Property will be front and centre of the government's planned reforms

A fascinating week with the Abbott government establishing its commission of audit in order to return the budget back to surplus which will require wide – ranging cuts.  Return to budget will be ‘a herculean task’, says Deloitte Access Economics so the leading question then is where are these 'rivers of gold' that the government will release in order to get the budget back to surplus?

I can’t see this happening anytime soon given these new cuts (whatever they will be) won’t be introduced until after the next election. The Abbott government’s preferred approach is to submit their reforms (cuts) to the voters at the next election seeking a mandate.

Front and centre will be property – housing is Australia’s great boondoggle. If Joe Hockey’s audit committee is looking for a way to save a lazy $43 billion a year, the middle and upper-class welfare that is Australia’s housing policy might be a good place to start.

The Grattan Institute’s renovating housing policy has determined that this massive wealth transfer puts $36 billion in the hands of existing home owners and a further $6.8 billion goes towards subsidising owner – investors into a product that delivers yields that are generally lower than equities or fixed interest. Between them, owner occupiers and investors receive over 90% of government funding directed towards the housing market.

The report confirms that government tax and welfare policies are contributing to housing unaffordability in Australia, with most of the welfare pie directed towards home owners and high income earners. Investors benefit from negative gearing and discounts on capital gains tax. First home buyers receive the first home buyer’s grant, which while popular, largely accrues to home owners via higher prices.

This motivated me to do a case study on Mosman and the conclusions sent alarm bells ringing. I went to the Mosman Council website and looked at the 2011 Census data.

MOSMAN

• Number of Houses: 4,746

• Number of Apartments: 8,079

• Combined Total: 12,891*

*Includes three houseboats, eight other and 55 not stated. The census also showed at the time it was conducted that 1,242 dwellings not occupied.

I am advised that Mosman has approximately 6,000 properties for rental which in itself is a staggering number – 46.6%. If the government were then to be heavy handed on negative gearing the Mosman property market would be absolutely decimated with investor exit strategies.

NORTH SYDNEY

• Number of Houses: 4,518

• Number of Apartments: 30,188

• Combined Total: 34,897

We don’t know how many properties are leased in the municipality of North Sydney.

Leave negative gearing alone said the REIA which was an expected response although the argument that carried the most weight was REIA persists with negative gearing lies. Reserve Bank of Australia data clearly shows that the overwhelming majority of investors - over 90% - buy pre-existing dwellings, and the proportion of investors buying new dwellings has fallen spectacularly since negative gearing was reintroduced in September 1987.

On the other hand, one area that could be looked at is the GST that applies to new homes. It is around one quarter of the taxes and charges that “drive a wedge between home builders and buyers”. Taxes and charges, including having to pay infrastructure bills up front, make up 40% of the cost of a new dwelling. This would explain why Australia’s new home construction is in the doldrums – and won’t be changing anytime soon. Furthermore this also sheds light on why so many of Australia’s construction companies have been forced into liquidation.

If the government does submit to abolish negative gearing at the next election it would win overwhelmingly given one third of Australia’s population rent, one third own with a mortgage and one third own without a mortgage.

Sydney beats $700,000 price barrier in the September quarter the median price jumped 4.2% to $722,718 – as one commentator remarked “We are in uncharted territory now.”

He has also been writing real estate blog Virtual Realty News since 2000.

The RWM real estate model has sold in excess of $1 billion in database sales globally.