Fraught as it is to make predictions, it’s that time of year, when taking a stab at what 2018 will hold is expected of business columnists.
Rather than forecast where the stock market will travel in 2018 – because that is way too dangerous – of even where commodities will go – which would be another perilous pursuit – I will confine my crystal-ball gazing to house prices and interest rates.
In 2017, we saw definitive signs of a change in direction on residential dwelling prices. After some false starts there is clear evidence that the property market is cooling.
We should expect this to continue in 2018 but at this stage there are no immediate signs of the property bubble bursting and a crash in prices.
Other than Perth and Darwin, which have both seen sizeable declines in property values over the past year, Sydney and Adelaide are the only cities where residential prices have started to actually decline and this should continue over the next 12 months.
In Melbourne, prices have essentially just held steady over the past few months. In the early stages of 2018, Melbourne should join its northern neighbour and prices should start to drift down.
The national property market declines will be driven by the falls in Melbourne and Sydney, which will be larger.
To the extent housing prices continue to experience a soft landing we should be grateful to the financial regulator, the Australian Prudential Regulation Authority (APRA).
It has essentially cleaned up the mess left by the Reserve Bank, which cut interest rates to the bone and in doing so created the preconditions for the massive price rises for housing.
APRA seems (to date) to have successfully employed “macroprudential” measures that essentially put checks on bank lending – curbing the rate of growth in interest-only loans and investor loans.
In response, banks started to increase the interest rates for these borrowers – which had the effect of cooling demand.
Meanwhile, over the past couple of months the clearing rate for housing sales has fallen significantly, which suggests seller expectations have not come down to match the market so many properties are simply not being sold.
Real estates agents may not be happy with this trend but it does indicate the property sellers are not especially financially distressed. In other words, they are not forced sellers.
This augurs well for a steady deflation in house prices in 2018.
This view is echoed by the group that monitors and collates property prices, CoreLogic. It expects to see a further slowdown in national housing market conditions and continued tightness on credit policies as “regulators keep a watchful eye out for a rebound in investment credit growth or, a reversal in the trend towards fewer mortgages with a loan to valuation ratio of more than 80 per cent”.
CoreLogic is also a member of the growing band of experts that don’t see an interest rate rise coming in 2018.
I agree with them but would go one step further and predict that we won’t see interest rates rises for at least the first half of 2019, given there is little prospect of inflation and wages growth in the short term.
(In December’s mid-year economic fiscal outlook, the government revised down its expectations for wages growth.)
Among economists there is little consensus. Financial markets point to a 50:50 chance of a rate rise to 1.75 per cent by the end of next year from the current rate of 1.5 per cent.
National Australia Bank economists are looking for two rate rises in 2018 – one in the middle and one towards the end.
At the other end of the spectrum, Westpac sees no rate movement in 2018.
Shane Oliver from AMP pitches his expectations somewhere in the middle and is looking for one rate rise in late 2018.
And Deutsche Bank economist Adam Boyton isn’t expecting a change in rates for quite some time.
“That view reflects not just an expectation that inflation is likely to remain low and wages growth stubbornly weak; but also that household incomes and spending will remain under pressure,” he says.
While the economy is expected to continue its gradual pick-up, it will be somewhat constrained until households begin to feel good again.
Would Australian Households Be Better Off if We Ditch Negative Gearing?
Economic modelling undertaken by University of Melbourne economists, and presented to the Reserve Bank last month, shows that three-quarters of Australian Households would be better off if negative gearing is abolished.
The study was posted on the Reserve Bank website for public release on Friday.
The paper explores the implications of negative gearing – including a 30 per cent collapse in the supply of rental properties – and found that abolishing negative gearing would lead to an overall welfare gain of 1.5 per cent of GDP.
Negative gearing is a policy that largely benefits landlords, and for the 17 per cent of the Australia population that have property investments – out of which 70 per cent are negatively geared – would be worse off.
The study estimated that thirteen per cent of the population would be directly influenced by the removal of negative gearing, and likely to quit their holdings.
“The housing prices fall because removing negative gearing takes a significant amount of housing investment out of the property market,” the report said.
“Both the proportion of landlords and the amount of resources allocated to housing investment, given by the average expenditure, have fallen significantly after the policy reform.
Importantly, removing negative gearing increases the average homeownership rate of the economy from 66.7 per cent to 72.2 per cent.
The improvement in homeownership was observed most predominantly among poor households, where the fall in house price and the rise in rent reduce the price-to-rent ratio in the economy by 4.2 per cent.
“This has direct implications on housing affordability as the fall in house price lowers both the downpayment requirement for mortgages and the size of mortgages required to purchase a house, making it easier for households to own a home.”
If negative gearing was to be scrapped, the average mortgage size held by homeowners would likely decrease 21 per cent.
“Eliminating negative gearing takes young landlords who were rich enough to meet a downpayment requirement for investment properties away from the market.
“This reconciles a recent trend in the property market that there has been a rise in investment housing debt holdings by young and rich 35 households who would have benefitted the most from negative gearing concessions.
“The aggregate welfare for the economy improves upon the repeal of negative gearing … around 80 per cent of households are better off after the policy reform.”
Australia’s negative gearing regime stands alone against comparable OECD countries. Only New Zealand and Japan allow the unrestricted use of negative gearing losses to offset income from other sources.
The report’s authors, Yunho Cho, Shuyun May Li, and Lawrence Uren said that along with their findings on negative gearing it would also be worth considering some partial restrictions, such as allowing tax deductions for mortgage interest payments only.
Originally Published: www.theurbandeveloper.com
Confidence in Queensland’s property sector falls for first time in nearly 2 years
CONFIDENCE in Queensland’s property sector has fallen for the first time in nearly two years on the back of the latest tax grab proposed by the state government, a new survey reveals.
