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Increasing house prices in Canberra?

By catey - 14 September 2010 37

House prices in Canberra have sky-rocketed over the last few years.

When working for the ACT government some years ago, I remember the discussion about the “live in Canberra” campaign and how to attract people here. One of the big selling points here has always been that housing was more affordable. So, now that’s gone. Obviously we all see benefits of living here but people taking that first step in a big interstate move need a hook and that was one of the good ones!

So, what are the factors in the price rise? Not just interstate investment. Definitely higher building prices is a factor, so what keeps the big project home players out of the market here? – someone was talking about that recently on RiotACT.

Maybe the ACT government’s approach to land releases is a factor – slowing supply? And this is a side issue, but the new blocks are small – big houses, small courtyards. Is this what families moving here escaping the bigger cities want? Is it what local families want? I lived a while in Wollongong, which has a similar sized population. When building a house there, there was a required “green envelope” area around the house ie the house could only take out a certain portion of the property with the rest to be landscaped, so double storey houses were a good option and then you could get cheap plants from the botanic gardens each year by taking your rates notice to show you were local (I think here its just a one-off supply of free plants after you first build, but could be wrong?). So, we were encouraged to have green areas around the house, not just tiny concreted entertaining areas on the side of your house!

I’d like to hear what the government’s thinking is on the rising price of housing in Canberra, as this obviously makes it harder both for locals to get their first home or move as their family situation changes, and for attracting people to live and work in Canberra. So, what is the Government’s approach to attracting people to Canberra now (presumably still a goal of the ACT Government?) and what are its plans for making housing more affordable for locals. (And by the way, the usual “affordable housing” (cheaper and even smaller) options they offer in the new developments don’t seem so affordable either!)

Any thoughts?

What’s Your opinion?


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Increasing house prices in Canberra?
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rebcart 12:01 pm 18 Sep 10

georgesgenitals said :

The problem is that joe average has been told things like “your home is your biggest asset” and “property is a big investment”, and as such people get confused about whether their house is simply their house, or something else.

Well I really have no sympathy for any joe average who sees the word ‘investment’ and doesn’t consider ‘risk of not making money back’ as part of the DEFINITION of the word. Joe average is a moron. 😛

georgesgenitals 11:22 am 18 Sep 10

rebcart said :

jjoking said :

Also the down side to properties coming down in price is for all the people how have bought in the past few years who haven’t really touched the capital on the loan repayments. if home prices dropped, as they have in America you would have people owing more on their houses than they were worth. that seem to be a pretty big down side.

That doesn’t really look like a problem to me. If they bought the house to live in for the rest of their lives, who cares? They’re not selling any time soon. If they bought it as an investment, sucks to be them, but that’s why it’s an investment and not a licence to print money – that element of risk that you won’t make money back.

The problem is that joe average has been told things like “your home is your biggest asset” and “property is a big investment”, and as such people get confused about whether their house is simply their house, or something else.

rebcart 11:09 am 18 Sep 10

jjoking said :

Also the down side to properties coming down in price is for all the people how have bought in the past few years who haven’t really touched the capital on the loan repayments. if home prices dropped, as they have in America you would have people owing more on their houses than they were worth. that seem to be a pretty big down side.

That doesn’t really look like a problem to me. If they bought the house to live in for the rest of their lives, who cares? They’re not selling any time soon. If they bought it as an investment, sucks to be them, but that’s why it’s an investment and not a licence to print money – that element of risk that you won’t make money back.

jjoking 9:47 am 18 Sep 10

housebound said:

You could increase land tax (only applies to investment properties) to make it less attractive, which might make people sell and thereby drive down prices.

Land tax effects the renter not the land lord, the increased tax is just passed on through rent. This would make it harder for people to escape the rental cycle.

Also the down side to properties coming down in price is for all the people how have bought in the past few years who haven’t really touched the capital on the loan repayments. if home prices dropped, as they have in America you would have people owing more on their houses than they were worth. that seem to be a pretty big down side.

georgesgenitals 6:28 am 16 Sep 10

housebound said :

Reasons? The prices started going up in 2000 across Australia because of Howard’s changes to capital gains tax, increased migration rate, and because of GST. On top of that, in the ACT we have:
1. land release squeeze in 2003-2005 (ACT government at fault)
2. 400+ homes lost in the bushfires (forcing up short-term demand for housing, and forcing up building prices due to supply-demand for labour)
3. stamp duty is tax deductable for investment properties (people tell me this is unique to the ACT) – and for some reason interstate investors discovered this en masse around the same time as the bushfires
4. interest rates went down, so people thought they could afford bigger loans
5. first home buyer grants forced prices up by about the amount of the grants
6. general continuation of the land squeeze, but by slow release of blocks with a high base price
7. increase in PS employment in Howard’s last years, leading to more demand for housing as people came here for jobs
8. taxes in general – eg stamp duty – have gone up due to bracket creep.

