Australia's 30-year property super-cycle is ending due to a combination of factors including rising interest rates, construction cost inflation (up 40% since the pandemic), falling property prices, and government tax changes (abolishing negative gearing and changing capital gains tax). The housing correction is already visible, with home prices in negative territory across major capitals and consumer confidence at record lows. This correction is expected to be the largest in 40 years, potentially exceeding the 8.2% decline of 2017-2019. The rental market is also under severe pressure, with rents rising 50% since 2019, driven by high migration (upgraded by 55,000 in the latest budget) and insufficient housing supply. The government's housing construction target of 240,000 homes annually is unachievable given current conditions, and the federal budget's tax policies are criticized as a 'tax grab' rather than genuine reform, with 52% of federal revenue coming from personal income taxes.
DFA Live Q&A HD Replay: Is The Australian 30-year Property Super-cycle Over? With Leith van Onselen追加:
Well, good evening and welcome to this live stream on the 19th of May, 2026.
It's Martin North here from Digital Finance Analytics. Great to have you on this evening. Thanks for taking time out of your Tuesday evening to spend it with us. Really appreciate it. And uh hopefully we'll have an interesting conversation as we always do with Leaf.
He's one of my most popular uh um guests along with TK and Tony Lantro. So I think we should hopefully get some good numbers. Please remember to like and share. Just before I bring him in, I'll also remind you that we're not providing specific financial legal advice. We moderate the chat, but do feel free to throw questions, comments in as we go.
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It makes a huge difference to us being able to do what we do. Right, let me bring Leaf straight back in. Hi, Leaf.
Nice to see you again. Welcome back.
Yeah, good day, Martin. Thanks for having me back. It's uh yeah, it's been um an eventful few weeks, I think, since last time we chatted. Uh it was only about 3 weeks ago, I think. And uh yeah, look, sit mate, since that we've obviously had a federal budget, we've had a we got a housing correction, um another interest rate hike. There's all sorts of stuff going on at the moment.
So, it should be a really good chat.
>> Yes, absolutely. And I I booked you um deliberately this week uh because I wanted to get you the week after the budget. So once everything had settled settled down a bit and and I've been amazed by the volume of commentary on all aspects of the budget. I mean you know pretty much everybody's got an opinion right uh not necessarily an informed opinion right and um it's fascinating to me Richard wilds from uh um Morgan Stanley uh Richard and I years ago we used to jointly produce the JP Morgan property report with DFA. So Richard and I go back quite a long way.
And um what was interesting about Richard's comment was that he thought that maybe we are actually going to see the end of the 30-year super cycle for housing. And he was linking it back to the banks lending. Of course, lending has been massive over recent years. And um maybe that this is what the government wants, but maybe also people don't want to recognize that actually the super cycle may be ending. And then I saw this from Alex Joiner who actually showed the massive acceleration of dwelling prices compared with price um income and inflation and uh you know makes the point if prices fell a bit it would still be excessive. And I guess at least my perspective is you need to go back 30 years or so to understand the seeds of our own destruction here. It wasn't just CGT and uh negative gearing, but it was also the deregulation of the banking system, the introduction of securization, the multiples uh variations that lenders were able to to do and a bunch of other things and a lot of other government policies too and money being thrown then at first-time buyers. And we can go on and on. The point is we've got ourselves into this position due to a lot of really bad decisions over a long period of time.
>> Yeah. And and look, it really has been a 30-year perfect storm, hasn't it? So, um and look, I I I agree with that assessment that that it's, you know, looks like it's coming to croper and it's probably going to end now, especially after the budget's tax changes and that sort of thing. Uh and also, look, we we you know, I got to be honest, it's um Canada and New Zealand are going through a similar process right now. And um again, I wish it's another time when I wish I'd put the put that chart in. I just forgot to do it.
But there there's a great chart that that um uh Justin Farbo and Buddy Macro put up about a week or so ago comparing the house price cycles across the developed world. And the two most similar economies to Australia, New Zealand and Canada, I'd argue, are both having very substantial house price corrections or crashes if you want to call it in real terms. Um, so I do have some charts in New Zealand for later, but Canada's also had a huge housing bust as well. So, uh, look, you know, we we obviously are defying gravity at the moment, but, uh, and there are some different factors here. I mean, we do still have much higher immigration than those two countries, but at the same time, it's, you know, um, I bet you a lot of people back a few several years ago before the correction set in in those two countries probably thought that their housing markets were impervious to, you know, housing crashes. But they're both they're both now experiencing one. So yeah, I I think if we are to get a get a you know severe correction or a crash in real terms, probably now is the time.
>> Yeah. And I think it's worth highlighting that Labor of course talked about sustainable price growth in the last election round and I always remember that interesting conversation, it was on the radio, wasn't it, with with Clare O'Neal. Uh and of course Albo uh committed to not change CTG and negative gearing and of course well there's a few questions now about that and it's interesting that Clare O'Neal now has refused to make comments about the fact that some of those people who got the 5% deposit might actually end up in negative equity. So it it is yeah will exactly right. So, so we we have I think seen a terrific example of significant government intervention. We don't have a free property market. We haven't had it for a long long time. But every time they sort of try to do something over here, something else falls off the wagon over on the other side. And I've always had the view that the problem is that we have more and more government intervention. We also of course have a bunch of assumptions that were made into the budget and we're going to spend a little bit of time talking about some of those assumptions because it tells you a lot about how the Treasury in particular and the politicians more generally as regarding the economy and also the role of taxation particularly personal taxation in the role of the economy.
>> Yeah, absolutely. Um, I'll no doubt go on a bit of a rant later on about uh my beefs with the budget. So, there's obviously a few decent things in there, but there's also a lot of pretty bad stuff in my opinion. Uh, and if I had to summarize the the budget, I'd sort of say it was more a tax grab than tax reform. Uh, whereas I actually wanted proper tax reform. Uh, and you know, it's something I'll probably cover off in detail later, but um and and and there was a few hand grenades in the budget as well for which could actually harm the nation. uh you know startups and that sort of thing uh that with the new CGT changes. So um yeah, I wasn't that impressed with it. Although I I've got zero qualsams and actually support the you know removing negative gearing and and tightening capital gains, >> the increasing you know basically going back to indexation on capital gains for established housing. I think that's smart.
>> Um I fully support that. But just some of the other things in the budget I was I was you know I wasn't too happy about which no doubt we'll get into a bit later.
>> Yeah I tend to agree with you. I mean we knew that something had to be done about the investor segment much much bigger proportion of the total housing market than pretty much any other western economy. It's double the size of for example the UK which were also worrying at 16% of of property being for investors and they've actually dialed it back in in the UK quite substantially.
Um the other point to make I think and this is something which I'm really quite annoyed about is the government recently changed the tax regime positively to enable the rentto buy sector to blossom and a lot of those big international corporations are now doing projects which are going to be built to rent. Um, so the bill to rent sector is now morphing from the the domain of the mom and dad investor to the big corporate investor and they've got a lot more tax breaks than almost anybody else. So I do worry about whether in fact this government is actually really doing things in support of ordinary people or whether they are actually more coupled to big corporate land and I perhaps put the gas tax or the non- gas tax on the on the same list, right? That they seem to be wired the wrong way in my view.
>> Yeah, that that that's a good point and I actually hadn't thought about that. So um yeah, certainly with the build to rent like do we really want the black rocks of the world? are these sort of investment firms basically taking over the the rental market and having arguably more market power than a diverse range of you know a million landlord mum and dads do but also there's a bigger issue as well. So you know a lot of those build to rents yeah the build they are building new new dwellings etc. But if you actually look at the rents that those uh build to rent properties rent out for they tend to be about 25 to 40% above market value like you know the median market. So they actually rent um the median value of the rents on those build to rent properties is way higher than the broader market.
So they so they tend to actually build more expensive properties. So um you know and and admittedly um I I know you know for example Damian Class rents one of those and I've been to his apartment.
It's nice >> and and he has um he has you know they got a nice pool and they got a gym and all this other stuff. So it is it is very well serviced but it's sort of not catering towards the affordable end of the market. And if you're worried about rental affordability, you sort of want to be uh um you know, catering more towards that affordable end of the market uh rather than, you know, building properties that are for wealthier people. Um obviously we need a diverse range of properties. So we should be providing rental stock of all different types, but I think you know these sorts of rules are going to skew the market towards that more expensive end. And when you're when you're dealing with, you know, uh the worst rental affordability crisis in our lifetimes, uh where whereby rents, according to Kotality, risen by 50% since the end of 2019, you want more affordable rentals, not less affordable rentals. So that that that's um yeah, that that's a really good point you raised and I hadn't actually thought about that. Well, it's something which I think we need to think about. Not least because I note that some of the recent projects which ostensively should have a proportion which are affordable homes bundled in they've underd delivered on the affordable homes component of the projects. Why? Because it's impossible to build affordable homes at a price point that makes any sense. The only way that you can make these project work is to build more flowery more you know higher higher kitted out uh projects which are attracting completely different sector of the market. So to my mind it is another example of misplacing uh effectively government investment and spending indirectly via via the tax breaks of course but claiming somehow magically that they can actually lift the number. The other little little tweak here of course is the states are being paid on a not on delivered properties but on approved properties.
