Andrew Bell’s Market Update: 2 Significant Impacts Regarding Negative Gearing

MARKET WRAP: Issue 10: May 12th 2016

There has been a lot happening within the market at present. First up was the 0.25% drop in interest rates. The Reserve Bank is pleased about many aspects of our economy, such as the fact that GDP is growing at 3% per annum, driven by improving household consumption and population growth, as well as a pick-up in resources and service exports. Furthermore, there has also been a further drop in unemployment to 5.7%, reflecting increased demand for labour, as they remain frustrated that the Australian dollar has been rising, which ultimately produces a drop in interest rates. This was seen as essential to get that Australian dollar down. There is no doubt that if they don’t get the fall they are looking for, or indeed for the dollar to stay down, there will be another interest rate drop in the wind, however, it is a real juggling act because the latest NAB Business Survey for the first quarter of 2016 shows business conditions improving and expectations about future also improving.

How Does Australia’s Dept Affect The Budget?

It was with this back drop that the Budget was handed down. A bit of a nothing budget everyone says, however, I just don’t know why Governments, and particularly Treasurers, can’t just call it for what it is. People talk about winners and losers in a budget. Well, this is bigger than individuals. Of course, every Government would love to be able to hand out increases in pensions and more money for social programs, to build more roads and football stadiums and so on. However, we all know that we have this substantial debt fuelled by years of deficits, and it has to be addressed. We all know as private citizens that if our credit card debt is too high then we have to pull our heads in – stop spending, don’t go on this year’s holiday, don’t go out to dinner as often, stay home and stop spending to get the debt paid off. Well, it is no different for Governments, and as soon as someone can explain that effectively to all of us citizens of Australia, we will get it. Get rid of the debt first and then we can use what we pay in interest and any surpluses to expand sensible Government spending.

Then, last weekend the announcement of a double dissolution general election with the election date being the 2^nd July. I am sure we are all cringing with the thought of an eight-week election campaign. I am sick of the TV commercials already.

Why Is Negative Gearing Important to Australia’s Real Estate Market?

For all of those interested in real estate, one of the features of this election will be the decision around negative gearing. It has been a key platform through the Australian real estate market for more than 40 years. Back in the 1980’s, and I was in business then, the then Government terminated negative gearing. However, a very strong lesson was learnt, where in particular, tenants were dramatically affected by a shortage of rental properties and rapidly rising rents. As a consequence negative gearing was turned back on again.

2 Significant Impacts Regarding Negative Gearing

1. The first concern about the latest proposal is that they are suggesting negative gearing be eliminated on resale properties and only be maintained for brand new developer stock. This is going to have a massive social impact. Most new developments are in the outer suburbs, meaning we will force tenants to have to move to these outer areas, where quite probably there will be little employment opportunities. For tenants who chose to live close to the cities or inner city, they will increasingly find diminishing opportunities and those rental properties that do exist will be able to command ever increasing higher rent. A massive social impact and I don’t believe it has been well thought out.

2. The second real concern is tourism. In market places such as Gold Coast, Sunshine Coast, Cairns and indeed other markets like Port Macquarie and so on it will mean increasingly less properties bought that can be used for holiday lettings and so important markets of Australia where the average Australian likes to holiday they will find it difficult to find an apartment or a holiday home for themselves and their extended families and will have to rely purely on hotel accommodation which is not the type of accommodation so many people are looking for and of course will just drive up hotel rates.

What Makes A Healthy Suburb?

Both of the two points mentioned are just two significant points regarding negative gearing. Other than the fact that it will mean less people will buy properties to be rented and as such there is just going to be an acute shortage of housing as time goes by. Most investors buy location and they won’t want to buy in developments, where almost the entire building is bought out by investors. The risk with this concept of driving all investment into new developments is that they are going to create ghettos. A healthy mix in any suburb is a balance between owner-occupiers and tenants. Rental only precincts have serious issues and are not good for the tenants or the owner.

As I say, it is going to be a long eight weeks and it will be interesting to see the opinion poll movement given that the two parties are now shown as neck and neck.

See you in a fortnight’s time.

Kind regards,
Andrew Bell, OAM
Chief Executive Officer
The Ray White Surfers Paradise Group