CONFIDENCE in Queensland’s property market has fallen for the first time in nearly two years on the back of the latest tax grab proposed by the state government.
The ANZ/Property Council Survey released today, taken in the weeks either side of the November state election, has recorded a drop of two index points for Queensland in the March 2018 quarter — the first decline in 20 months.
The state now has the lowest confidence levels of all Australian jurisdictions.
The re-elected Palaszczuk Government has announced plans to increase land tax rates by 2.5 per cent on properties worth more than $10 million and more than double the tax rate for foreign investors from 3 to 7 per cent.
Property Council Queensland executive director Chris Mountford said the results confirmed industry concern about the proposed property tax hikes, which he argued would hurt jobs growth and home values.
“At a time when we need to do more to catch up with other markets, increasing taxes on property is a big economic risk,” Mr Mountford said.
“The impact of these proposed tax increases can already be seen in the figures.
“Forward work schedules, staffing level expectations, and Queensland’s economic growth predictions are all down.”
The Property Council is urging the Government to reverse the proposed tax increases, saying ordinary Queenslanders would pay the price because businesses would be forced to pass on the cost to consumers.
“The proposed land tax hike is ultimately going to flow through to affect capital values, and impose higher rents and costs on businesses,” he said.
“I think there’s a general lack of understanding that foreign buyers are a key ingredient to getting new housing construction starts going.
“If we’re making it harder for those people to invest in Queensland, ultimately that’s going to flow through to lower levels of activity.”
For the last two years, Queensland has consistently lagged behind the major states when it comes to confidence, only remaining in front of Western Australia, where the end of the resources boom created significant economic challenges.
But the latest survey shows a surge in confidence in WA.
“Clearly confidence is starting to return to the WA market,” Mr Mountford said.
“They’ve turned a corner and yet we haven’t had that sentiment shift.
“If anything, we’re still bumbling along behind the other states.”
But ANZ senior economist Daniel Gradwell said that he was not too concerned about the confidence drop in Queensland during the quarter,
“Overall sentiment is still sitting at pretty solid levels, even though it has dropped off recently,” Mr Gradwell said.
“I think it’s fair to say Queensland has essentially moved past its mining-related downturn.
“We’re starting to see economic activity improve, particularly across the labour market with unemployment at its lowest level in about four years.
“So confidence is already translating into actual economic activity.”
St George Economics noted in its latest economic outlook for Queensland that the state’s economic growth had picked up over the past year, with business investment gaining momentum, commercial construction strengthening and robust employment growth.
Nationally, the survey reveals New South Wales has lost its throne to Victoria as the property industry with the strongest outlook.
It gathered responses from 1374 professionals within the residential and commercial property sector.
“It’s a large sample size, so we’re confident it’s reflective of what’s actually happening on the ground,” Mr Gradwell said.
Originally published: www.news.com.au
Tax changes send Chinese buyers offshore
A MAJOR crackdown on Chinese buyers of Australian residential property could finally bring housing prices down to earth, experts say.
AN AGGRESSIVE crackdown by state and federal governments is sending Chinese buyers of Australian residential real estate offshore.
Last year the NSW government doubled stamp duty for foreign investors from 4 percent to 8 percent and increased the annual land tax surcharge from 0.75 percent to 2 percent, while the Federal budget removed capital gains tax exemptions for overseas buyers and introduced a 50 percent ownership cap for new residential developments.
The budget also introduced a “ghost tax” giving the Australian Taxation Office power to fine foreign investors up to $5500 a year if they leave their properties empty, plus up to $52,500 for failing to lodge their forms.
Meanwhile, the Victorian government’s own vacant residential land tax kicked in this month, with owners in 16 council areas facing potential fines equal to 1 percent of the property’s value if they leave their properties empty.
Last year, Credit Suisse analysts estimated foreign buyers purchased 25 percent of all new supply in NSW, with Chinese buyers accounting for nearly 80 percent of foreign demand.
But according to financial services company UBS, tax and regulation changes combined with moves by the Chinese government to prevent money flowing offshore were sending those buyers to greener pastures — with Bangkok tipped as the next hotspot.
“What we have found is that Chinese buying of property abroad tends to be very price and currency-aware,” UBS head of global property research Kim Wright told The Australian.
“Their focus on specific markets will fade or pick up, depending on their view of currency. Over the last two years, we have seen Asian buying of Australian property, specifically Sydney, Melbourne and Brisbane, that’s been very strong. It looks like that has started to fade over the past six months.
“I think it’s the combination of factors. Prices have been very strong in Australia so there is now a discussion that the cycle has started to peak and there are the tax changes that have come through along with the tax controls.”
It comes after latest CoreLogic data showed national dwelling values fell 0.3 percent in December. “The Sydney and Melbourne property boom continues to deflate,” AMP Capital chief economist Dr Shane Oliver said in a weekly note.
“Tighter lending standards, rising levels of unit supply, slower Chinese demand and reduced investor enthusiasm for a property are all impacting and are likely to lead to further declines in Sydney and Melbourne property prices this year of around 5 percent — may be a bit more in Sydney and a bit less in Melbourne.”
Dr Oliver said the cooling in Sydney and Melbourne was good news for the Australian Prudential Regulation Authority and the Reserve Bank and “helps provide the necessary flexibility to leave interest rates low until the broad economy is ready for a hike”, which isn’t tipped until late this year.
“It also provides a bit more room for first home buyers,” he said. “However, other cities are running to their own cycles with Hobart likely to continue strengthening, Perth and Darwin close to the bottom and moderate growth in Adelaide, Brisbane and Canberra.”
Originally Published: www.news.com.au
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