The REAL Budget Reply – ‘Certified BS Free’ (No not Bill Shorten's)

A point by point analysis of what the budget means for residential property

The budget appears property market neutral, what it takes from it directly, particularly from foreign investors and from the broader market indirectly through a clever tax on the big banks that the government knows will be passed on (which it will through higher interest rates that the banks will cop the flak for and not them), it appears to give back through an unprecedented salary sacrifice measure (a tax cut by any other name) to help people struggling to get into the market to get into it.

Perception is often not reality and that is certainly the rub of the budget on property.

The flagship measure for property in the budget of the new salary sacrifice option assumes that those who qualify for it will want to take it up. Even if market conditions don’t change, given we are not known savers at any time, the take up will likely not be anywhere near what the government would have you believe it will (not that they have provided any specifics).

Were the market to start to drop which is the underlying intent of the governments other measures, any current desire among those who qualify for the proposed measure to use it may go down with it.

Were that to happen which is not all that unlikely that would mean that there is next to nothing positive for property in the budget, it is all take and no give.

The government was already on a double winner budgetary and politically from the instant cash windfall from taxing the banks and the cheap political mileage that comes from openly bashing both current market nasties (really?), the banks and foreign investors.

Most of the other measures are negligible negative or impractical as we expand on below.

Given voter sensitivities around recent price rises in political powerhouses Sydney and Melbourne, what the property sector got in the budget was probably about as good, meaning about as bad, as it could have expected.

The government needed to be seen to be doing something to cool those sensitive markets and they believe their cleverly conceived measures achieve that.

Whilst the measures won’t fully stop the baying from the Labor Party for the deconstruction of negative gearing (which if they were in power they would be much less keen on given it could harbinger the wholesale deconstruction of the construction industry, Australia’s biggest employer and a very large part of their voter base), it will remove much of its oxygen.

Making sense of the changes individually in general order of true importance and significance…

50% cap on foreign investment in residential development projects

Politically very clever in it allays the concerns of those who believe we’re selling off the farm and at low fiscal risk because other investment disincentives already introduced at state and federal level (complementing China’s own) already had the investment property market cooling fast.

What it will do is speed up the rate of cooling and the collapse of many development projects (and those behind them), both further bitter pills for banks to have to swallow, particularly those who didn’t see the writing on the wall sufficiently to appropriately de-risk their investment apartment development exposure book when they still could.

In trying to avoid or at least delay collapse, it will increase the desperation of developers to seek out even more ‘creative’ ways to clear stock (or at least to be seen to have cleared stock if it buys them time), and if being sold overseas, find ways to ensure they are not officially contravening the new 50% foreign investor ceiling.

That may require paying even more onerous ‘fees’ to marketers. Many developers are already parting with unconscionable commissions of 20% or more for sales (30% we hear at some China property fairs, which is highly dangerous because buyers paying 30% more than the real market price for property can quickly create a house of cards that wouldn’t take much to collapse in on itself).

Reducing the CGT withholding limit on the sale of foreign resident owned property from $2million to $750,000 while raising the rate from 10% to 12.5% and removing foreign resident exemption

These measures are again unashamedly and blatantly populist and patently anti-investment, further proof that the government believes that the construction boom which kept the economy ticking in the wake of the mining bust has now outlived much of its political and economic usefulness.

Whilst the measures will boost the budgets bottom-line immediate term (in some ways justifiably – tax avoidance by Australians is bad enough, for foreigners it’s worse because the money usually goes offshore) they’ll prove to be the last straw for many current and intending investors.

As attractive as our clean air, secular society, quality schools, and low incidence of corruption is, there is a point at which it gets too hard. The government has done much in this budget, on top of what it’s done previously, to reach that point.

Ghost Tax

The government is proposing charging overseas investors $5,000 per year for every half year in any full year foreign investors leave their property empty.

Sounds crazy? Well that’s because it is.

If you thought some of their other proposed measures smacked of rank populism, this one’s putrid. How on earth is the government going to prove whether someone has or has not resided or had a tenant in a property for periods totalling 6 months in a given year? Are they going to camp on their doorstep? Require a swipe card on the door which would obviously need a retina scan facility to avoid fraudulent claims of occupancy? Divert some of the hundreds of additional ASIO car sitters they’ve recently employed to fight terror to this latest national emergency?

The idea is not even that crazy it might work. It can’t. There is such a void in the logic in practise you could drive a truck big enough to carry the unions annual undeclared cash contribution to the Labor Party through it sidewards.

Changing Capital Depreciation guidelines and removing tax breaks for visiting investment property or for collection of rent (unless through a licenced real estate agency).

These whilst not insignificant are not big ticket items in the budget and were one a cynic (which I am – particularly of government) you would conclude that they’ve only been introduced to further deflate the Labor Party’s argument that negative gearing is to blame for the country’s high property prices which is why we need to get rid of it.

Their argument is not without merit but the horse has bolted. Over the last 30 years negative gearing has become the foundation of the property market. Were you to pull the rug out from under it now the consequences for the economy would be devastating. Labor know that (which is why they wouldn’t really do it in practise themselves and even if they were stupid enough to try it, the unions wouldn’t let them) but are greatly enjoying making the government squirm with the threat nonetheless.

$300,000 tax free superannuation contribution from the sale of a principal place of residence for retirees.

If I thought that the market might take this offer seriously I probably would have made it the lead point here but as I doubt anyone smart enough to have $300,000 equity in their home (unless inherited and then not always) would be dumb enough to volunteer to move $300,000 from where it is tax and age pension test free (their own home) to their super where it would be no longer, so I haven’t.

If when next to nobody takes up the generous offer confirming to the government that the vast majority of people with significant equity in their home also possess significant smarts, short of them improving their chicanery, logically expect them to decide that current age pension asset test free status of the proposed tax free contribution continue after it is moved to a superannuation fund as this would at least free up the $300,000 to be spent in the economy, a far better outcome to the status quo of retirees sitting on all that money (both tax and asset test free) and it not being available to stimulate the economy.

If however, the concept in its current proposed form is widely embraced, whilst I won’t run naked down Queens Street, I will have to accept that the rumoured systemic decline in education in this country has substance.

Fortunately, I doubt I will ever have to do that.


Best Regards,
John Johnston