And so there's a massive gap in my mind between approvals of properties and actually properties being built, delivered and the keys handed across because it's too expensive to build with all the inflationary pressures that are in the building and construction sector.
you can't get the workers and in fact if you look at a comparison of Australia versus other countries we are building on a population basis a lot more than almost everybody else anyway so our capacity to build more is very is very limited so once again when you start peeling the onion back you realize that again this ain't going to work >> no and and that's another good point you raised so there was a article came out uh a couple months ago I think in the AFR and actually profiled Western Sydney it might have been the Australian one of and and they said that in um you know this sector area of western Sydney they'd approved something like 22,000 apartment uh homes I should say but only um like a fraction of those it was like under 10,000 have actually gone ahead to construction so they just they've approved a bucket loads of load load of homes but they're actually not starting construction on many of them because it's just simply too expensive right they the developers can't make um they can't build at a price that people can afford and and that they can break it break, you know, profit. And this all gets back to the fact that construction costs have risen about 40% since the pandemic. And now that we've got the the global energy shock, costs are going up even further again. And a whole bunch of developers, I don't know if I mentioned this last time, cuz it's it was certainly an issue a month ago, last time we talked, a whole bunch of developers around Australia have warned that their costs are rising. So there was um Satellite property group who's like a specializes mostly in Western Australia, but they're the second biggest house and land developer uh in Australia and they they they they estimated that the cost of building a new house is going to go up by about $50,000 like so that you know talking about a house and land package >> because the the rising diesel prices alone is going to mean that preparing a block is going to cost another 20,000 then you got all the added costs in you know PVC pipes and masonry and timber and cement and all these other things that go into building homes. That's all rocketing in price as well. And we've seen the cost inflation across, you know, re plumbing, for example, has passed on a whole bunch of costs. All all these suppliers are now jacked up their prices. And that just means that after this 40% surge in cost that we've had since the pandemic, we're likely to get, you know, another 10 10 or so percent at least. Um, and and once that gets added on on top, it just means that it becomes even more expensive to build.
prices become, you know, have to go above what people can afford. And that there was a uh uh one one of the developers, Daycorp, um actually he, you know, they they they said a quote something along the lines of um feasible projects have now become marginal.
Marginal projects have become infeasible, unfeasible. Was it that that's almost a direct quote what they said, you know, a couple weeks back based on this cost inflation. So obviously if the costs go up, you're going to build less and it's going to make it even harder to meet the government's housing targets. And at the same time, and I'm sure we'll get into it, the government's still got the pedal to the metal with immigration. So that's just get, you know, obviously crush loading the supply side.
>> Yeah. Yeah. And just one other little factor to think about. It's interesting that when you look at new properties and there's a bit of a premium when you buy new, but as soon as you go into it, that property tends to drop in value a little bit. Why? Because down the road you can buy another new one because they're building that, you know, just down the road. Now, if property prices are rising significantly fast, that may be not too much of a problem. But if we are now in a situation where the property market is going sideways or down, suddenly the idea of buying new is not that attractive. And I would ask whether because of that we are going to see an uplift in property investors piling over into buying new properties or you know paying to to to to invest in new properties when in fact the economics of those new properties are already shot because of the inflationary pressures and the expectation maybe of price falls rather than price rises. So maybe we won't see a a surge across two more new bills.
>> Yeah. And absolutely that the headwinds are massive. Right. So you've got not just the construction costs I just mentioned, but you've got obviously higher interest rates, which you know makes it less profitable for developers to build, but then at the same time, we've now got falling property prices.
So you know, all that means is that with with prices falling, it's kind of the reverse of what happened during the pandemic whereby builders signed fixed price contracts and then the costs went up and then they became unprofitable and a lot of them end up going out of business. It's the other way around. If you know if a developer goes, "Okay, I can do a project at this and they think that but they're not sure that what what price they're going to sell because the prices are falling. It doesn't take much for the price to fall back. Like if it takes them a year to build something and they're worried that the next year prices could fall by 5 to 10% which is possible suddenly that that uh that project that they start construction on by the end by the by the time that the you know it's finished construction they'll actually make a loss on it. So falling property prices are terrible for for developers and terrible for construction. And there's actually I wish I'd chart it. I might do it for next time. But if you actually plot um you know home prices against construction rates that they're actually you know um uh you know reasonably correlated, right? So when prices go up you tend to get more construction. When they go down you get less construction.
And it's pretty logical why >> because developers in a falling market don't want to develop because they don't know what what price they're going to be able to sell that property at in a year's time once they finish that development. And and in the case of apartments, it's more like two years to build an apartment block. It takes a lot longer than attached house. So that lag time is a lot longer. So, if you're starting an apartment block now or you're thinking about, you know, starting one right now and it could take you 2 years, you don't know what the house price, the housing market's going to be like in 2 years when we've got tax changes, interest rates going up. The markets are starting to fall. Um, you know, we've got broad broad-based uh property price declines across Sydney and Melbourne and the other smaller markets. The growth is falling quickly and they're likely to go into negative sooner or later. um it's not conditions that are conducive to actually for developers to build more uh you know it's it's a triple whammy. You got rising costs, rising interest rates and falling prices and also labor shortages as well. So you know it's quadruple whammy. Uh so you know it's this whole notion that the government thinks that they can magically start boosting supply is just delusional because the macroeconomic factors just don't support it.
>> Absolutely. Well, we'll get into some of that, but let's let's sort of go down the rabbit hole a little bit. Um should we start with where property prices are actually now and what the dynamic is and then perhaps from there move into some of the budget issues?
>> Oh yeah 100%. So so I've got some charts uh I've put together some of these actually came out today by um Justin Farbody and macros. So today we got the you know the the weekly consumer sentiment consumer confidence survey by Roy Morgan and you can see on the left hand side we got a tiny little bounce today but you can barely see it on the map. Um you can see that A&Z Roy Morgan's consumer confidence survey. So that's a weekly survey. Whereas the Westpak Melbourne Institute's a monthly survey, so it lags, but you can see that consumer sentiment or confidence according to A&Z Roy Morgan is tracking at close to its lowest level on record.
Now their records go back to the early 1970s. So they're pretty much well they're pretty much at record lows, right? um this week was up a tiny bit, but you can see on that chart the black line, absolutely terrible consumer confidence. Next to that in the middle, um they've actually got the uh house household price expectations. Now, that's in the orange line. Now, obviously, they're still at a reasonable level overall, but they've fallen quite sharply, and that probably reflects the fact that house prices are falling. So, people don't expect house prices, well, house price growth is has tanked. So as a result, people now expect are obviously less confident about price growth. That's pretty logical. And on the right hand side, this is the money chart. So this is um Justin Farbo, he he uh seasonally adjusts the Kality daily index. Now, I was going to put my chart up here, but his is cooler cuz he seasonally adjusts it. I don't know how he does it. Um but you know, mine showed similar. But you can see now that in seasonally adjusted terms, and actually in raw terms, they're also falling, but not quite as much. You can see that home prices across the five major capitals, that's the dashed black line, are now in negative territory. So, the housing correction has officially began. The across the five major capital city markets over the last 28 days, uh or monthly um you know, home prices are now negative and they've been pulled down by fairly significant falls across Sydney and Melbourne. So, they're now falling by about 1% month- on month. and uh the old strongholds of Brisbane, Adelaide, and Perth. Um they're still growing and Perth's still growing at a decent clip, but they're all turning downwards, right? So, you can see the momentum's coming out of them, and that's that that makes sense when you've just had three rate hikes in a row, and you got very poor affordability in those those markets. And obviously, we've now had the federal budgets tax changes, which are going to smash property investors.
Um buy demand's also stalling. So last week we got the housing finance data from the ABS and and that actually um so now it's quarterly used to be monthly but we got the March quarter data and across all the cohorts so we're talking investors first home buyers and just um non-first home by own occupiers housing finance commitments for fell pretty heavily. You can see on that chart again from Justin Farbo, he's plotted he's uh plotted the the uh quarterly growth in finance commitments against the monthly dwelling price growth. And as you know to be expected, they're very highly correlated. So obviously housing finance growth has now turned negative and so is price growth. That makes sense. In the middle, I've got the uh the latest auction final auction clearance rates.
So last weekend's haven't been updated yet cuz we haven't got the final results yet, but uh I've done as a monthly average and you can see that um in in May so far, so it only captures the first two weeks of May, but I've done monthly averages there. You can see across the the major capital cities that auction clearance rates have absolutely crashed and historically auction clearance rates are arguably the best leading indicator for house prices. You can see it's very very uh you know strongly correlated there. I've plotted I've done the um the monthly average against the quarterly price growth and on the right hand side totality about a week and a half ago released their monthly chart pack and it showed that monthly sales are now falling have now fallen below the 5-year average in both six month moving average terms and just in raw monthly terms. What this sort of tells you is that buyer demand's falling, right? It's, you know, buyers are now um not not competing for housing stock like they were previously, which is why I've got falling finance commitments, falling auction clearance rates, and falling home sales. So, so the floor is sort of starting to come out of the market now. And that's been reflected in uh in in lower house prices. And um Kotality about a week or so ago, it might have been a week and a half ago, they in their latest chart pack, they actually um plotted the biggest house price declines recorded in Australia over the last 40 years. So this is nationally.
And I think we're going to smash the for the the 40-year biggest decline because that was only 8.2% between 2017 and 2019. Now, if you think back to 2017 and 2019, that was when we had the banking royal commission. We had the uh the APA curbs on investor mortgage lending and the Labor opposition at the time they went to the 2016 federal election proposing changing negative gearing in capital gains tax and then they went to the 2019 election and it wasn't until they got defeated at the 2019 election and and Sco won that the the election that was you know um the impossible election to win. He won that that we started seeing house prices rebound. So 8.2% 2% is the biggest house price decline nationally in the last 40 years according to Kotality. And I personally think this episode that we're now going into is going to beat that.
