The 2026 Australian federal budget changes to negative gearing and capital gains tax have significantly reduced investor borrowing capacity by up to 30%, contributing to the biggest property price decline in 40 years. This correction is compounded by three interest rate hikes, weak economic sentiment, and a surge in new listings, creating an over-supply situation where demand is weakening while supply increases. The timing of these policy changes during an already expensive housing market has exacerbated affordability challenges, particularly for first-home buyers who entered the market under the 5% deposit scheme. While these changes may benefit first-home buyers by reducing competition from investors, they also risk triggering a broader economic downturn as property price declines affect multiple sectors including construction, removal services, and retail.
Buyers abandon Australian propertyAjouté :
Uh good afternoon, Leath, and welcome to this week's edition of the macro and the mortgage with myself, Katherine Kashmore from Land Cycle Investor, and Leath Van Onelin from Macro Business. And what a week it has been. I know you will have heaps to say this week on the fallout from the federal election and already buyers are coming to me and telling me how much their budgets have been quashed. So, um, this is a story that I relay to you last week about the first one that I heard, which was a a buyer that I was talking to prior to the election, and he told me he had 850,000 to spend, and he was thinking about investing and, you know, going out there and he's not even even using negative giving. He's investing in his um, SMSF, so you know, the changes in the federal budget weren't going to impact him. And uh, he went to his broker after we'd had a chat and came back and told him he'd only got 500,000 to spend and was it worth buying. And I have heard so many stories about this. And what was quite interesting in in my course of investigating this was you might have heard that the property firm D'Od um has now um gone into liquidation. Dash dot doshat dash dash dot I think it's I think it's called. Do you come across this in the in the news? Um have gone into liquidation anyway. and uh they wrote this whole list of reasons as to why they you know they've had to shut down and the investors that are going to be impacted and of course it's excuse after excuse about you know the economy and consumer sentiment being very low.
And then they have also said that um their clients that they're working with can no longer borrow what they you know they've gone down like 20% or something in borrowing capacity since they gone to their brokers. And so what we're really staring at at the moment is the the crash is already here because this is going to impact prices significantly.
Clearance rates are already crashing. So it it it's uh not a good atmosphere out there. So you're going to drill down into it all today. But what have you been experiencing on the ground since we last spoke?
>> Yeah, similar sort of thing. So I speak to real estate agents uh and the same kind of thing, Katherine, also in the media. Uh so some of the media some brokers quoting the media said that basically for investors now um because of the negative gearing changes that their borrowing capacity has been shut cut by up to 30%.
>> And that kind of aligns with what you just said and that the reason for that is that because investors on existing homes now can't need gear that that means that the the banks or the lenders now um basically have shaved their after tax cash flow. Right? So they're they're after tax cash flow because they're no longer getting that back in their taxes.
Uh and so they're so so now investors will run a bigger loss, a bigger cash loss than previously. And as a result, they've crimped their borrowing capacity by up to 30%. So that that's a massive change when you think about it. And I've spoken to several real estate agents, but there's one in um in Brisbane I'm pretty friendly with. We chat a lot on the phone, and he uh basically said to me, he goes, "Mate, the market's dead."
Uh he just said straight out, market's dead. um huge change in the last month.
Um so and and also just in the data and I'll show some of that in a second, but there's been obviously a big collapse in auction clearance rates which is a sign that demand's weakening or very weak but also there's also been quite a big surge in in new supply as well. So um you know vendors are now putting homes in the market and and so we're getting over supply now with so more homes less demand equals you know pending over supply. Now, it's not over supply in a structural sense for the rental market and that sort of thing like you know population versus housing construction.
We're talking about overupp um for for listings, market listings versus buy demand, which obviously takes into consideration a whole bunch of factors, borrowing capacity, interest rates, tax settings, people's income, sentiment, that kind of thing. And sentiment's obviously incredibly weak at the moment because the budget, three interest rate hikes, a lot of concern around the economy. We've had a big uptick in unemployment in the most recent ABS data. Uh, and I think that's going to get worse as well. Uh, with all the AI and roll out and plus, you know, we still got the potential for a, um, I guess fuel rationing potentially down the track. It's, you know, we've sort of avoided at the moment, but um, yeah, that that that's also a risk down down the road as well. So, yeah, I think um, I actually went on Carl Stefanovic's show, got invited back on after going on two weeks ago, which was great. We had a good 20-minute interview and uh yeah, I was pretty uh I got a nice sound bite which I said at the start where I said, "Cl, we are facing the biggest decline in property prices in at least 40 years." And I did that for the for the clickbait, but obviously um that doesn't necessarily mean it's going to be a full-blown crash because the biggest decline in 40 years according to Kotality is 8.2%. Right? So, we only have to get almost close to double digits nationally and you have the biggest decline in 40 years. But I honestly think we're we're we're looking at that. And of course, as you say often, uh, you know, a national decline of up to 10% doesn't mean 10% everywhere. Obviously, there's some markets that'll be a lot worse than that. There's some markets within capital cities. Uh, there will be some properties that will go up probably, you know, some might go up, but um, you know, an average across the nation, a 10% decline roughly is, you know, pretty decent and in some areas it'll be a lot worse than that. And as I mentioned last week, you know, there are areas around Melbourne for well, I don't know if you call them Melbourne, but yeah, the Mington Peninsula that that's still part of Melbourne. Um, you know, places like that have already seen massive declines in values because of the changes in the uh land taxes affecting investors, holiday homes, that sort of thing. Uh, so some of those properties has been reported that they they're taking 50% haircuts. So they basically doubled during the pandemic and now they've h haveved. Um, so you know, there are areas that are already bleeding and yeah, I I think that after talking about it for years, this could actually be, you know, the closest thing we get to an Australian house price crash now.