9. Property at the end of the 1990’s was cheap by long term standards. It was ‘bottom of the cycle’.

OzChick 1:41 pm 15 Sep 10

housebound said :

8. taxes in general – eg stamp duty – have gone up due to bracket creep.

Stamp duty rates actually have not changed since 2002.

housebound 12:28 pm 15 Sep 10

Reasons? The prices started going up in 2000 across Australia because of Howard’s changes to capital gains tax, increased migration rate, and because of GST. On top of that, in the ACT we have:
1. land release squeeze in 2003-2005 (ACT government at fault)
2. 400+ homes lost in the bushfires (forcing up short-term demand for housing, and forcing up building prices due to supply-demand for labour)
3. stamp duty is tax deductable for investment properties (people tell me this is unique to the ACT) – and for some reason interstate investors discovered this en masse around the same time as the bushfires
4. interest rates went down, so people thought they could afford bigger loans
5. first home buyer grants forced prices up by about the amount of the grants
6. general continuation of the land squeeze, but by slow release of blocks with a high base price
7. increase in PS employment in Howard’s last years, leading to more demand for housing as people came here for jobs
8. taxes in general – eg stamp duty – have gone up due to bracket creep.

Negative gearing isn’t in itself to blame, since it was around in the 1990s, when prices went down slightly. Something happened with foreigh ownership laws too, which means people are buying houses here for investment purposes, then leaving them empty, but I suspect that has more effect in Sudney and Melbourne than here. Occupancy rates have also declined since the 1980s due to the rate of singles wanting somewhere to live when they leave home and due to the divorce/separation rates.

How would you fix it? Not easy really, but the government could do a few things. No. 1 could be easily solved by the ATO. And the first home buyer grant could go, as could negative gearing. You could increase land tax (only applies to investment properties) to make it less attractive, which might make people sell and thereby drive down prices. But there would be some renter pain in the short term – would a government be willing to wear that?

Just making land cheaper would help too. I can’t believe a block of land costs $200k+ just to sell. Why not make it significantly cheaper for those fabled first home buyers?

rosscoact 11:42 am 15 Sep 10

High dwelling prices don’t do anybody any good, there’s no argument on that score. And yes you are correct because a 5% return is a 5% return no matter if it’s 50 x $100,000 houses or one $5,000,000 house and a diversified portfolio is preferable in any case, which the former provides.

In the short term removing negative gearing reduces demand and increases supply through investors getting out of the market. Thus it would result in an immediate drop in house prices. The down side is that a drop in house prices would mean that banks no longer have sufficient security over developmnet projects which causes their cancellation or at best a long term postponement. This puts Australia’s largest or close to it industry i.e. the building industry virtually out of work. This causes a recession and no governmnet since Paul Keating’s infamous mutterings wants to be responsible for a recession.

Of course it doesn’t stop there. The recession causes unemployment and in combination in a drop in house prices people have negative equity in their houses and no way to pay a mortgage. Then you have the Australian equivalent of the GFC.

So while successive Federal governments and the Reserve Bank are concerned by asset inflation and the imbalance this causes between income producing assets verses residential assets, they have a tiger by the tail and can’t let go.

wycx 10:56 am 15 Sep 10

Rosscoact, I would agree entirely that positve gearing makes the most sense. It is interesting that you would say that to remove negative gearing would be bad though. If its removal resulted in a drop in house prices, wouldn’t that be a good thing for those planning on a positively geared property investment, i.e. increased yield?

rosscoact 9:05 am 15 Sep 10

wycx said :

Disclosure please rosscoact! Do you happen to have any negatively geared properties? I find such information is necessary when considering the opinions of negative gearing advocates…

I’ve owned shares for some thirty years and yes I negative gear those where I have to. The last couple of years have unfortunately been great for negative gearing of shares.

I’ve owned investment properties on and off for the same period. Residential investment is not that great a return in the main unless you do the development so I have only one property which is about neutral (the income is approximately the same as the outgoings) and I’ll keep for a year to get the 50% reduction in capital gains.

Trust me on this, no one and especially professional investors (which I’m not) makes a fortune with negative gearing. I believe in positive gearing, i.e. your income is greater that your outgoings, anyone who believes otherwise is a loser (literally).

wycx 5:02 am 15 Sep 10

Disclosure please rosscoact! Do you happen to have any negatively geared properties? I find such information is necessary when considering the opinions of negative gearing advocates…

georgesgenitals 2:42 am 15 Sep 10

mr_wowtrousers said :

Australia wide reasons:

Negative gearing. Basically a system whereby half of Australia invests in overpriced property (usually after their first house, as an investment) and rents to the other half who can’t afford creating a bubble economy where nothing is really produced but where prices artificially skyrocket.

Get rid of negative gearing and introduce incentives to invest in Australian business/technology/science. Of course, that won’t happen . . . too many voting baby boomers would lose out.

I think you’ll find about a third of Australians own their home outright, a third are paying off a home loan and a third rent. This is changing slightly, though.