Um, and I wouldn't be surprised if it beats it pretty handsomely because when you look at when you look at the factors that are combining, we've got record high housing valuations. So, relative to income, uh, mortgage payments to disposable income, uh, years to save a deposit, whatever you want to, whichever way you want to cut it, housing affordability has never been worse in Australia. So, we've got massive overvaluation. We've just, we've now got a cash rate that's at 4.35%, we've had backto backto back rate hikes. The financial markets are still tipping one or two more rate hikes by the end of the year. Uh, if we get one more, that'll be the highest cash cash rate for about 16 years. And if we get two more, it'll be the highest in about 18 years. So obviously we got a you obvious uh you know a tightening mortgage market. And then um we've obviously still got the the global fuel shock and all those sorts of things which are smashing confidence. Um they we still have a risk of having diesel shortages in the next month or two. Although right now it seems we're in this kind of you know calm period which could smash the economy. Um and obviously home prices are already falling and and then we've got the the budget tax changes. So this is just like a perfect storm for house price declines across everything.
Monetary tightening, weakening economy, um major tax changes which are going to smash investor demand. All these sorts of things are just conspiring basically to I think for Australia to have its biggest house price correction in in at least 40 years.
>> Yeah. Well, it's certainly looking like a downturn. How long and how deep, of course, is the question. It won't be uniform across the uh the whole country.
I suspect that uh some types of property will do better than others. Uh the owner occupied house is now sort of the last bastion of of tax tax free uh uh you know, investments. So, we'll probably see some people putting more money into into those unoccupied houses. But overall, it's a a bit of a mess. And um just uh a little uh input from me here.
Uh whether you saw this, but of course um the 5% deposit scheme has helped 250,000 Australians into their first home. Uh coupled with now uh Clare O'Neal unable to confirm whether young Australians will plunge into negative equity due to Labour's new laws. The housing minister guaranteeing that prices won't fall would be insane. We are meant to have a market. And that's really the point, isn't it? Tar spot on with that. And and that's really the point. So unfortunately we we've had a lot of people who have been led into the property market with the government incentives and uh you know with the promise of the 5% deposit and uh people are still you know on the view well property prices can only ever go up in Australia. Well, yeah, but they have fallen as as that totality chart uh you know reminds us and as you say we're at a very precipitous position at the moment because pretty much all of the metrics whether you look at leverage high amount of debt across Australian property whether you look at the income to price ratio or all the other dimensions too it just makes sense and of course the rental sector is also under huge pressure now with significant rises is in the rental sector and lack of supply and we still have the high migration going on at the moment. So, it's a real mess.
>> Oh, absolutely. I mean, it's um yeah, it's an absolute shocker and and and CBA actually well I mean the the federal budget obviously upgraded net overseas migration. So um it actually upgraded migration over and tar done a great chart on the top here which just basically shows h how much previous federal budgets had missed on migration.
So pretty much since the Albanese government came to office, every single federal budget that that they put together uh has promised one thing in migration and then the reality's ended up basically, you know, kicking him in the butt. And you can see that you you can see the upgrades to net overseas migration from the 2022 23 budget all the way up uh to the later budgets.
Every single time they've missed and every single time the uh migration forecast has come in stronger than what they anticipated and and this time was no exception. So the federal budget last week upgraded net overseas migration versus the myo in December and last year's federal budget by 55,000. So all of a sudden they now expect 35,000 more net net overseas migration this current financial year and another 20,000 next financial year. And that of course means if you've got 55,000 more migrants than what they were expecting, that means 55,000 more people who need housing. and almost all those 55,000 people that extra people will rent. So it's just that you know it just adds to this whole lack of supply dynamic. It comes at the same time as the rental bank rate in Australia is tracking at close to its lowest level on record and we've and we've seen as I said before 50% spike in rents since the end of 2019 with most of that in the last few years. Um and rental grow you know rental growth is reacelerating according to Kotality. So rents are now rising at more than 5 12% peranom which is well above wage growth and um they you know it's reacelerated and it comes at the same time as CBA have just released their about a week or so ago released their latest dwelling price uh dwelling construction forecasts and that's the chart on the left. This is their base case. statue had a worse case than this, but I didn't bother putting in here. And CBA thinks because of this global energy shock, which obviously, as I said, is has has lifted the cost of inputs into housing, they now think that Australia is going to build less houses than they thought previously before the Iran war. So, you can see the yellow line there was their pre-Iran war construction forecast, which was still poor, and now they've downgraded that to the blue line. And you you can see where Elbow's housing target is there in the on the left hand side chart. It's right up there at 240,000 a year. That red dot uh dash line at the top there. A level of construction that Australia has never achieved before. Even during last decade, so between 2015 and 2020, we when we had that high-rise apartment boom where we built all those crappy two-bedroom uh one and two bedrooms sits with leaky balconies and flammable cladding and absolutely terrible quality. Even during that period when we had a cash rate of 1 and a half% versus you know 4.35% currently the best year of a single year of Australia's housing construction in history was about 223,500 in 2017 which is the very peak of that black line and that was alone was 7% below the the annual average that the Albanese government picked um forecast over 5 years. So we we have a government that is completely delusional, that is completely gaslighting us, has set a target for construction that has never was never possible even under ideal economic conditions, let alone a 40% increase in construction costs, a massive rise in interest rates, labor shortages, and now the the oil shock and war in the Middle East, which has raised input costs. And according to CBA's forecast, they they forecast that over this 5year housing accord period, whereby the Albanese government's forecast 1.2 2 million homes over 5 years. CBA reckons we're going to miss that by about 325,000. It might have been 340,000. It's one of those two numbers. So, we're not even going to be close. We're going to miss it by about 26 or 27%. So, we're not, you know, it this is clown show stuff. And just to top things off on the right hand side, put another chart from Justin Farbo, which actually put up today um on on construction on insolvenies. You can see the construction insolvenies there. the black line have picked up again. So we had this period after co um and I mentioned this before whereby a whole bunch of builders lost heaps of money because they engaged in fixed price contracts under home builder. So if you take a walk down memory memory lane with the Morrison government when co hit they basically brought in this home home builder stimulus whereby they subsidi subsidized people billions of dollars to go out and build new homes thinking it was going to help. The problem problem with it is people signed the contracts to build the homes and then cost soared by 40%. And what that meant is that these contracts were predominantly fixed price contracts and it meant that developers were locked in to produce a home at this price which they thought was profitable but then when costs went up like that suddenly they were making losses and making big losses and as a result we saw a huge number of construction firms go go bankrupt and basically leave and now we're starting to see like those construction insolvenies never really came down. They came down slightly last year, but now they're starting to go up again. And you know, again, a whole bunch of developers have warned that this new surge in construction costs, thanks to the war in the Middle East, um, is likely to send a whole new round of builders broke. Right now, again, these aren't conditions that are conducive to building more homes. If anything, Australia is going to build less homes in the next several years because of these costs. high interest rates, um you know, builder insolvenies, um falling prices, all these sorts of factors and rising construction costs because of the oil shock. So, yeah, it's not the right time to be basically revising up immigration, which is what the government's done, into a housing crisis. It's ab into a supply crisis. They're absolute morons and as a result, the rental crisis is going to roll on.
>> Absolutely. And a greater proportion of people are renting van than ever. The numbers of course are all-time high. The number of people who own their property outright continues to fall because the more people have mortgages and those mortgages are bigger. Those mortgages are also now going to uh be subject to higher interest rates as we discussed earlier on. And so they're going to be paying more of their disposable income to effectively support their mortgage or indeed if you're in the rental sector, the rents. And I see that in my surveys and in my rental and mortgage stress. So we have an economy at the moment that is absolutely squeezing a lot of households. Now there are some doing well that's you know not a problem but there are quite a few who are not and looking at the sort of the assumptions in the budget and the way that the budget was formulated it seems to me that this was one a a cash grab two it was dressed up as something to support the housing agenda but three it's not going to do much at all to actually solve the insolvable housing agenda if you start from this point of view which is want to build some more stuff. Well, actually the chances of building more stuff is zero.
>> Yeah. And at the same time, you're you're pumping demand with more people who need more stuff to be built. So it's, you know, it's crazy. So they so they're continuing to, you know, pump demand with high migration and again, you know, it's been upgraded by 55,000 at the same time as supply has just been absolutely choked. And you know, um, that's a very bad equation if you're somebody who is renting or you, you know, you care about supply and you care about affordability. Uh, high demand into a supply constricted market into a market that's becoming more supply constrained is a recipe for disaster.
>> Yeah. And this is what I think was worth highlighting. Why is it that the migration numbers have been kept up? I mean that there is a logic that Treasury will argue one we need more workers in Australia.
Businesses of course want more workers.
We've got certain sections of the construction sector that want to sell more stuff to those people coming in. So they're very keen to advocate that and of course a bigger tax take because you have more people who potentially might be paying tax if they do actually work.
But the migration story is actually very deceiving when it actually looks at the economic value to Australia and the benefits of Australia.
It actually doesn't bring more value to Australia.
