John Edwards

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GUEST OBSERVATION
The Reserve Bank’s recent decision to introduce an interest rate reduction is a strong indication that there are changes brewing for Australia’s property market.
To fully understand how this rate cut will affect our housing markets, I think it’s essential to firstly understand how they have performed over the last 12 months. My research shows that there has definitely been some ‘winners and losers’ in the state comparisons.
The clear winner of the housing market battle is Sydney, which has documented a 16.78% annual growth rate from the period of December 2013 to December 2014. Performing equally as well in the unit market with an annual growth of 12.90%. By all accounts, what we have just witnessed is one of the largest boom periods in Sydney’s housing market history.
Taking this into consideration - along with its strong annual economic growth throughout 2014 that saw its state final demand increase by 3.5% - it is clear to see why people who are looking to enter the housing market would choose New South Wales. This compares to Western Australia, for example, whose economy is arguable in recession with its state final demand falling in the last three reported quarters.
This aside, when we take a deeper look at the Sydney market we uncover some unfavourable facts, including:
<ol start="1">
<li>The ABS’ latest reported commencements in new housing currently sits at 4,082 dwellings above the median commencement rate of the last five years. 
</li>
<li>New housing approvals, as last reported by the ABS, are running at 2,591 dwellings above the five year median. 
</li>
<li>Population growth, as last reported by the ABS, is slowing and currently running at 1,728 people below the five year median. 
</li>
<li>Residex estimates that there are currently some 7,000 dwellings surplus to need. 
</li>
<li>Unemployment is increasing, and is likely to increase a little more than was anticipated, given the lower crude oil prices and a consequential likely reduction in employment in the LNG development and exploration area.</li>
</ol>
These observations suggest that the Sydney market is heading into considerably oversupplied territory, which could lead to some significant corrections. In fact, analysis right across Australia indicates that there is a national stock overhang, and in many states it is significant.
So what does this all mean in a situation where interest rates have decreased?
We can anticipate that the interest rate decrease is likely to stimulate the markets, so house prices will probably move forward from here, with the lending control of the major banks hopefully keeping the markets from overheating.
But is this a good outcome for the property market? My simple answer is… no!
While it may be good in the short-term for existing house owners, throughout my three decades of monitoring house price growth, I can confirm that each period of growth always ends with a number of people who bought close to the top of the market getting burned due to their excessive leverage. 
I issue a warning to all, and that is that we have passed the top of a normal growth period, and we are now about to have the market further stimulated. This will take the growth into unchartered waters where affordability will be worse than we have previously seen.
If you are an investor wanting to get into the market, take care and make sure you don’t pay a premium for any purchase you make, especially if you are buying new units.
John Edwards is a consulting analyst for <a href="https://www.onthehouse.com.au/" target="_blank">Onthehouse.com.au</a>.
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The interest rate cut was a bad outcome for the property market: John Edwards

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GUEST OBSERVATION
Negative gearing is currently a hot topic, with opinions clashing across the net.
Whenever an investor benefit is considered being removed, it is important to remember that under the surface the benefit could actually be more important to the end user of the asset.
If you were to reduce the investor return or benefit for any kind of asset, the investor has two options. Firstly, they could exit the market and no longer provide the resource, placing funds in another asset class. Or alternatively, they could increase the cost of providing the asset to maintain the level of return they wish to achieve.
Either way, the impact of both options is ultimately the same, rentals increase due to landlord rental increases or rental increases due to tenant competition for the same property due to low levels of rental stock availability.
All asset sectors should be treated equally to maintain a balanced marketplace – this includes shares, property, and so on. Investors must always make decisions based on quality and return prospects, not on benefits that are available as a consequence of some sort of government incentive.
There is currently nothing to stop investors negatively gearing their share portfolios and achieving the same effect as investing in the property market. Therefore, in essence, removal of negative gearing from the property market alone would create a market distortion.
Notwithstanding all the above, what one can’t do is enter a transaction with the main objective of reducing your tax liability. This would in fact be in contrary to the provision of Part IVA of the tax act - the section that deals with tax avoidance.
Equally, if you are entering the transaction on the basis that you will make profits from capital gains and not rental returns, you are in effect in the business of trading in property and therefore not entitled to the capital gains tax benefits.
Negative gearing has now been around for so long and so widely accepted that many will believe that there are no constraints as to its use. Hence, it is very likely that there are many people with significant claimed tax deductions that could be lost and if the Tax Commissioner reviewed their tax returns. The impact on many of these people would be very catastrophic.
So what should happen? The government should have the Commissioner clarify the position by having him issue a general tax ruling/advice. The advice should indicate that:
<ul>
<li>Transactions which are geared beyond a level which causes tax losses annually for an unreasonable period of time (say five years) will be subjected to review and where there is evidence of tax avoidance then the provisions of Part IVA of the act will be applied. </li>
<li>Where an investment property is sold and if at no time during a reasonable pre-sale period did the rental income exceed the interest and other deductions, the tax office would consider the transaction was a purchased for the purpose of trading in residential property and hence the capital gains tax benefit of only having to pay tax on 50% of the gain would not be available. Equally in this situation the tax office alternatively may seek to disallow deductions claimed and take action under Part IVA of the act.</li>
</ul>
Undoubtedly our tax lawyers will find numerous very technical reasons to suggest the ruling/advice is inappropriate. However, in reality the ruling/advice would simply put the nation on alert and create a level of risk for the majority which would cause negative gearing to be used as it was intended and avoid any need to remove it totally.
This is a simple and effective solution that could be implemented very easy and not require any legislative changes. It would allow the Taxation Commissioner to look at existing property transactions as they’re being sold.
Overall, I do believe that negative gearing is necessary. It is a subsidiary in favour of the lower income earners who are renting as it encourages the provision of stock for these people. However, there are increasingly cases where it is being allowed by federal government authorities when it should not be, and this is distorting the market, causing higher house prices and making it harder for first time buyers.
John Edwards is consulting analyst for <a href="https://www.Onthehouse.com.au" target="_blank">Onthehouse.com.au</a> and founder of <a href="https://www.residex.com.au/" target="_blank">Residex</a>.
If you are looking for a more in depth analysis of John's property research, you can find this in the <a href="https://investors.onthehouse.com.au/" target="_blank">Investor Centre</a> at <a href="https://www.onthehouse.com.au/" target="_blank">Onthehouse.com.au</a>.
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It's not just investors who benefit from negative gearing

