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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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jedwards-8kHM8GNY6d

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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Guest observation
Everyone is talking about a housing price bubble, particularly in Sydney, but is this really the case?
In my honest opinion, I think probably not at this stage. Although I do predict that we will see an influx of struggle-stories in the press.
It's safe to say that both Melbourne and Sydney markets are continuing with a strong growth pattern. Melbourne, in particular, documented a very strong capital growth rate throughout August at 2.31%. Sydney closely followed this at 1.52%.
The Sydney median house price now sits at a very high $852,500, which is getting closer and closer to that $1 million benchmark. So the question is, when do we expect to see our capitals hitting those million-dollar medians?
Million-dollar cities
Based on the historical data, our predicted growth rate for Sydney has been calculated at 5% for the next five years. This suggests that Sydney houses will hit the million-dollar value mark in three years. However, the predictions indicate that growth rates are going to slow in the short term, before increasing to 6% on average per annum towards the end of the next five years.
If the above scenario is the outcome, this would mean that Sydney would breach a million-dollar median value within five years, most likely during the first half of 2019. In Melbourne, a similar growth trend indicates that it will take ten years to reach a $1 million median, expected to occur during 2024.
Two million-dollar suburbs
Based on these predictions, in turn we expect that the number of suburbs with a median value of $2 million will increase. Today's figures show that there are currently 277 suburbs in Sydney with a median house value of over $1 million, with 41 of these currently breaching a $2 million median.
With this level of growth, we anticipate that by 2019 there will be 91 suburbs in Sydney with a median value in excess of $2 million. This suggests that around 9.5 per cent of the city will fall into this category, while the city portion that will fall under a $1 million house price median will be 43.25%t.
Australia's highest-value suburb, in terms of a median house price, is currently the eastern Sydney neighbourhood of Point Piper, where the current median sits at $8.099 million.
This article continues on the next page. Please click below to continue.
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Unaffordability
Data shows that the Sydney market is slowing, although not as quickly as we would like it to. The current stance is that the level of unaffordability in the capital is now at historic highs, with loan repayments on a median house equating to approximately 54 per cent of an after-tax median salary.
These figures are extraordinarily high, which would usually send the market into retreat; although the fact that the market continues to display strong growth levels indicates that there is another issue.
I expect that this current level of unaffordability is causing the 'housing bubble' concerns. However, there is another potential explanation, and that is that the Sydney market purchasers have changed, so the affordability ratios are no longer valid simply because median income families are not buying the median income home.
Those who fall into the median income family bracket in Sydney are currently most likely to be renters, with the actual buyers being seasoned property investors with higher than average salaries. Median income families in Sydney are now buying on the city fringes where prices are currently more affordable.
Back to the bubble
Returning to the issue at hand, in my view, a housing bubble exists when there is significant growth in asset values, and the asset value growth is driven by borrowings. In more general terms, a bubble comes about through greed and carelessness from both lenders and borrowers in a situation where there is an oversupply of stock.
Are we in this situation currently? Well, there's nothing to suggest that we are. I believe our banks and financial intermediaries have stable risk management policies in place, despite their aggression in trying to maintain their market share.
In my opinion, the driving growth factor seems to be driven by existing homeowners who have much more reasonable levels of income and assets to support their property purchases. Due to this, the lenders can also be more aggressive due to having to compete in these market conditions.
There will always be a group of people who will ultimately cause lenders problems in an environment where there are high house prices and low interest rates. This is a consequence of some buyers overstretching themselves and getting caught up in a change in personal circumstances. As a word of warning, I would suggest that this is not the time to stretch your capacity and excessively borrow, but to look towards a lower cost investment and avoid the stress and potential pitfalls.
In the days ahead, I expect dwelling price growth rates to slow, with the market stabilising and exhibiting little growth throughout 2015. Those who are looking to make a first investment shouldn't rush into anything, and instead wait until the market moves into this more consolidating phase.
If you are looking for a more in depth analysis of my property research, you can find this in the Investor Centre at <a href="https://www.onthehouse.com.au/" target="_blank">Onthehouse.com.au.</a>
John Edwards is the consulting analyst for onthehouse.com.au.
 
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Housing prices: Boom or bubble?