>> No. No. Especially the the the quantum and the quality that we that we've run the migration system. So, you know, obviously we we've we've run a migration system for 20 years that has been in excess of the nation's capacity to build housing, infrastructure, and also business investment. Um I don't have the charts with me unfortunately but we we have experienced you know what what's called capital shallowing in the past you know decade especially but you know really the last 20 years whereby we've grown the population faster than than we've had private invest private business investment as well as infrastructure and then plus housing and what that's meant is that the capital stock of the economy has been diluted by hasn't grown as fast as the number of people have grown and that means that per per person capital stock has shrunk.
And that may ultimately makes you less competitive uh sorry less productive and also ultimately lowers living standards right because you got a higher percentage of people using the the for example the infrastructure base so you get more congestion infrastructure you got to share it with more people. Um in the case of housing obviously we've got record you know rental banks rates at record low. We brought more people in we can build houses for and that's created a rental crisis. um and and and a and a general hit to our livability because if you live in you know Sydney, Melbourne or the big major cities, you're watching your uh everything's become crush loaded whether that's to go to aos go to a doctor whatever everything takes longer now um and everything's more congested than it was before and this is all you know hits to your quality of life and and we it's it's just going to get worse because unfortunately the federal budget uh sorry not the federal budget the center for population in their 40-year population forecast for for Australia forecast that we're going to add another 13 plus million people in the next 40 years and we effectively add another Sydney, Melbourne and and Perth to the nation's population in just 40 years and nearly 11 million of that is going to be in the capital cities and Sydney's going to go to a according to their forecast Sydney is going to be 8.5 million people by the mid 2060s. Melbourne's going to be 9.2 million people. Um I think Brisbane's going to be I think 4.8 eight uh might be you know 4 point something like 4 point middle middle middle fours and Perth similar so basically we're going to have two mega cities of Melbourne and Sydney and Sydney's supposed to grow by nearly 3 million people by the mid20 over the next 40 years Melbourne's supposed to grow by you know about 4 million people uh well not quite but you know close and you just got to ask yourself how are we going to squeeze this number of people in without seriously compromising living standards. How are we going to build enough infrastructure for these millions of extra people in the especially the the two major cities? Where's the water going to come from? We're going to have to build desalination plants everywhere.
Where where's the energy going to come from?
Are our you know grandchildren going to have to live in shoe box apartments because houses will become so scarce and so expensive and and so rare because we're going to have literally in Sydney 3 million more people in the existing urban footprint. um which means we're going to have to bulldoze a whole bunch of houses and build apartments instead.
Uh similar in Melbourne. So, you know, these are all the questions that the that the government never bothers to look at and the federal treasury certainly never looks at it because the federal treasur treasury is too busy counting the dollars. So, we we you know we have this we have one of the worst vertical fiscal imbalances in the world in this country whereby the federal government collects 80% of the tax revenue and the states and local governments only collect about 20%. And as a result, the federal government, which controls migration policy, has a direct incentive to import hundreds of thousands of people every year because if they do that, they get to collect all collect all the extra personal income taxes, which is the main thing they collect, as well as the extra company taxes and other things that the federal government collects, but they don't pay all the but they don't pay the costs. So the costs of that migration aren't internalized on the federal government.
So we're talking about you know um most of the costs from migration get pushed onto the state governments because the state governments are primarily responsible for the services and infrastructure you know be that schools hospitals public transport those sorts of things and in order to uh those things have to keep up with the population otherwise your living standards go down and the federal government basically force feeds people in the city of Melbourne and as well as Brisbane and you know Perth as well but um and the state governments are left trying to build the infrastructure and services for these people. They can never afford to do it. So they end up going into debt. Which is why places like you know Victoria and New South Wales are drowned in debt. And often those governments will then sell off every single private uh you know asset they can to get some quick money in the door. They go they go down to the cash converters and fogg off the titles registry and you know the all the utilities and everything they can sell to try and get some money in the door so they can then um you know try and build some infrastructure which they then end up selling off to transurban whatever anyway. And we ultimately end up with lower living standards. And this is all because we have this ridiculous system whereby the federal government gets all the gains from immigration, doesn't wear the costs, so continues to run it hot.
It's as simple as that.
>> Absolutely. And uh I you know this is a complex set of interactions between multiple dimensions, right? And I think sometimes people want to see simple you know logic onetoone logic and and this question came in as you were talking which is how can house prices fall if you say migration is going up. Well my thoughts and then I'll let Letha build up from that. One is when migrants come the first thing they tend to do is to come into Australia and then rent. So it puts initial pressure on the rental sector first and we're already seeing that. Some of them come with sufficient funds to be able to potentially buy later, but a lot of them are not actually that high quality migrants. So their their income base and their asset base is not that flash. So many of them don't end up necessarily going directly into the housing market early on or they go into a model of housing where you've got multiple occupancy in one property.
So there's some factors there. But um Leaf, how can house prices fall when migration's going up?
>> Well, yeah, I mean I I think you explain it well. So So house prices like migration is just one of many inputs into the house price model if you wanted to call it a model. Um, you know, interest rates is obviously a major one.
Borrowing capacity like lending rules, all those sorts of things, tax settings.
Um, there's a whole bunch of is, you know, there's a whole range of things that go in and set set house prices.
Migration is just one small component of that. And so it's multifaceted. You know, the um house prices, the the drivers of house prices are multifaceted. Um, and that's because you borrow for housing like for to to purchase a home typically involves borrowing, involves leverage, involves going to a bank. And so all these lending rules and that sort of thing thing matter. Uh whereas rentals rents you can't leverage rents, right? You can't borrow to pay rents. Rents are based on more a more of a pure supply demand market. Number of people who need rentals versus the number of rentals in the market. um they're there two main factors and obviously income growth as well right so there's basically it's a three variable market really renting it's demand supply as well as household income growth determines how much people can pay on rents um whereas with house prices it's those things but also lending rules um you know interest rates tax policies all these sorts of things bank and m mom and dad all these factors that that influence house prices and unfortunately even with high migration, a lot of these factors that determine house prices are pointed down, right?
They're basically negatives at the moment. So, we've got rising interest rates, negative. Um, with rising interest rates, you get lower borrowing capacity. That's a negative. We've just had the federal budget change capital gains tax and negative gearing, which is going to smack investor demand. That's a negative. Lenders are now going to lend less money to investors because they can't take into consideration the the added cash flow given the after tax cash flow from negative gearing. That's a negative, right? Um obviously just general overvaluations are negative. Uh economic conditions uh with you know we're likely to get rise in unemployment etc. That's also negative. So there's a whole bunch of negative factors that are likely to push down house prices even though immigration is one small positive. But again in the you know when you when you talk about house house what what the factors that set house prices I'd say if you had to weight them immigration is probably like 15%. On uh on you know it's it's impact if you had to do a house price model what determines house prices. Immigration well the rate of immigration is probably like 15% of that variable. But on the rental side, it's almost it's the dominant variable and um because it's more of a just pure supply demand market because the whole credit factors and capacity to borrow and all that sort of stuff don't register on the rental side.
>> Absolutely. I did some modeling some years ago looking at those different levers and their their abilities to be able to influence the u the property market. The biggest by far was credit availability. So if if you increase the multiples at which you can borrow >> uh or if you drop the interest rates which means you can borrow more because borrowing capacity actually is a subject you a function of interest rates uh then effectively that's going to put a lot of upward pressure and momentum on prices.
The reverse is true. If interest rates go up all else being equal the borrowing capacity comes down and that means that people are less able to borrow. Of course, the banks have actually been quite clever in in recent times because they've tended to grow the average loan duration out which reduces the interest payments a little and they are still pushing intereston loans on quite a few households in some cases I think a bit irresponsibly because interest only doesn't solve the capital problem and if you don't have capital appreciation um you've still got a problem because you still got a debt that you're not actually servicing. So, so I think those are some of the factors to bear in mind.
Migration is a critical issue, but it's not the only issue. And so when Angus um Taylor, for example, links migration to housing numbers, um I think that math is a bit too simplistic.
>> Yeah. Yeah. I mean, look, certainly I I think it's fair enough if you're talking about the rental side. If he if he's trying to talk about, oh, making house prices affordable, >> um yeah, look, that's way too simplistic. But if he's talking if cuz I I must admit I can't actually I'd actually read what he said about it cuz I think cuz he's so unlikely to win. I haven't really paid that much attention to it. But if he's talking about general housing affordability, uh he's probably on a winner if he's talking about the rental affordability. Yeah.
>> And and you know, to be honest with you, when when I talk about housing affordability these days, I sort of focus more on the rental side anyway because um I think I've said this previously on this show, >> you don't have to buy a home, but you have to live somewhere. So, so if you can't buy one, you still have to rent, right? Um, so rental, you know, renting is the fallback option. It tends to hit lower income earners harder as well because lower income earners tend to tend to rent. Uh, if you're a first home buyer, you t typically rent before you buy later. Um, so, you know, for me, when I talk about housing affordability, I nowadays I focus on the rental market because, um, you know, not everyone has to buy a home. even though you know that that's almost I don't I don't want to sound um up myself or anything but that's almost a luxury now is buying a home. Um but everyone needs somewhere to live. So if you can't buy a home you got to rent. And if we make that expensive well then the next step after you you you know you not being able to afford rent is effectively homelessness, right?
You know the next rung below that is living in a caravan park. The next rung below that is living in a car and the next rung below that is literally being out in the street. So if we make the rental side particularly unaffordable, that's that has major social ramifications, right? So um that that's the sort of issue that I look at more and there's no doubt about it that we're you know we we've run migration so hot so so much faster than the capacity to be able to supply housing that we're just making that rental c that that that rental equation really bad. And if you just again if you look at the K totality numbers they reckon that um you know advertised rents have increased by 50% now since the end of 2019 and that's added more than $11,000 per year to the annual cost of renting the median home according to Kotality. So that is just a massive hit to anybody's, you know, anybody's a tenant in Australia. You're now sacrificing a much larger share of your income just to put a roof over your head renting than you were, you know, several years ago.
