Increasing house prices in Canberra?

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…

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.

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.

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.

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.

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.

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.

Rollersk8r said :

There’s a decent article on this very topic (Victorian perspective) in today’s Age.

You’re right – it’s an excellent article. the decline in housing affordability is both a national tragedy a major scandle – and one that neither major party, federal or state, has had the guts to do anything about thanks to the malign influence of the building and real estate industries.

A house is supposed to be something live in, not something you live for.

pepmeup said :

also if prices keep rising it is good for the local gov, they can keep jacking up rates. So the local gov really has no motivation to lower house prices or stop the continued growth

Bingo! I don’t think government at any level has anything to gain from lower house prices. They may say they feel the pain of people locked out of the housing market, but I’m not so sure.

By the way, I remember clearly when negative gearing was temporarily removed in the mid-80’s – I was renting at the time and the landladies lost no time in putting up the rent, citing the axing of negative gearing as their reason. The rent didn’t go back down when negative gearing was restored – funny, that.

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

also if prices keep rising it is good for the local gov, they can keep jacking up rates. So the local gov really has no motivation to lower house prices or stop the continued growth

Also if you look at the average house being built in Canberra now, it is a 4 bedroom two bath room, with double garage under the roof line. the average size is about 180-200 square meters. If you compare this to houses built in the 80’s that were mostly all 3 bed 1 bath no garage. then you will see the big price difference.

Also with the huge push for a “Knowledge Nation” we now have a much larger percentage of school leavers going to university and a much lower number of school leaves going into the trades. So a bricklayer now gets paid about $1.40 per brick to lay, as well as all the other trades also costing more. I would love to know the average income in Canberra of all those people with an arts/law degree and weigh that against all those with a trade. I wonder who gets paid more?

The other point with negative gearing is that for most people with negatively geared investment properties, the only way they can actually come out ahead in their investment is if the capital value of the property rises so much that the capital gains when they sell it actually cover all the losses made in the interim.

That’s a fine strategy when house prices have been going up at the rate they have over the last decade. The reason that this has been able to occur is that people were willing to take on increasingly large mortgages, not because wages have been increasing greatly. People can only service the interest on so much debt, and once this maximum level of debt has been reached, prices wont be able to increase, and that negatively geared property probably wont look quite so appealing.

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?

He’s going to say that rents went through the roof because the incentive to invest in rental properties was removed. This is in fact, wrong.

If you actually bother to look at the ABS CPI deflated rents for the period 1985-1987, when negative gearing was removed, you’d notice that only Sydney and Perth experienced significant rental increases. In fact, rents in Adelaide and Brisbane fell, and rents in Melbourne remained flat. Negative gearing was removed nation wide, if it did indeed cause rents to increase, then you would expect to see rents increase in places other than Sydney and Perth.

It all comes down to income, The average full time income in Canberra is about $74,000 and the national average is about $62,000. That is what makes the big difference. Look at what is happening in mining towns in Queensland and WA where house prices have also sky rocketed.

It does look like we are getting ready for another quick rise, two house came on the market in kaleen this week, 1 for offers over $685k and the other at offers over $690k, to me that seems very expensive for 4 bedroom houses on blocks that are not RZ2 zoned. I will be interested to see what the final prices are.

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?

almost 20 years without a recession doesn’t hurt either

And 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.

I’d like to hear what the government’s thinking is […]

wouldn’t we all!

shaneb said :

Of course, I meant to say the 1890’s..

yes, but you were thinking 1980’s when the constitution was being shafted… 🙂

vg said :

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

Over the last ‘few’ years? Bullshit they have

Ha ha, best contribution I’ve seen vg. You are to be congratulated on a surprisingly accurate summation.

There’s a decent article on this very topic (Victorian perspective) in today’s Age. It'[s nothing new but the two points worth noting are that we’ve used our increased prosperity to take on more and more debt (and compete for better houses) – and it’s investors and negative gearing that are locking young people out of the market.

Negative gearing is the sweetest tax dodge of them all, if you’re fortunate enough to have the money to invest. Which is why there would be rioting in the streets if any government tried to change it.

http://www.theage.com.au/opinion/society-and-culture/ownership-out-of-reach-20100913-1598d.html?autostart=1

Of course, I meant to say the 1890’s..

From my non-professional point of view the increases (beyond CPI) in the cost of housing seem to be caused primarily by increases in the price of land, especially in the non-prime locations where prices are strongly influenced by the price of new land being released by the ACT government at the fringes.

Why is new land in the ACT so expensive? Because in the 1980’s when the constitution was drafted the Commonwealth was given a head of power enabling it to make laws relating to corporations (and inadvertently – taxes on corporations). Fast forward to today and you have a huge fiscal imbalance between the federal and state governments, whereby the federal government collects and spends the majority of the ~$300 billion in taxes collected and the states do their best to provide the front line services that people actually care about with their share the remainder. Additional revenue streams needed to be found and property is it.

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

Over the last ‘few’ years? Bullshit they have

“I’d like to hear what the government’s thinking is on the rising price of housing in Canberra”

The government is thinking “woo hoo! higher land values means more revenue generated from new land releases”.

“what are its plans for making housing more affordable for locals”

Present some piece of media propaganda every once in a while to make it look like they care, whilst doing everything they can to try and ensure that property values continue to rise.

Although house prices are expensive here, Canberra is still one of the most affordable capital cities in Australia simply because the average wages here are much higher than in other cities. See this graph.

As for why they are expensive (Australia wide, not just in Canberra), I believe it is primarily because of people’s increased willingness to take on massive amounts of debt, and the entrance of property speculators into the market.

A lot of people will tell you that it is a case of demand exceeding supply, but I don’t think this is true for most places. In Canberra for example, between 2001 and 2006, the population increased by 14,292 people, and the number of dwellings by 9,659. This means that for that period, a new dwelling was built for every 1.48 people moving to Canberra, despite the number of people per dwelling remaining steady at 2.6. That is to say, between 2001 and 2006, supply exceeded demand.

Perhaps unsurprisingly, the 2006 ABS Census reported that 1 in every 16 dwellings in Canberra were unoccupied.

They just need to move a few public service departments to sydney or melbourne. That would be enough to send house prices crashing.

canberra has the highest mean income in Australia i.e. people can afford more, it’s simplly more affordable

supply was limited a couple of years ago but I think 6000 dwelling site were released in the last two years and 5000pa are promised for the next couple

wollongong is about half the size of canberra and has half the average income

Google is your friend. Try “act governmnet affordable housing” for instance or even go to the site http://www.actaffordablehousing.com.au

Queanbeyan – enough said

Maybe they need to start talking about the “Capital gains”. 😉