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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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The famed professor and statistician W. Edwards Deming once said: “In God we trust. All others must bring data”. For anybody interested in real estate, from the property professional to the armchair investor, this maxim is more relevant today than it has ever been.
Thanks to mobile and online technology, the average Australian is overwhelmed with access to a huge realm of data – from macro-economic trends such as interest rate changes to the in-depth granular property statistics on transactions and suburb details. There really is a smorgasbord of information at our fingertips.
The information is an invaluable tool. Data can help inform people’s property buying decisions and it can make us feel confident about –those decisions, by providing us with a guide to what will occur in the future.
But the important thing for us to realise is that not all information is created equally, particularly the statistics.
There are various sources of property information in the market. These include sales and listing records, auction clearance rates, various statistical measures from parties such as the Australian Bureau of Statistics, and many other non-government organisations. While some of this data is open and public, much is not.  Taken together however, this data is extremely valuable, because of its multitude of applications:
<ul>
<li>
Financial organisations use to it determine valuations for mortgages;
</li>
<li>
Investors and buyers can use data to pinpoint potential areas for investment;
</li>
<li>
The Reserve Bank and Federal Treasury uses it to identify when markets are too hot and need cooling or stimulating;
</li>
<li>
State governments use it to help predict their annual revenue as a large percentage comes from duties on property.
</li>
</ul>
For the consumer or property professional, there are a host of third party sources that capture this data and present it in various forms. But not every source presents the same information.
Broadly, the challenges facing property information providers can be broken down into two areas: the accuracy and method for collecting the source data and the application and analysis of the data to provide real insight.
When it comes down to the first challenge – the freely available public data is obviously the first go-to source. It then comes down to  enriching it that with deeper information, and this can be something as simple as having a team picking up the phone to real estate agents to find out who sold what. Obviously a lot of this process is automated, and will vary by provider. For example, sources closely aligned with media companies will use that media company’s listing data as a primary source.
However, while having accurate data is clearly vital, information without context is useless. 
That, in essence is the challenge for all property data companies. It has moved on from who’s data is more accurate and who has more records, to how it can be used to provide value and confidence to the person on the street. It’s not just about finding the data, it’s about turning it into intelligence and bringing it to the right people, in the right way.
John Edwards is consulting analyst for <a target="_blank" href="https://www.onthehouse.com.au/" rel="nofollow">Onthehouse.com.au</a> and founder of <a target="_blank" href="https://www.residex.com.au/" rel="nofollow">Residex</a>.
Onthehouse.com.au has launched a new Investor Centre, a free source of property information. 
             
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In data we trust: How data informs smart property buying decisions

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The recent predictions by US economist Harry Dent, claiming that <a href="https://www.propertyobserver.com.au/news/property-crash-is-like-popping-popcorn-especially-in-melbourne-harry-dent/2014020567560" target="_blank">Australia’s ‘property bubble’ is going to burst</a> and that prices will be slashed by half, is somewhat an extreme view. Though it pays to be aware of these economists and the alarming claims, which pop up from time to time, it pays more to check the data they are providing as proof.
Dent is saying that US real estate prices will fall by 60 to 65%, Australia by 50% and that stock markets and China will crash – heralding a new ‘Great Depression’. But his claims don’t appear to be based on any data – there are little to no facts supporting that we are in for a depression.
Dent offers up no hard explanation for his predictions, apart from the income to house price ratio, and this is very high in a lot of cities where people want to live such as Sydney, Melbourne, San Francisco, Los Angeles, New York, Auckland and London. The reality in these places, is that there are rising populations and limited supply of housing in their most popular areas.
The ratios are of course much lower in less high-demand areas where there is slower growth, or where populations and prices drop when an industry such as mining or manufacturing goes into decline. Big cities however, are much more insulated as they have many economic strings to their bows.
If anything, Australian markets are getting stronger.
While residential property in many of our capital cities could now be deemed borderline ‘unaffordable’, I would contend that because a market has an asset that is somewhat unaffordable does not mean that it is overvalued.
Value is after all a function of the preparedness of a buyer to pay a price for the asset based on its unique attributes and its scarcity. So, while there are buyers at the current price, it is not overvalued.
Australian capital cities are unique in that our populations are generally concentrated in them. And, due to the cost of providing infrastructure to new land areas, our cities do not easily provide supply. Populations in Australia are growing and hence there is always some level of demand for housing assets.
Unaffordability is generally a measure based on the capacity of a median family to be a first home owner. There are many buyer types in a market, including investors and existing home owners.
An unaffordable market simply causes the type of buyers in the market who are active to change.
An unaffordable market for the first home owner simply causes a higher level of families to rent.
A population in an unaffordable market finds solutions to making a market affordable. For example, they may increase people density per dwelling, or alter the size of dwellings to reduce costs. They don't tend to sell into the market because it is unaffordable unless they have to as a consequence of unemployment or similar income failure.
But this point is the important issue: whilst there is no significant oversupply due to selling pressure or development of new properties, the increasing population will hold demand at current values and consequently our property markets will not be overvalued – and therefore we are not experiencing a bubble.
To be honest, I am not hugely surprised that Dent predicted the GFC (if this is actually true) as his predictions do seem to follow a similar theme. As with many economist naysayers, one would have to be right about something sooner or later – it’s a bit like predicting a dice will throw a six, if you keep throwing of course it will.
What I would suggest for buyers is to take a long term approach based on the data. Work on the basis that economic growth and prices trend higher and higher over time, and although it may be interrupted by recessions and other negatives, the general theme is up.
It’s important to be on top of these sorts of startling predictions – but take them with a certain level of cynicism.
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>.
 
 
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John Edwards

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