>> And that's that's, you know, pretty poor situation.
>> Yeah. And of course, if you think about real adjusted incomes that haven't really grown much at all for a good number of years, it means a greater proportion of that income has to go on the rent. And I'm seeing a lot of households now at 45 50 55% of their disposable income just going to pay the rent, which doesn't give a lot left for for other things. So that's another factor in all of this, and that's why we've got a lot of households uh in significant difficulty. Now, let's just switch to the budget a little bit because it's worth, I think, just unpicking the nexus between the budget and housing a bit more because there were some significant changes.
>> Yeah. Yeah. Absolutely. So, so, so obviously there was some stuff that was flagged beforehand, right? So, so you know, we we we knew before budget night a couple days before was, you know, pretty well leaked that they're going to um basically abolish negative gearing on existing housing. So how how that works is if you had a ne if you had a investment property before budget night, so last Tuesday, you could continue to negative gear that forever. So that until you sell it. So that's basically been grandfathered. If you purchase a uh home between budget night and 1 July next year, you can negative gear for the next financial year about to start. Um, but after one July next year, basically anybody who didn't have an investment home before budget night will no longer be able to negatively gear. So, what that means is that uh any net rental loss on their property, they won't be able to apply that against their ordinary wage and salary earnings.
they'll have to carry it forward uh either for future years where whereby if they hold the property long enough and it eventually becomes positively geared, meaning the rents grow enough to to more than offset the outgoings, you can then apply those accumulated losses against that. Or if you eventually sell the home, you can apply that against your capital gains um to reduce your capital gains tax. So you basically let you, you know, you can't claim those losses against your current income. You got to carry it forward. Um, there was also a an exemption for newly constructed dwellings. So, the government basically is going to allow negative gearing going forward. If you buy a newly constructed dwelling, so that's either you develop one yourself or you purchase a brand new one, you will then be able to negatively gear. And the policy intent to that is obviously to push investor demand in a newly constructed dwellings to try and boost housing supply. Um the capital gains tax changes were also well flagged although there was one hand grenade in there which I'll mention in a second. Um so basically for one July next year we're going to shift back to the pre199 uh dividend uh the CGT indexation model.
So what that means is that before budget night last week or actually up until 1 July next year um you can basic uh you can it's the old 50% CGT discount method.
So, what that means is that if you buy an asset for, I don't I'm just going to pick this out out of the air, $500,000 and you then sell it years later for a million and you make a $500,000 nominal profit. So, that's before inflation, you then pay half your marginal tax rate on that gain, right? So, it was basically 50. So, so what it meant is that the the maximum um capital gain that gain that you could pay was I think 22 and a half%. So the top motor tax rate divided by two and from 1 July next year we're going to basically the old the old model which is dividend imputation uh sorry indexation. So what that means is that you only you get taxed at your full marginal tax rate but only on the um real gain of that. So the nominal gain less the inflation rate. So again, using that example, if you buy buy a house for $500,000, you sell it for a million dollar 10 years later, but over that time um inflation was uh 50. So if inflation was half of your gain, you only pay um tax on the gain less the less the amount accumulated inflation over that time. Hope I explained that properly. Um so that that sort of um model is less advantageous if you're in a fastmoving market. So if you buy an asset at the start of an upswing and it gains value very quickly and you want to sell it, you know, after a couple years, you're obviously worse off with the inflation indexation model because you won't you won't have that much um inflation build up over that period of time, but you would so you be paying on a higher real gain. Um but the longer you hold the asset, so if you hold the asset say for 20 years and you've you accumulate years and years and years of inflation over that time, it actually becomes more advant more more advantageous the longer you hold it. And um under this indexation model than the old model, but by and large it's a net negative for most investors.
They'll end up paying more tax and and and there was a hand grenade in there whereby the government's implemented a 30% minimum tax on on capital gains.
Now, um, that was clearly designed, I think it's a bit scummy to be quite honest, that was clearly designed to have a go at selfunded retirees, right?
So, what they want to do is they basically want to get more tax out of people who accumulate assets over the working life, shift into retirement, quit work, so they're not they're not having that so they don't have earned income. And then if they sell off say partials of uh parcels of shares to help fund their retirement, the government wants to charge them a 30% tax rate on their real inflation adjusted gains. Now just to give you an example, so if you're a self-funded retiree, you move into retirement, you want to sell off $15,000 of shares every year to help fund your retirement just to give you a bit of a bit of a supplement. Say you're getting, you know, bit of super money as well. um under without this minimum 30% tax rate, you'll pay 0% tax on that capital gain because you'll be below the taxfree threshold. If you sold say $40,000 parcel worth of shares, you'd pay a uh 16% tax rate without this minimum 30% tax cuz you're below the $45,000 um threshold whereby the market tax rate goes up to 30%. What the government basically wants to do is set a set a minimum 30% tax rate to try and extract more tax out of those people. Um, I think it's a bit scummy, but you know, whatever. Um, by and large, my my my overall take on the uh on on these changes for the property market is actually pretty good. Like I I I personally have no issue with the negative gearing and the capital gains tax changes for established dwelling. I think it's a good thing. And the reason why I think it's a good thing is that chart on the right which I've got here which basically shows you. So this is from domain but it shows you the correlation between investor mortgage demand and first home buyer mortgage demand. You can see that they're almost a mirror image of each other. So when investor mortgage demand goes up, firsttime home buyer mortgage demand goes down. And that just tells you that investors are crowding out first home buyers from home ownership because they tend to compete for similar stock.
Right? So often you'll go to first home buyer go to an auction. This is before these these these rules came in and they get out bidded by an investor and which means that they got to they're forced to rent rather than own a property, right?
Which is obviously not good socially. If you can knock out that some of that investor demand out of the especially out of the established market, it means that you'll have a downward pressure on house prices because you're going to have less overall demand um le less overall mortgage demand for housing.
That's good. It's going to make housing at the margin more affordable. You're also going to have more first home buyer participation obviously because you're going to have less investors buying which means you're going more first home buyers. That's good. And also means that over time you're going to have a higher home ownership rate because you're going to have more first home buyers in the market and less investors. That's a good thing. So So this is all good good stuff, right? Um now the property lobby's obviously squealing that um these changes are going to kill the kill the rental market and basically drive up rents because they reckon oh well if investors don't participate and they leave the market um therefore you're going to have less rental homes. Well that's actually not true and it's not actually the a particularly smart argument because obviously if an investor sells a home right an established home the home doesn't disappear. it'll get sold to an owner occupy. And what it means is that you basically substitute a home home for rent, you make it into a home, an owner occupy home. So it means that a first home buyer instead of being a renter, they become a first home buyer.
So yes, you reduce the the supply of rental properties, but you also reduce the demand for rental properties because you have more owner occupiers in the market who don't need rentals. So you know, and to be honest with you, I've got some charts here. Um, now maybe the situation's changed from what it was back then, but I have some charts here and I did these years ago back when uh when when Labor in 2019 was looking to, you know, implement to abolish negative gearing and change capital gains taxes and there was all those arguments about, oh, it's going to drive up rents and when the when when the when the Keading government um temporarily abolished negative gearing between 1985 and 1987, it sent rents soaring, blah, blah, blah.
It's not true. So I've got some charts here again I did these years ago of real inflation adjusted rents and you can see the capital city aggregate on the left hand side I've put in the red is the period that negative gearing was was um was abolished and you can see that it had absolutely no impact on on the rental market uh in aggregate that's the chart on the left now there were two markets where rents did rise over that period and that was Sydney and Perth and I'm doing real rents here so inflation adjusted Sydney and Perth rents did rise and that because the rental banky rates in those two markets were incredibly low when the rules came in. So the rent the market was rising anyway but the other markets the rental growth actually fell or was negative. So Melbourne the uh real rental growth actually fell when the negative gearing uh reforms came in.
Uh Brisbane rents actually fell in real terms. Same in Adelaide. Hobart no discernable change. Canra the um real rents actually the rental growth fell.
So, it's all pretty obvious. It's all shown there in red. I'm not the only one to come up with these conclusions. Um, Soul Leake came up with exactly the same conclusions. That's the the panel on the left. Uh, ABC Fact Check came up the same conclusions and so did the Graten Institute. So, basically that, you know, it's a bit of a myth that the abolishment of negative gearing back in the 80s actually drove up rents. And just one final point, um, we actually sort of know how this is going to work out a little bit in the rental market just by looking at Melbourne or Victoria because although it's different, Victoria sever several years ago massively increased land taxes for investors and what that did was it actually um reduced the number of investors in Victoria. So a whole bunch of property investors have sold up in Victoria and they've sold their their rent their invest their rental properties and you can see the chart on the left hand side which actually comes from um uh comes from the Victorian government. You can see that the number of active rental bonds in Victoria. So that's basically a proxy for rental supply in the state has actually shrunk.
So investors have been selling up for a long time now, many months or many quarters in Victoria. Yet Victoria's actually experienced slower rental growth than the other capital cities according to Kotality. And Victoria's rental affordability, sorry, Melbourne, I should say, Melbourne has experienced lower slower rental growth in the other capitals. It's also has better rental affordability than the other capitals.