Probably more a correction, but even so, you know, the the biggest decline in 40 years. I think I think all the ingredients are there now.
>> Well, what's interesting about that headline, of course, is that we ran with that headline gosh, you know, a couple of weeks ago prior to the federal budget. We and the newspaper sort of grabbed hold of it. But, you know, the the biggest decline in 40 years, you you have to think back and and anyone that's watching this that remembers the early 1990s recession and how that impacted Australia, um, and how that impacted property prices across the east east coast. It wasn't a pleasant time at all and unemployment shot up, you know, to around 10 11%. Um, and that's actually what I think that we're we're heading into because and and the reason being because when you get property prices that fall, it's not isolated to people that own property and okay, property prices fall. It brings down the entire economy because there are so many businesses that are choreographed around the property sector. So, you know, we're not just talking about the finance industry and the real estate companies and the insurance companies, but we're talking about, you know, the removal companies and the furniture companies and the building materials and construction and the traders and everybody that relies on high housing turnover to, you know, increase activity in their own businesses. But also as rates go up, you know, for the people that have got a mortgage, then that makes them rethink about what they're spending. Discretionary spending drops and that's what the consumers uh sentiment index, that's why they're all plummeting to record lows. I think the one came out in America from the University of Michigan um showing also a record low. So, you know, these these things are going to really impact the economy and really bring everything down with it. And you know, you could argue that the the budget and the changes to negative gearing and capital gains tax were very poorly timed in that regard. I would argue it. I I don't >> I I agree 100%. So obviously look you know um I I personally as you know my view is I don't mind the changes. I think they're necessary from a although you know with the caveat that they should have cut personal income taxes as well obviously like you don't just you know raise effectively raise taxes but then don't cut it elsewhere and get proper tax reform. They didn't do that.
But, you know, in isolation, the the changes will take investor demand out of the market. Obviously, you know, through this borrowing capacity thing. Um, you know, investors just aren't going to want to lose more money to um to to invest into a market where looks like capital growth is going to be gone now for years and there's a good chance of decline. So, you know, it's going to kill investor growth. But that's obviously good for first home buyers, right? Lower prices is good for them. It also means when they rock up to an auction, they won't be competing against an investor who's got more got a bigger wallet and bidding against them. So first home buyer demand should go up other things equal which means that the home ownership rate should go up. So and all those reasons it's it's good but it's also the the timing is incredibly proyical, right? So they so they brought this in at a time when at the start of the year Australian housing had never been as expensive. So relative to prices to incomes, the years to save a deposit, all that stuff was the highest in history. Even the mortgage payments to disposable income before the RBA hiked three times was pretty close to almost the highest in history. Now it would be the highest in history. Now we've had three rate hikes. So you know that was obviously and then we had the obviously we had the Middle East uh crisis and all this other stuff. So um yeah, it's not great timing because it's going to exacerbate exacerbate the downside obviously. Uh so you know not not good on on um on that measure but >> yeah it it it just goes to show like sometimes timing's when you do policy changes timing matters and just if they done it as the market was in a bull run you know it would have made more sense to take heat out of the market but now the market's already had already turned before they did it. Now they're just going to exacerbate >> with rates were already going up. I mean we we already had that actually that was the point that KL Stephanovic I'm sure you'll share it on on your channel but KL Stephanovic was trying to say >> in your last interview which was you know hang on wasn't what was happening anyway slowing the property market down and you know the argument about getting first home buyers in I just premise this with I mean I've dealt with hundreds and hundreds of home buyers over the years and I've never met one that hasn't been concerned with once they buy into the market their property price going up. It is a psy a psychological thing when people buy property they want the price to go up and and you know having dealt you know because I've worked very hard in the housing affordability arena by you know working with Prosper Australia for many many years and uh even there I would say that you know when people own a house they're happy to get out when all the policies are working in their favor and they give them the biggest winfall gain. So you know this, you know, people can can scream and and you know, you've been writing macro business for years and you know, I used to contribute to articles to macro business. So you know, I know the audience there and and you know that they've been the spec, the idea of the investor being being the enemy is is great to sort of preach about, but you know, that's the way policy has taught people to invest in this country is to uh build their wealth through speculating on property. And nobody wants to get caught red-handed on the other side. But let's get >> Can I can I one last thing before I get into that? So again, the the people I feel most sorry for are those who suck it into the 5% deposit scheme, right? So you know that came in October one last year. At that stage at the start of when around about Octoberish, uh even into November, people still thought the RBA would least keep rates on hold or maybe even cut. And you know, they they were enticed in the market. They were still the market the sentiment was still pretty bullish on on home prices.
