be unwound over time. In the meantime we can only dream of a simpler, fairer tax system

 

I wonder how much those stats have changed in the last 3 years, I'd think the household spend would almost certainly have changed negatively and the debt levels with it. Any idea when the next set of those stats comes out, is it census based?

Interesting stats though, I guess anyone who bought before about 1995 and doesn't own their home outright in Australia made a pretty big mess of it (or has kept upgrading and remained in the cycle) so that 31% makes sense when you consider the age profile of Australia (you could probably move that figure to 2000 and not change it much)

The old have your cake and eat it too.

Agree here, the Australian system is pretty bloody broken, a total overhaul is almost impossible unfortunately. Every review comes to the conclusion that a major overhaul is needed and every time the government picks out the 3 or 4 most politically favourable changes suggested and makes them instead just compounding the broken system. It's actually amazing how inept the taxation system and its administration is.

Given that it's so broken and not going to be fixed I guess the best you can hope is to fix those bits that are easy targets. CG concessions and NG both distort the housing market, the CGT concessions in particular are basically a property based distortion and a massive hidden factor in wealth transference but CG is not an easy fix because it again means "going after peoples homes" which is political suicide. The super system is the obvious area that could actually be fixed without costing votes (donations on the other hand...), NG is another area that can be fixed without a great deal of votes being lost but to fix it properly would cost votes because it would certainly not involve any grandfathering.

It would be great if there was someway to make "making Australia better" a higher priority than being reelected but that's probably a pipe dream as well.

 

That's a 10-20 year dream though, politicians can only dream in 3..

 

It's definitely a pipe dream.

Sad but true.

The other side is that even if a government had the guts to reform the tax system, it would only be temporary. The reforms would almost certainly be unwound over time.

 

Extended interview with Chris Watling

 

Great interview. I agree on every point.

 

Background:

• The OP is in response to my post (Bill shorten poised to take negative gearing.) wherein I had presented the similarities of economic changes underway in Australia with taxation reforms of 1986 in USA with regard to the motivating factors and the types of reforms enacted.
• Most of my arguments were based on a paper by a professor of economics at MIT https://www.bostonfed.org/economic/conf/conf36/conf36g.pdf
• OP seeks to rely on demo-graphical differences between US and Australia to argue that the policy outcomes would be different.
• Most of the demo-graphical discrepancies and their significance has been debunked by other posts already.
• I will attempt to analyze these demo-graphical differences within the framework in which these arose.

Analysis

• Statistical compensation of demo-graphical variance: The statistics generated by the paper ibid did allow for demo-graphical variances and the statistics were normalized for urban-rural and house-apartment, steady/non-steady states within USA. The results presented were based on demo-graphic variability models as proposed by other researchers and peer accepted.
• Population: Inapplicability and triviality of population, it's growth rate and stability (as interpreted in OP) has already been addressed by other posts. USA's population was 240 million in 1986 with a growth rate of about 1% when the TRA were introduced. Although lesser than Australia's growth rate 1.6%, it was on a base of population more than 10 times Australia's current population.
• Population Concentration: Australia's population concentration should amplify and not attenuate the consequences of policy changes. The drop in apartments in urban areas was much more than stand alone house or rural areas.
  
• Urban-Rural Divide: In 1986 Rural population in USA was 25% which is comparable to today's Australian rural population. Rural population (% of total population) in the United States
• Rental Yields: Existing higher or lower rental yields are not correlated to the cost differential (caused by policy change designed to change residential economics) between the cost of capital for home ownership (or a perception thereof) with the cost of rental. This is a psychological inflection point at which people decide to cease renting and yes the property economics play a substantial part in this decision.
• Restrictive Planning Laws: I have not done a comparative analysis as yet but seeing Melbourne's skyline for last 10 years, I doubt that it is easier to build in Tokyo or New York than Melbourne or Sydney. If we assume that energy efficiency and green house emissions reduction forms a subset of planning laws, Australia has a lot of catching to do.
  
• Ideal Population Mass: I do not understand this term and its correlation with population growth. Some clarification and definitions would help.

Its a learning experience for me, so it would be interesting to know which of the following policy outcomes (of TRA 1986) will be significantly different in Australia (if NG and CGT tax lurks are removed along with enforcement of APRA gudelines) and why

• Residential investment remained unchanged. In fact employment in building sector grew.
• Cost of capital for ownership for middle to high earners increased but the increase was insignificant.
• For low income earners cost of capital for ownership fell from 17% to 40% below the cost of rental from year 1980 to 1988.
  
• Vacancy rates for multi unit residential buildings increased by 50% resulting in collapse of rental returns.
  
• Passive loss rule stopped high leverage tax shelters in real estate.
• Passive loss rule caused dumping of property (housing, hotels, offices etc) onto market accompanied with fall in prices
• Financial Institutions: The reduced asset values weakened the balance sheets and in some extreme cases lending institutions were bailed out. In other cases the ability to lend was diminished

A significant point of difference would be contrasting inflationary environments between today's Australia and 1986 USA.

 

What does this mean? Can you give a real example with figures please.

 

Here are the formulae with their harem of variables for the two terms from the paper. These are complex and America-centric


Extract from the paper should put it in more simple terms:
The user cost of capital for rental housing also rose in the 1980s, increasing from 9.6 percent in 1980 to 14.9 percent. For a family with a $45,000 income (adjusted gross income in 1988 dollars) that faced the choice between renting and owning, the user cost of capital for home-ownership fell from about 17 percent below the user cost of capital reflected in rental housing in 1980 to nearly 40 percent below the user cost of rental capital in 1988. The distortion in the rental-ownership
decision for such taxpayers in 1980 was significant, and by 1988 the bias in favor of home ownership was much greater.