Now, this doesn't say that these changes make rents more affordable. What what that this is more a story on migration.
So Victoria and Melbourne's population growth is actually hasn't grown as quickly uh as its pre- pandemic trend because so many people left Melbourne during the pandemic. So Victoria's actually had slower population growth than it had pre- pandemic. Whereas places like Queensland have had much stronger growth, South Australia's had much stronger growth, Western Australia's had strong growth, and New South Wales has had roughly the same uh it's yeah it's basically followed it pre- pandemic trend. So it's more a population growth story. But even so, if it was true that these these sorts of um disincentives for investors that actually lead investors to sell properties drove up rents, well, surely you would have seen it in in in Victoria and Melbourne uh when they when the government bought in these land tax changes cuz again, as that chart shows very clearly on the left, the green bars, heaps of heaps of investors have left the Victorian market and yet rents haven't exploded in Victoria. Right? So I'm personally not not concerned about the impact on the rental market from these changes. If I am concerned about the rental market in general, but that's more an immigration story. And again, rents have risen by 50% according to Kotality since the end of 2019 with negative gearing and with full capital gains like the old capital gains tax rules, right? So I don't think all of a sudden now that these rules have come in that the rents are going to suddenly sore when they've already soared anyway over the last couple years. And if and they they they certainly will rise, but they're not going to rise because of these changes. They're going to rise because the government continues to pump immigration like there's no tomorrow into a market that can't build enough homes as I've explained previously. And I think that's that's the fundamental driver of rents. It's not these sorts of changes.
>> Absolutely. I agree with you, Al. And uh I've held the same view as you for some time that the migration question and the rental question is is interestingly linked and you know there are examples around the world we've covered that in previous shows you know in New Zealand and Canada right where in fact rents have uh corrected a little bit more but just on the budget it's very interesting to just unpick some of the assumptions that were were in the budget papers. Now there always assumptions in any budget but I thought there were some really quite interesting ones here. No change in productivity over the forward view. So productivity is still going to be sluggish despite the fact that they promised that they were going to cut some cut some red tape. I will believe that when we see it, the share of the economy that is actually effectively funded by government going up not down and the share of tax take from individuals continuing to rise relative to corporates. Absolutely there. But they also had two different scenarios, didn't they, about the impact of the oil situation. And it's worth just reflecting on the fact that the budget core assumption is it's a short-term blip in oil price and it comes back quickly. But they did have another view as well which was actually much more adverse.
>> Yeah, absolutely. So, so they also forecast I think they call the prolonged um war >> and and it was basically you know it's sort of an edge case that they've come up with where they reckon the Brent crude price uh instead of you know falling back quickly which is kind of their their baseline forecast at the moment is that that that the whole thing gets resolved and we get oil prices coming back down etc which I think I think that's a little bit too optimistic but they also didn't did an edge case whereby Brent crude goes up to $200 US per barrel, which is basically sort of double the current level. So, you know, a massive oil shock and I think the highest in history is about 150ish or not even 150, just under. Um, so, you know, you know, we're talking very expensive prices and and and that would basically drive inflation above 7%. Uh, push unemployment above 5%, it would also shave about, I think, half a percent annually off growth. Um, so, you know, that that that's their, you know, mega cataclysmic scenario. in the budget. Now, I personally think we'll probably be somewhere between what they forecast and that.
>> Um, I think that's probably an edge case that that they've, you know, that that's their doomsday scenario.
>> Um, I don't think we'll we probably won't get that, but I think also the the way things are going in the Middle East, I don't think we're going to get a quick resolution either. Uh so you know we'll probably get something in between what the baseline forecast was and and that um whether it's more towards what they're predicting or more the other way I don't know like how long's a piece of string but I think it's going to be sort of somewhere in between.
>> Yeah. And it's interesting to note they use the 60 US iron ore price as a sort of a hollow log which they always do and then magically manage to exceed the budget which is >> I actually don't mind that though like like I sort of don't mind that they're that they're um that they that they're cautious on that. I I'd have rather that than sort of been um you know forecasting $100 plus whatever and then oh look we've got budget surpluses and all this stuff because then they go oh we've got these surpluses let's go and spend it.
>> Yeah. Well, I sort I sort of agree, but then they claim magic.
>> Oh, good. Yeah, good. They always spin it.
>> Good good management of the budget. No, no, you were just wrong on your forecast again, which you know, and I agree. It's good being conservative. Now, I just want to touch a bit further on this tax take issue because I don't think people have got their head around the implications of all of this.
>> Yeah. So, um you know, this is one of my biggest issues with the budget, right?
So, so they've worked out all these ways to get more tax. So, closing down the, you know, obviously negative gearing changes going to raise more tax. The capital gains tax changes, they forecast to raise more more tax. They've also implemented a um 30% tax on discretionary trusts, which again, I don't actually disagree with it. Um, I'm not an expert in how discretionary trusts are used, but I imagine they're used for tax avoidance. Um, so you know, if you're reducing the ability for people to avoid tax, well, as someone who doesn't use one low trust, I'm all for it because I don't do it. I don't use it, right? So, you know, but the the thing about it is I'm all for that stuff if they were then to use that buckets of extra billions of dollars that they've raised to then lower the burden on income on on on regular wage and salary earners because this the federal budget is one of the most addicted um you know the federal government in Australia is one of the most addicted governments in the world to personal income taxes. So, you know, according to the budget papers, 52% of the federal government's uh revenue, the federal budget's revenue comes from personal income taxes, which is just absurdly high. And over the uh by by I think it's 2030, according to the budget, it's it it's by 29 uh 202930, the forecast that the tax take from personal income taxes is going to go from 52% currently to 54.5% of federal revenue. So they're going to increase their tax take. Now the thing about it is the average tax take from the federal government. I got a chart here which is it's it's more personal tax revenue to GDP. But you can see that it's gone up quite a lot already especially over the last several years and it's forecast by the parliamentary budget office just to keep rising. Now the reason why that's scummy is that especially in the recent years real wages in Australia have actually fallen by about 6% uh since the since mid uh 2020. So in this postco period, the typical Australian has less purchasing power than they had before because their wages haven't kept up with inflation.
Yet despite that, we're all paying higher taxes than we were 5 years ago because every single year that we get this nominal wage growth that doesn't keep up with inflation, the federal government takes a higher share of our income as tax because we move up into higher tax brackets, right? So every year for by doing nothing at all, the federal government collects more tax revenue from us even though we're going backwards with ne with negative real wage growth. And that's obviously something, you know, that that's not particularly uh um fair because the because the federal government indexes lots of taxes that we pay. So for example, all the excises, so tobacco, fuel, um alcohol, all those sorts of excises and some other taxes are indexed every year by inflation. So the reason why they do that is to ensure that their tax take doesn't shrink in real terms, but they don't then index the tax scales by not I don't necessarily think they should do it by inflation, but they should do it by the midpoint of the RBA's target band, you know, so 2 and a half%. They don't index the tax scales to ensure that we're not dragged into higher tax brackets every year purely because of inflation, right? So it's a sort of heads win tells you lose scenario. Now the reason why it matters is that Australia's tax system is becoming absolutely ludicrous. So according to the the Australian Bureau of Statistics and I pulled these numbers last week as of May last year um so May 2025 the median full-time cash earnings in Australia. So cash earnings are basically all your earnings you get before tax from working in a job. Um they were 98,120 uh $124. That was in May last year. Now, if you if you um uplift that by the wage growth we've just had, it means that currently the median full-time earnings in Australia about $101,000, right? That that that's that's as of May this year. Now, the data hasn't come out yet from the ABS because it's always comes out late, but you can sort of, you know, be be around $100,000 or just over. That means that you only have to earn about 1.9 times the median full-time earnings. So not the average, the median, the average is higher again to pay the top marginal tax rate in Australia. Now I think that's absurd that it kicks in at such a low rate and according if you actually um you know upscale the current median full-time earnings by the wage growth forecast in the budget means that by 2027-28 the median full-time wage is going to be about $18,500.
And that means that by 2027 28, if the government doesn't doesn't change the tax scales, you'll only have to earn 1.75 times the median full-time earnings to pay the top margin tax rate. And what I've done is at the bottom there, I've done a table where I basically just extrapolated by the budget's sort of steadystate wage growth forecast over the next decade. And if we just got 3.25% 25% wage growth every year, which isn't even a lot. And in this sort of higher inflationary environment we've got, and we're probably going to have a prolonged period of sort of set sort of stagflation a little bit, um we're going to have have, you know, median full-time earnings that barely keep up with inflation, but we're going to get pushed into higher and higher tax brackets. And just as an example, so I've just used the the top model tax rate here as an example. If they don't adjust the scales by 2020 by 203536, so in a decade's time, if you just up upscale the median full-time earnings by wage growth, by then we're going to have a median full-time earnings of $140,000.