>> And tens of thousands of them basically dived in on that 5% deposit scheme. And now, you know, um, come 2026, they've seen three rate hikes now, and now prices are tumbling in Sydney and Melbourne at least, and then they're really slowing quickly in the other, uh, you know, major capitals as well. So, you know, th those people are facing, you know, having bought at the top, then seeing their mortgage payments go up when they borrowed 95%. So, they're taking out a mega mortgage, paying, you know, extra money every single month, like a lot of extra money, and they're now potentially being negative equity.
That sucks for them. And on your point about turnover, Tom Panos did some great shorts uh on YouTube or Instagram, I don't know, it was on YouTube, I think, and he actually talked about how uh when when turnover collapses, it tanks the economy. He basically made all the same points you made. You get less removalists, you get less activity across across the spectrum, >> right? So, and we're sort of going into a low turnover environment now. And part of that's because of the the the tax changes obviously quarantine negative well sorry grandfather negative gearing for existing investors. So you know some in existing investors is going to say well the prices you know the outlook sucks so I might as well just hold on to it. Um I'm not going to sell. So they'll hold on to the properties to get less turnover because they're incentivized to keep it because they've got those negative gearing benefits. Even though I think losing money on something where you're not getting capital growth stupid but that's the psychology. Um so you know we are likely to get a lot less turnover now and it's also going to affect state budgets obviously because stamp duty is a major driver of you know it's the main major driver of most state government's budgets as well. So yeah, it just filters through >> they'll they'll backflip. They will backflip on this policy that is >> Yeah. Which which would be a shame be a shame because that's not a bad policy but again ill time right because you do it it's the sort of policy I know obviously that election last year and whatever but it would have been a lot better to have done it a year ago when we were in an upswing uh or even two years ago would have been better as we were going into a you know we had basically couple years of very strong price growth. It would have been better to have done it two years ago as we're going in upswing rather than now when we're already into a downswing after the RBA's hiked rates and we got this stubborn inflation from the Middle East oil shock which means the RBA is going to remain on you know remain with higher rates for longer sort of thing. Um so yeah the the timing could end up killing it killing the policy.
>> Well I mean the the point is is that we're going to fall into a recession. I mean that that is a firm forecast and mine has been for for many years around this time of the cycle. And if we fall into recession, there's only one thing that a government can do. They can either if they want to remain in power and that is to get you out of recession as quickly as possible. And the quickest way for governments to get you out of recession without fundamental taxation reform, which was what you called for, which was, you know, doing more of a shift by taking income off off um off labor and productivity and putting it onto land natural resources. That was the kind of structural reform that would have balanced this out. But because they haven't done that, because there it's a tax grab from every orifice, then when we go into recession, the only way and the quickest way for them to get out of that without doing a massive policy change, tax policy, which doesn't seem like they're going to do, is to um pump the property market. And the way to do that would be to reverse these policies straight away. And that that's why I think that that it's it's highly likely that they'll do it. I've I've had um I have a friend that works in Treasury and he's saying to me, "Oh, look, the government's not phased at the moment.
The only thing that they're looking at is the startups and maybe tweaking, you know, doing a few policy tweaks, but um it's easy not to be phased at at this point. You know, when we get closer to the election and the economy is really suffering, which it will be because if we have the biggest fall in 40 years, then just as Tom Panos has accurately assessed as well, it's going to bring down um the economy. It always does.
Whether it's uh rate hikes that that pinch people on one side in terms of you know them defaulting a high number of defaults and unable to pay the debt or whether it's something else you know it's that credit squeeze that is really going to uh produce that that downturn and that downturn is going to impact all sectors of the economy eventually not to mention the stock market which carries an awful lot of property wealth um you know so I mean we've discussed we've discussed little bits of this before but before people sort of fall asleep on us I Guess we need to get to the charts.