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If Sydney’s growth continued at the high levels being seen before, then it could have been the beginning of bubble conditions and price drops, according to Residex’s John Edwards.
Discussing new research from Onthehouse that noted residential capital growth rates for May were at lower levels that expected, Edwards expressed his relief.
“With any luck, the statistics will continue on this new trend of lower rates of growth over the next few months. Housing markets, particularly Sydney, were moving to a “boom” like performance,” said Edwards.
“This was dangerous and could have led to a “bubble” and a severe correction if it continued. The slowing of the market at this point in time suggests that we are going to avoid this outcome. Having said this, the Sydney market is still overvalued and in reality too expensive,” he said.
In many areas across Australia, <a href="/news/brisbane-catching-up-but-overvalued-sydney-still-strongest-of-the-capital-cities-onthehouses-john-edwards">houses and units experienced negative growth rates for the month</a> – although overall national house growth was recorded at 0.36% in May. This compares to 1.71% in the last quarter. Units dropped nationally by 0.23%, compared to 1.17% growth over the quarter.
In Sydney, house growth was subdued at 0.24%, but remains 17.42% up over the last 12 months. House values in Melbourne dropped 0.03%, although still clocked in 9.45% growth over 12 months.
In fact, over the month, Country Western Australia recorded the highest house price growth rate with a 2.38% result. Perth, however, had the biggest house price decline, with a 1.9% fall.
In the Northern Territory, units grew the most by 1.53%, with unit values falling the most in Country Tasmania, by 2.73%.
These figures have Edwards a little more comfortable that growth rates will be subdued in the future.
“The data from May is not sufficient on its own to confirm that this lower rate of growth is about to be a new feature, but my best guess is that this will in fact be the case,” he said.
He also notes the Sydney unit market is likely passed its peak, with 2.81% growth for the quarter ending May.
House and land may not be quite at this point.
However, it is not as clear that the house and land market has arrived at the same position. 
“The Sydney house and land assets are more often traded via the auction market and hence clearance rates are potentially a lead indicator for this sector. In recent weeks, auction clearance rates in Sydney have been softer – our calculations indicate that the Sydney clearance rate was 68% for the week ending 14 June. This figure suggests a market that is now slowing.”
Turn the page for the full details of house and unit price movements across Australia.
<hr class="system-pagebreak">
<img src="/images/2014/06/19/residex-june-19-one.jpg" alt="">
Source: Onthehouse.com.au
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Sydney market overvalued, with “bubble” potential: John Edwards