And you'll only have to earn just under 1.4 times the median to pay the top larger tax rate. So this is just an absurd situation we've got here whereby through by by doing nothing at all the government every year is collecting more tax office even though our incomes in the last several years haven't kept up to in with inflation and in fact the RBA's forecast in the statement of monetary policy forecast that by 202728 which is as far out as they go um real wages in Australia are going to be tracked at about December 200 I think December 2011 levels might be December 2012. But regardless, we're going to be tracking at levels we haven't seen for decades because we've had because our purchasing power has been eroded by inflation so much. And yet we're going to be paying more taxes than ever because every single year we get dragged into these higher tax brackets by nominal wage growth that doesn't keep up with inflation. Basically, we're getting dragged in higher tax brackets because of inflation. So my this Martin is my biggest single issue with the budget is that the government it's a tax grab not tax reform >> because they've worked out all these different ways to squeeze extra tax out of us by negative gearing capital gains taxes taxing discretionary trusts. Some of that stuff's good but it's not good when they don't then use that money to reduce the burden on wage and salary earners. And this this is another reason why this whole argument about intergenerational equity equity was complete crap. Because if you want to make the situation more equitable for younger people, don't tax them so bloody hard. Because it's young people who are entering the workforce or are entering their peak earning years now who are trying to get in the housing market, but you're taxing them more and more every year, which makes it harder for them to not just buy a house, but harder for them to live. And the federal, you know, our tax system is so warped that the government thinks it's okay to spend billions and billions of dollars subsidizing the purchase of electric vehicles so that when someone buys an electric vehicle, they then don't pay fuel excise. So the government pays money out of the budget to subsidize people to buy an electric vehicle and then they lose the revenue from the fuel excise which then they make up by through gouging wage and salary earners with extra income taxes every year. So you know this is this is another thing that annoyed me about this budget. They kept going on about intergenerational equity and stuff. It's like, well, how's this helping intergenerational equity by charging wage and salary earners more every year when it's young people who have got 40 years of work ahead of them or 30 to 40 years ahead of them are going to get absolutely gouged for extra tax every year. Like if you want to help them, cut their bloody income taxes, right? And raise tax elsewhere. So whether that be from raising the GST or I don't know taxing our resources better or a whole any or even better stop spending so much bloody money because the federal government is let's let's face it they're not spending our money very well and and and one of the things I hate about this income tax system we've got that continually showers the government with more money every year just through bracket creep is that it gives the government no incentive to cut back spending and actually spend our money wisely because every year the pot of money that goes that that they collect off us rises because of bracket creep and that gives them more money to waste, right? And and so so if we actually index the tax scales, it would give the government less money to waste every year and they might actually have to spend it a little bit better. So, you know, this whole thing about intergenerational equity, what a load of hogwash. But yes, they they did some tinkering around negative gear and capital gains taxes, which will take some demand, you know, pressure off house prices will slightly boost the home ownership rate and first home buyers. Yeah, that's good. At the same time, you're gouging young people with higher income taxes. Um the government's spending like drunken sailors, which they have been. And as a result, we've got higher state and federal debt, which means that if you're a young person now entering the workforce, you're now um you know, entering an economy with much higher per capita public debt than someone 20 years ago did. So that's not equitable. And at the same time, the government's running a mass migration program which is driving up the cost of renting which hurts young young people who are in the rental market and first home buyers who want to purchase a home who then have to spend more on rents because of high migration which takes means that they take longer to save up deposit and also obviously the high migration puts some upper pressure on prices as well. So you know this whole thing about interial equity was complete crap to be quite honest. there was only, you know, one tiny policy in that budget which actually helps young people looking to buy a home at the same time as the government's gouging them in all these other ways. And, you know, of course, that's been ignored by most of the media.
>> Absolutely. And just a couple of other interesting points. Uh, if you look at that ratio, you know, the the 1 whatever it was that you showed, in some European countries, it's five times. So in other countries the profile of when highest tax rates come in are completely different.
>> Yeah. Can I just add to that? Um so pretty much the only countries that are sort of similar to us are the Scandinavian countries.
>> Yeah.
>> So so so those ones have similar ratios but pretty much every like all the other English speaking countries have got much higher ratios than us. Uh New Zealand's uh by memory was um about 2.5. So it's not that much better u but slightly better. But, you know, like, you know, UK is a lot better, Canada's higher, US is higher, like significantly higher.
>> Uh, we're we're we're we're more like a Scandinavian country in the way we charge for personal income taxes, but without the SC Scandinavian country benefits.
>> Yes, I was going to say that if you compare the Scandinavian countries with very significant profiles like we've seen, they have a huge amount of more support for people um through through through their more sort of social uh model. The other observation is if you think of um the full year that you work for I reckon it's about May before you actually start earning for yourself.
>> So you know up till May you are basically just earning for the government and um that's a problem because that has now moved it used to be I think April and now it's moved to May.
So more of the year you are just effectively a you know whatever you're doing wherever you're working you're basically working for the government.
>> Yeah. Yeah. and and and we haven't even talked about that, but there's another there's another issue with the budget which I'm um concerned about which I'm hoping they fix. Like there has been some mutterings that they that that they're going to reconsider this, but the um obviously the the capital gains tax changes also uh they they do risk stifling um startups and venture capital. So um and and and I know this from my own experience although I'm obvious I wouldn't fall into these rules but you know if if you're someone who basically quits uh like for me in my case I quit Goldman Sachs right and started macro business took a monstrous pay cut like I like I think twothirds pay cut maybe three quarters I basically lived on baked beans for a couple years incredibly stressful never worked as hard in my life uh trying to start that up um but you that there's less incentive to try and start something new when the when at the end of that period when if if you succeed and there's a lot of company you know a lot of startups don't succeed like the the the chance of succeeding is actually pretty low there's going to be less incentive to actually do a startup if at the end of that if you succeed you and you sell it you then got to pay higher capital gains taxes and it's particularly bad for startups because often um when when you start a startup now I wasn't in this cuz we were just you know myself Dave and um you another guy started up and we didn't have employees right so we just this doesn't apply to us but a lot of startups they have to employ people and they can't afford to pay them full salary so what they do is they give them equity in the company right so so you take a reduced salary for equity in the company but that equity becomes less enticing if you're going to pay higher capital gains tax on that in the event that it's actually actually successful and and most of these startups start with a business valuation of zero Right? Which means that pretty much any value you get at the end is going to be taxed on the full amount because you're starting off with zero. Right? So, so that that um there is a risk and this has been a massive concern in the venture capital community as well as the starter community, the tech sector, all this sort of stuff. They've all been very concerned that these capital gains tax change is going to give less incentive for people to to basically go out on a limb, have a go and try and start something up. Um and that ultimately is bad for the nation's productivity. It's going to be bad for business investment at a time when Australia's business investment is incredibly low and it needs to increase and it's ultimately going to stifle entrepreneurship and potentially send capital overseas and also potentially send people overseas like you know the um entrepreneurs will be incentivized to leave Australia and have a go somewhere else. Uh you know because we we will after these rule you know after these changes have capital gains taxes that are among the very very highest in the world. Now, there was one positive in in the budget fact sheet on the capital gains tax changes. They did have one paragraph that suggested that the government is going to consult with the startup sector on the impacts of the capital gains tax changes. Um, Treasurer Jim Charas has been out the last few days saying that that they're looking into it and they're going to consult with the industry. So is Claire O'Neal.
Uh, she's mentioned that as well in the media. So hopefully the government's going to carve startups out of the uh the new capital gains tax rules because really my my personal view is if you're going to try and start something new and you're going to risk failure, which you know a lot of them do, um they they should be taxed at a lower rate, right?
We should be trying to encourage people to have a go and to try and create new things because by doing that you end up with the Adlassians or Canva uh and these other successful companies as well as a whole bunch of medium-sized companies that most of companies sorry not countries mediumsized companies that most that none of us have ever heard of which are successful right there's there's heaps of those across Australia but you know most of them started off as as valued at zero with as an idea and worked really hard for multiple years and then got to where they are but you Along with those success stories, there's also probably three times as many that fail. And the government doesn't give you a subsidy if you fail, but they expect to take a big chunk if you win, right? If you win and sell, they take a massive amount of your money, but if you fail, they don't give you a subsidy for it, right? They don't bail you out if you fail. So, it's a sort of heads win tells you lose scenario um from the government. So, I'd like to see the government actually walk back the capital gains tax changes and actually tax tax um startups pretty lightly >> because we actually need more people to have a go in Australia. We need more entrepreneurship and we need more new businesses created because ultimately that's going to lift all boats. It's going to, you know, increase productivity. It's going to increase investment. Um that's the sort of stuff Australia should be going for rather than trying to tax it out of existence which unfortunately I think could be one of the, you know, the side effects.
>> Yeah. And I add to that the cost of energy of course is also another huge impulse on uh businesses trying to get going and you a lot of manufacturing has gone offshore because of it. So, uh, if you look at the tax settings and that we've now got as well as those energy costs, it's really really hard to see how businesses can thrive and I agree with you that that um startup uh situation should absolutely be um revised and there are probably some other negotiations that will probably go on in terms of the uh the budget process. But the bottom line for me is that uh you know if you stand back and just think about all the things we've been talking about today, the the chances are we're going to see property prices sliding. We're going to see momentum in new construction not taking off the way the government wants.
They're not going to be able to achieve their targets. We're going to see households who are more taxed and effectively getting less for that tax take because the government is horribly inefficient in terms of how and where it spends its money and it quite often spends things. the tobacco excise story being a magic example of how not to do things for example and >> snow hydro >> snowy hydro another oh and I should just say it's 119 billion that's off balance sheet >> which is the other little number right snowy hydro few other things completely out of the numbers so they've actually continued to use that wonderful little technique of hiding those big expenditures >> slush funds everywhere >> slush funds everywhere And and so when you stand back and just think about it, you got to ask, well, who is the government working for then?