 

It means that it was between 17-40% cheaper for someone to own a property than it was to be a tenant and pay rent.

Edit: Yep, @Skilled_Migrant was much faster and more concise.

 

Perceptions can change is a weak argument - it can be said about virtually anything. Perhaps you could start a thread on what changes in perceptions you expect would cause migration to slow or reverse.

Do you feel it's relevant to compare African residential real estate & their housing taxation policy to those in Oz ?

I use term guaranteed in a wider context than 'death & taxes', more like Govt guaranteed - Oz govt policy is to increase popln. Japan's popln has not grown for >15 yrs, US by far < 1%pa, Germany is ~0%pa, Oz is +~1,5%. All these growth rates are expected to continue for the foreseeable future.

I was careful in the language I used when making those assertions - I didn't use the phrase all the others. Oz is clearly v. different from Japan in terms of popln growth, and v. different from US & Germany in terms of homogeneity of popln.

So do you think that yields should be above cost of funds ?

Again I didn't state all the others - much of US is an example of less restrictive planning laws.

I use the term guarantee in the context of Govt guarantee. Oz Govt projects popln will increase to 50M by 2060(?) that's pretty close to a guarantee.

See above.

You appear to be asserting that Oz today & US in 1980s were similar.

Similar enough for a policy that worked for them in 1980s will work in Oz today ?

To me they appear to be poles apart -

• US popln has increased by ~10% in the 30 yrs post policy change, Oz expects to increase >100%
• Oz isn't expected to relocate 50% of it's popln to regional areas in the next 35 yrs
• US had relatively lax planning laws back then
• US yields are currently well above the cost of funds
• US popln was 1000% bigger than Oz today

We are also poles apart from Japan & Germany (but for different reasons)... & The Congo.

 

When yields are above cost of funds, there's an arb, and prices will move up. As they did in America these 6 years. When yields are below cost of funds, the only driver of value is speculation. As they happened in Australia.

On perception, get angry at a few Chinese students buying up milk powder, and we'll see.

 

• My hypothesis was limited to the motivation and subject of reforms under TRA 1986 to contemporary Australia, specifically with regard to tax lurks of NG and CGT. What transpired in USA, is not a matter of my assertion but a historical fact.
  
• Demographics was specifically your construct and all that I and others did was point out its insignificance, irrelevance and compensation in the statistical data.
• For the sake of fairness I had also highlighted the difference in inflationary environment between the two as well as limitation in establishing causality as the over riding factor was high interest rates in USA in 1986.
• As already pointed out by others, there is nothing to indicate that percentages should triumph absolute numbers in effecting policy outcomes.
  
• The debate is in poor form (straw man logical fallacy), when the opponents argument is varied or in this case extrapolated with a hope that the audience will not notice.

• Straw man fallacy again.
• I have made no comment on the policy success or otherwise either in USA or Australia.
• All I did was tabulate the consequences of the policy, from a reputed paper.
  
• My reasoning is simple. similar policy motivation and reforms => similar consequences within the confines of residential policies.
• My Straw man response: If we are to prefer demographics at the cost of history, we should replace Australian currency with Tulips. I hope the absurdity of extreme extrapolation is self evident.

• Personal opinion vs documented historical facts. Have your pick

• US Figures are wrong and Australian figures are based on assumptions 35 years out.
• No evidence of relevance / correlation to policy outcomes.
• Based on policy outcome in USA, greater urban concentration of population actually detracts from your argument

In addition to international examples provided earlier, it will be worthwhile noting that laws are just one part of building process and can be as easily flouted in Australia as (every/any)where else :

• Selim Mehajer and his ilk are driving trucks through Autralia's strict planning laws.
• Premiers are accepting wine for grant of permits.
• A permanent commission is required to keep count of snouts in the trough of Autralia's planning laws.
• Councils have been suspended.
• .......

• That was my point actually
  
• It is easy to consider Australia as a subset of US 1986 and limit our consideration to urban USA. This implies that the policy outcomes will be more severe.

 

Your posts about TRA 1986 and it's applicability to the Australian situation have been very interesting and enlightening. However, I believe there is a major flaw in your analysis. As well as making reforms to capital gains tax, the government "lowered the top tax rate from 50% to 28% and raised the bottom tax rate from 11% to 15%."

The issue is drawing a link between the event (Tax Reform Act Of 1986) and the outcomes (for example, Vacancy rates for multi unit residential buildings increased by 50% resulting in collapse of rental returns).

We know the outcome but what was the cause? Did vacancy rates increase by 50% because of changes to negative gearing or because the bottom tax rate was raised from 11% to 15%. Or was the cause the recession? Or was the cause a combination of all of these things? Because all the events happened at the same time, it is impossible to identify the cause of the outcome.

My point is that unless the government is proposing to increase the lowest marginal tax rate in Australia, the outcomes of TRA 1986 have limited applicability to the Australian context.


Read more: http://www.investopedia.com/terms/t/taxreformact1986.asp

 

Australia really is different. Have a look at Australia from an outsider's perspective

These charts suggest the housing bubble is out of control

 

Good article, completely agree with it. Let's see what the outcome will be.

 

With yields being low even homeowners have vested interests in a rising market otherwise they ask themselves why they bothered wasting so much money purchasing a house when they could’ve lived in the same suburb for a much lower price (and not had to worry about council rates, insurance, maintenance etc.)