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GUEST OBSERVATION
Our federal budget is due to be delivered on Tuesday 13 May, 2014 and we are being repeatedly told that there has to be significant cuts to expenditure. Our state budgets will be delivered soon after that date.
In essence it is time for governments to deliver something which is new and helpful to maintain and increase housing stock, but at the same time does not simply drive housing prices higher. This definitely rules out changes to negative gearing as its removal would simply reduce investor activity and available housing stock.
There are two outcomes in our housing markets that are needed:
1. Ensure there is an increase in Australian citizen investment in new housing stock; and
2. Increase the number of first home owners in the market.
The first, in my view, is a state issue
Most of us will have family or friends who have been trying to buy a home and failed because they have been out bid by a cashed-up foreign buyer. One has to ask whether foreign buyers should have equal rights as Australian citizens. I suspect not. That is not to say that foreign buyers are not necessary in our markets, rather they are simply investing in a low risk, very attractive country and for that benefit they should have to pay some type of premium.
Altering our land tax regime would enable us to charge this premium from foreign investors and potentially decrease their activity without necessarily decreasing supply of new stock. This can be done by increasing the land tax payable by non-Australian citizens who own property in our country and at the same time, decrease the rate of land tax charged on property owned by Australian citizens, with all property purchased in the future and currently held, being subjected to these changes. Obviously, the amount of these alterations will need to be modelled and the changes would need to be phased in.
The consequence is clear. Foreign investment activity would be marginally reduced (depending on the altered tax rate applicable to them) and the lower tax rates for Australian citizens should cause increased investment activity by this group. It should also mean that the first home owner may have a better chance of competing when buying.
The second, in my view, is a federal government matter
The first home owner has been forced out of the market simply as a consequence of rising house prices and the consequent level of income needed to support a home loan.
In essence we need to organise things so this group – and everyone buying a property to live in – has adequate cash flow to meet the high home loan repayments. This will particularly be the case when interest rates increase in the medium term.
A relatively simple change to the capital gains tax (CGT) legislation is required.
This change would allow home owners to claim interest deductions on their home loan repayments where they elect to be subject to normal capital gains tax on the profit they make on any future sale of the property. In essence they exchange the right to have their home exempt from capital gains tax in exchange for the right to immediately reduce their taxable income by the interest they are paying on their home loan.
Being brutally honest given the government’s current budget problems they should simply just phase in the removal of the capital gains tax exemption on the family home all together and automatically provide first home owners who buy a new home with the right to claim interest deductions. Politically this might be better for government than altering pension rights and health benefits etc.
Allowing buyers to elect to claim interest as a deduction would mean an improved annual cash flow which will help to make housing more affordable. What is the cash benefit? Well assume someone has a loan of $400,000 and has a tax rate of 22% then the annual benefit at current interest rates would be in the order of $5,000 per annum or roughly about $100 per week.
The impact of this proposal on borrowers as interest rates increase should also not be overlooked. That is, deductibility means that interest rate increases will not have as large a negative impact on our first home owner as they would otherwise. As interest rates increase their deductions increase and their tax liability is reduced. Hence as interest rates rise, defaults on home loans are likely to also be lower.
There needs to be some detailed modelling to work out a progressive phasing in and potentially define a percentage of the interest cost on the home loan that would be allowed to be deductible. Once this is done then a reasonably solid estimate of the cost to the federal budget could be identified.
From any logical perspective, a combination of subjecting all of our owner occupied housing to a form of capital gains tax and allowing our first home owners to access interest tax deductions, does have merit. And provided it is structured in a manner which does not drive housing prices higher, it will also make housing affordable for the next generation.
The negative which could be seen as a benefit by some, is that it would encourage home owners to limit their trading activity in their own home. That is, a home owner would potentially be less inclined to use their home as trading stock and instead use it as a mechanism for wealth generation by buying with the intent of selling following renovation.
In the short-term we are going to be asked to accept some difficult decisions and perhaps the above, implemented carefully by government could potentially soften the perceived blow.
John Edwards is consulting analyst for <a href="https://www.onthehouse.com.au/" target="_blank" rel="nofollow">Onthehouse.com.au</a> and founder of <a href="https://www.residex.com.au/" target="_blank" rel="nofollow">Residex</a>.
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Two brave budget decisions that would benefit tomorrow’s generation

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New research released this morning from Residex, the research arm for Onthehouse, has listed 10 suburbs for expected house growth and a further 10 for unit growth that they believe will perform over the next five years.
Property market growth, overall, is expected to be steady over 2014, however some areas, particularly those in the inner ring, will potentially prove lucrative.
<blockquote>
The findings show promising areas in every capital city's inner ring for investors.
</blockquote>
John Edwards, founder of Residex, said that the findings show promising areas in every capital city's inner ring for investors.
“We are expecting to see Sydney and Melbourne’s growth rates slowdown in the next six months and in other national markets next year. Although inner ring areas often fall into the least affordable class compared to their suburban neighbours, the data indicates there are still opportunities for savvy investors, in the right suburbs," he said.
“From a national perspective, I’m expecting to see commentary from the RBA later this year that will affect consumer sentiment and again moderate growth. This will mean changes in the recent strong national growth trends. Property investors will need to be cautious about which suburbs they invest in – particularly in inner city areas, which will deliver a very mixed range of returns."
He also noted that stable growth "never occurs in a linear way", with a fall expected to be seen in growth numbers by the end of the year, with two to three years of minimal to zero growth. By 2018, strong growth is expected to re-emerge, along with the results of the suburbs below to 2019.
Overall, units are predicted to bring in lower returns than houses should. Inner ring suburbs will bring an average of 4% to 8% over the next five years, with Melbourne dominating the top five.
“Melbourne is defying past predictions. My feeling is that there is an oversupply of property, especially units, but demand is currently being propped up by three main factors: property developers are managing their units well; international buyers are supporting new unit sales; and higher public confidence is being driven by factors like good clearance rates at auction," Edwards said.
“Anybody buying property over the next 12 months needs to be aware of the growth patterns, now more than ever it is important to do solid research around the market to back up your decisions with data and insight.”
See over page for the top predicted growth suburbs
<hr class="system-pagebreak">
<img src="/images/2014/04/14/edwards%20april%2014%20one.png" alt="">
Source: Residex/Onthehouse 
What are your thoughts on these suburbs' growth potential? 
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John Edwards

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