>> Yeah, that's right. So So it's it's obviously working for its own self-interest that you, you know, you think or or or the big end of town or there's there's certainly um certain groups that are on the take who are obviously doing very nicely out of this whether it's the you know, CFMEU in Victoria and um you know, a whole bunch of others.
or or you know, unions in the uh industry super space or whatever. You know, it um they're certainly not working in in in our benefit. Um which is, you know, the the reason why this stuff matters is because the federal budget makes up about one quarter of the nation's spending, right? So, so it's a massive part of the economy and obviously that one quarter of spending is predominantly through taxes, right? The other the rest of it's borrowing, which is not a good thing.
But so they so they basically tax households and businesses a bootload of money to then recycle that spending into all these different areas. Some of it's good, but some of it's bad and some of it's wasteful, right? So, we should care about how that's spent because it's basically one quarter of the economy.
It's one quarter of domestic demand roughly. And if you have the states, it's more like 40%. Right? So, you know, because the states are a whole another story. They're also basket case as well.
I live in Victoria. I'm living it.
Right? So, um you know, this is all really important stuff. And it's important because it's our money and we should care how that's spent and how efficiently it's spent. And also, we should care that the government is basically working at cross purposes to the Reserve Bank of Australia. So, you know, e even before this energy shock began or the war, you know, in the Middle East began in late February, we had inflation well above target. Um, we had excessive government spending. The RBA had just lifted rates once in uh in February before the war even started.
So, we already had an inflation problem.
And we had an inflation problem predominantly because the government government, you know, the government's basically engaging in wartime spending levels, right? We've basically got the highest public spending um shared to GDP. Um you know it's it's slightly below the peak of the pandemic, but it's basically at sort of wartime levels.
You'd have to go back to the Second World War to get similar sort of level spending levels that we've got now. So the government's running sort of an expansury wartime budget during peace times. um to borrow Tar's phrase. got a burnout economy whereby the federal government's got the you know demand uh you know it's got the foot on the pedal uh pumping the gas through its massive spending while the RBA's got its foot jammed on the brake trying to hike interest rates to slow demand and the government's working at cross purposes to the RBA and you know ideally you'd have we you you'd have a situation where the government spends our money properly because it's our money but also doesn't work across purposes to the RBA and unfortunately They're doing both.
They're spending poorly and they're working across purposes with the RBA.
They they got the foot on the gas while the RBA is trying to, you know, slow in slow the economy and slow inflation. And then unfortunately the obviously this this global energy shocks reared its ugly head. Now we've got cost push inflation from that. Uh so we've just got this absolute perfect inflation storm at the moment. And it was already a problem before the war, but now the wars wars hit. We've had the the feeding directly from the higher petrol diesel prices and now we're getting the second round impacts of that whereby business is now passing on the extra fuel costs in what in what they charge. So now we're getting the second round inflation impacts as well. So, you know, this is all a disturbing situation, but um you know, the RBA can't really do anything about the global energy shock, but the government sure as hell can help them out by spending properly wisely and and not spending like drunken sailors, which unfortunately is what they're doing.
>> Absolutely. And spinning remarkably as well, trying to dress it up as intergenerational fairness and support for the housing sector, all of those things. um you know there's a little bit of that in there but it's not really the main objective and I think that uh when we look back on this budget le I think we will say that there was a potential to do a lot more good than they actually did do although within it there were a couple of changes that were actually quite beneficial I think in terms of the CGT and uh and negative gearing for the housing sector but more broadly because of this global shock that is coming down the pipes the clocks are ticking we're going to run out of various things at various points. No easy way out there.
The RBA in their minutes said they going to probably have to sort of wait and see how things shake out, but the market is saying more rate hikes. So, another downward force on property.
>> Yeah. Can I just add to that? So, that that that was interesting. So, the RBA minutes came out today and also Sarah Hunter, who's the assistant governor, she gave a speech as well. So, we had sort of two tidbits there and and yeah, they they they basically said they're going to, you know, the board's leaning towards holding in June, so we're probably not going to get a rate hike the next meeting cuz I want to see how things sort of pan out. But, um but in Sarah Hunter's speech, she basically said that um they are expecting, you know, significant second round inflation impacts uh for so we've already had the initial hit from the, as I said, the rising petrol, diesel prices, etc. And now the RBA is expecting, you know, quite a lot of pass through from broader businesses into cost. So I mentioned before the cost of construction materials are already sort of fed in.
They're now expecting broader cost pressures. And I've got a chart here actually from today's speech from um Sarah Hunter. Uh it's the chart on the far right. So indirect domestic fuel intensity of CPI. And this is a chart she put up in her speech and it basically shows you um how much we're expecting you know uh how much all these different components could be impacted indirectly uh by fuel fuel high fuel prices. So obviously travel is more expensive right? So if you want to get on a plane uses a gas that's gone up in price but also fruit and vegetables has a very high um diesel component. groceries, very high diesel component cuz pretty much everything in a shop when when when you go and buy something in a shop, everything has got there via a diesel powered um you know truck or via a ship on bunker fuel uh or you know so it's basically been delivered via a diesel powered or a bunker fuel powered um you know device or or vehicle. Um, but you can see in the see in those yellow bars there how how much higher diesel prices impact all these areas and and I've got a chart there in the far left also which shows that Australia is the most diesel dependent economy in the in the world just about because we we we consume more diesel per capita than just about any other country and the reason for that is we're a a very large country. So again to get to to move goods around you have to move goods a very long distances which means you know diesel trucks diesel trains so use a lot of diesel. We're also obviously got a very um intensive agricultural sector and a very intensive mining sector and they also both use a lot of diesel and that's the charts in the middle there.
You can see the industrial uh oil use.
So transport massive uses of diesel, jet fuel, uh mining huge huge users of diesel. Agriculture huge uses us uses of diesel. Um even construction is a pretty big user of diesel and utilities as well. So you know the the these higher fuel costs are going to feed inflation across the economy and we're starting and and the RBA basically warned that we're going to start getting those second round impacts whereby business because of the higher fuel cost start um raising their prices and passing on the cost to consumers. And that just means that we're going to be in this world of pain with inflation for, you know, the period ahead. And if the war in the Middle East doesn't resolve quickly, which is the federal budget space forecast, and it ends up becoming prolonged, the pain is going to be worse.
Um, and the RBA's basically said in their minutes that and also last week, um, or after the last meeting, um, I think that was two weeks ago now. I'm sort of losing track of time. Two weeks ago, the RBA governor um Michelle Bullock said that, you know, they're going to have to um tighten monetary policy to counteract these forces.
So, you know, it's going to get worse.
We're going to have higher inflation, well, prolonged inflation, and we're going to have more rate hikes more than likely. And that's obviously not just bad for the economy, but it's obviously going to be pretty bad for the housing market as well.
>> Absolutely. And I think it's just worth highlighting Michelle Bulock in the press conference talked about those different cycles. You know, the first order, the direct impact of the fuel, the rate hike that she did wasn't anything to do with that. It was already embedded in the uh decisions that had been taken previously. The second round that she was worried about, but the third round, which is the broader issues of unemployment and those sorts of things, will work through potentially.
And that actually creates a very uncertain environment and uh you know uncertainty unfortunately also will have a flow over onto the um property market too in a further potential negative uh step down. Le I think we've come to the end of the show. Um I want to say thank you very much for all your um work on the charts and uh as always a great uh articulation what's gone in. If people want to find out more about you where do they go?
>> Okay so they can go to macrobus.com.au.
That's sort of the mothership where I write every day. also YouTube channel.
Just type my name, Lethanson, you'll find it or it's Letho. Um, pretty much just put up put up all my media interviews. Uh, you also find me on some other random places now. I did the KL Stephanovic show last week. Um, 1hour interview with with Carl and Clive Palmer, would you believe, but actually it's done about 170,000 I think on YouTube. It's been very popular. So, um, yeah, that was one of my better interviews. And also I did an interview today earlier today with Mark Boris. Um you know the the you know founder of Yellow Vic Road and Wizard. Uh he's he's a ripper bloke. Uh we we chatted for about an hour on on the budget. So that should hopefully go up um I think tomorrow or Thursday. Uh sorry, Wednesday or Thursday this week. So you can watch that as well if you want.
That'll be on his channel. Um, so yeah, I'm pretty much uh I'm I'm I'm kind of in my uphill trajectory at the moment just saying yes to everything and doing a whole bunch of shows and whatevers just just cuz it's um you know strike while the iron's hot. So but those are the places macro business leave on YouTube or just random places around the internet.
>> Well terrific le well thank you very much and um I'll um I'll get you back on next month again because I love having these conversations. I love going into the data but also thinking about the implications and uh clearly there are many implications. Thank you very much.
Uh congratulations on all the recent media work. Keep it going and we'll catch you again soon.
>> Yeah. Cheers mate. I'll speak to you next time.
>> Cheers. I'll take you offline and I'll close the show there. I hope you found that informative and interesting. I certainly did. Uh I'll be back next week with a show specifically I think on um property but haven't quite worked out the shape of that yet. So keep an eye on that. And of course, the daily shows will uh continue to be made. Uh uh another one coming out tomorrow. And so it goes on. Always more to talk about.
The dogs are still here. Yes, they are.
Oops. Push the right button. The dogs are still here. They have moved the other way. So I have to shift the camera around. There you go. So um that's the dogs. And I think it's walkie time. So that's my next plan. Thank you very much for spending time with us evening.
Please like and share and subscribe if you haven't done so. Thanks for all the comments in the chat and u we look forward to seeing you on the next live show next Tuesday. This is Martin North from Digital Finance signing off. Take care.
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