The reason people won’t invest as much in technology/science is that it’s much riskier, and often doesn’t pay off as an investment. Property is less exciting, but much more reliable for average returns (which is all you really need when gearing up a bit).

FWIW, I agree with nhand42 – there doesn’t seem to be a lot of real experience coming through in many of these comments.

mr_wowtrousers 11:27 pm 14 Sep 10

It has been expensive for the last 5 years at least. I have been away a while and have recently returned to find that “expensive” has morphed into “ridiculous”.

Canberra specific reasons:

Highest average wage in the country
Constant influx of public servants
Constant influx of students

As such property, private and rental, will always be in demand.

Australia wide reasons:

Negative gearing. Basically a system whereby half of Australia invests in overpriced property (usually after their first house, as an investment) and rents to the other half who can’t afford creating a bubble economy where nothing is really produced but where prices artificially skyrocket.

Get rid of negative gearing and introduce incentives to invest in Australian business/technology/science. Of course, that won’t happen . . . too many voting baby boomers would lose out.

nhand42 9:28 pm 14 Sep 10

Grail said :

Rental investors already get to depreciate every last brick and nail of a new home over the first five years or so,

It’s 30 years for the bricks and mortar, not 5 years.

why should they be allowed to claim a cost of doing business as a deduction against taxable income?

Why shouldn’t they? Depreciation means the investment has lost value. You’ve lost part of the asset (the house value) so the government reduces your liability (the tax owed) accordingly. It’s just accounting. Everything has to balance.

(after having depreciated the value of the place and claimed that depreciation as another income deduction).

The “place” depreciates all by itself by virtue of being older, crappier, and of less value to a buyer. The owner has less of an asset than when they started. Why shouldn’t it be a deduction? That’s how investing works; you make money, you pay more tax, you lose money, you pay less tax. Of course you can claim a loss in asset value as a taxable deduction. It only makes sense. Otherwise, why invest?

Remember that depreciation is only on the house. The land appreciates in value and you better believe the government sticks it to you on that one.

The capital is the cost of the house – that is fully depreciable. The loan is just the cost of doing business – that’s an expense, not another deduction.

Expenses are deductible in all businesses. I’ve been running a business for 10 years, and investing in properties for almost as long, and I’m not convinced you’ve much experience in either field.

georgesgenitals 6:23 pm 14 Sep 10

One way to perhaps remove negative gearing would be to confine losses to the asset generated income itself. That way, positive cashflow investors wouldn’t be impacted, softening the blow to investors a bit.

Grail 5:53 pm 14 Sep 10

Rental investors already get to depreciate every last brick and nail of a new home over the first five years or so, why should they be allowed to claim a cost of doing business as a deduction against taxable income?

The popular negative gearing strategy at the moment is to borrow 110% on an interest-only loan (110% to cover the fees associated with obtaining the property) for a brand new property, wait until the house becomes worth more than the loan, then sell it and move to the next property (after having depreciated the value of the place and claimed that depreciation as another income deduction).

This means that a property investor has (a) 110% borrowing power vs a residential owner’s 95% borrowing power, (b) the renter paying rent, (c) depreciation on bricks & mortar and (d) ability to claim interest on the 110% loan as a deduction against their unrelated income (ie: the money from their day job). These advantages mean the investors can drive the price of houses up while the people looking to buy a place for themselves are left in the dust.

Rents are high because house prices are high. Rents will not skyrocket if negative gearing is removed, neither will investors flee the market in droves. Investors just have to face the fact that other businesses claim expenses as expenses, not income deductions. The capital is the cost of the house – that is fully depreciable. The loan is just the cost of doing business – that’s an expense, not another deduction.

arescarti42 4:29 pm 14 Sep 10

rosscoact said :

Very Busy said :

rosscoact said :

for you young’uns or those with short term memory problems research what happened in the early eightys when negative gearing was removed for a while.

Could you save me the trouble of doing the research and just tell me?

No, otherwise how are you going to learn?

Actually, every man and his dog got out of property and into shares. No investors in property means no rental property development which equals deflation and recession. The assumed corollary that the scartster refers to was an urban myth which originated with the shock jocks. The fact of the matter was that the recession caused jobs loss, majorly in the building industry and people were unable to pay higher rents, sharehouses became quite popular.

yay, sounds great, let’s remove negative gearing

My apologies for putting words in your mouth rosscoact, it is just that the supposed rent increase is a pretty widespread myth presented by a lot of people as fact. “no rental property development which equals deflation and recession” is blowing things out of proportion however.

If the government was really concerned with keeping the construction industry strong, then they would change negative gearing so the concessions only applied to newly constructed properties. As it is, 9 out of 10 new negatively geared investments are people buying existing properties, and buying houses that are already built does nothing to help the construction industry.

In it’s present form, all negative gearing does is cost the government billions in tax concessions, inflate prices, and encourage speculation in the real estate market.

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