>> Oh yeah.
>> Go through um the data for this week and then we can um spin on to have a bit of a chat about that and spin on to some questions that have come through um in the comments from last week.
>> Yeah. So so just a just a quick you know I always give the weekly house price update uh thing nowadays. So um this is the totalities daily index. I always do the 28 day change just the easiest way to track it. And yeah prices are now well they were falling a week ago.
They've just fallen a little bit more now at the five city level. So this so the totality index if you're just joining for the first time it's basically daily index that they that they release and it's only for the five major capitals. So that's obviously you know Sydney, Melbourne, BR uh Brisbane, Perth, Adelaide and then there's a five city aggregate which is basically it's almost a proxy for the national house housing market but it's not quite because it doesn't include the smaller states or the regions but either way you know it the national market tends to follow those five major capitals and the the five major capitals obviously shown in the orange line there. So that's fallen a bit steeper in the negative.
Sydney and Melbourne are still losing losing money. Uh sorry, falling in value. They've been falling in value for months. Um Brisbane, Adelaide, and Perth are all slowing very quickly. So that's pretty obvious. Um they're still recording positive growth, but that is slowing down very very quickly. Now, this is more a Sydney and Melbourne story because the auction mark auction market's only really strong in Sydney and Melbourne. Like that they dominate.
They're they're auction they're the auction capitals. The smaller markets don't do that many auctions. Um but you can see the auction clearance rates and historically they've tracked prices very closely. So uh I've used Kotality for the auction clearance rates. So these are the final clearance rates got the monthly average.
So I've taken basically the first was it three or four weeks of May because we've got this weekend coming up which will count to this month next week and I've average it out and I've done the average for every single month. So the national level which is heavily weighted towards Sydney and Melbourne. You can see the auction clearance rate on the left. Uh left chart that's tracking down levels we haven't seen since the pandemic. Um and I've put it against Prop Track's quarterly price growth. I use Prop Track because that's the longest series I've got where you can do this. You can see the correlation very strong. Like auction clearance rates are a great leading indicator. They're pretty much the the best real time indicator we have for the strength of the market. Well for Sydney and Melbourne anyway. Um you can see Sydney in the middle middle auction clearance rates have absolutely collapsed but they are tanking in Sydney. Um and it's only a matter it's it's obviously going to feed into prices. You can see the correlations there again pretty strong. Um and Melbourne on the right hand side also tanking but not as bad as Sydney. But overall you know what it basically tells you is that the buyer demand has has fallen heavily especially in the last sort of you know couple weeks. Well, it's really it's been this year that's it's fallen in Sydney and Melbourne, but the last couple weeks has gotten pretty dire. Um, at the same time, we've got listings piling up. So, every single week, Totality releases a market indicators report. And what and this is one of the charts that's in that report.
It's pretty handy. So, what it shows is basically the the change in listings as of the start of this week versus the start the same time last year. And you know a few months ago basically Sydney and Melbourne had more listings than the uh previous 12 months a few months back but now pretty much well most markets now are following them. So Perth still u total listings are still down on last year in Perth, Hobart and Darwin but the you can see the new listings now are rocketing well have gone up quite a lot everywhere. Um, and Brisbane's a really real uh interesting one because a couple months back Brisbane had a massive shortage of listings and it was well down on last year. Now listings have spiked in Brisbane now. So they got new listings which is like less than 30 days I think it is. That's the um that's got up nearly 20%. On last year total listings up nearly 4%. But across every single market new listings are up. So people are versus the same time last year. So people are starting to put more homes in the market. Now that's probably you know it could be uh because of the three rate hikes people saying look you know I need to get out if you're an investor like I'm losing money whatever the new tax changes it could also be the fact that in places like Brisbane Adelaide Perth it could be inner stator who've just basically made a moss in the last 5 years saying time to take profits I'm getting out um and because they don't see much capital growth ahead it could be any any number of reasons but regardless demand is down supply is up so that's obviously not good for prices.
Um now this week we got some data which actually suggests that you know interest rates will remain on hold at the June uh RBA meeting. You know almost definitely will remain on hold but could remain on hold for a bit longer as well. Obviously depends on the data but uh the the the Reserve Bank space got two key performance indicators right so one of them is obviously to keep inflation between its band of 2 to 3%. Now we're above that. Uh the other one is full employment. That's sort of its two ying and the yang of what the Reserve Bank does. Now the latest uh last week we got the latest unemployment data for April and it shot up. So the unemployment rate shot up to four 4.5%. Now that doesn't sound too bad, but that's sort of the highest since late 2021. And you can see the chart on the left that it was well above what the the latest statement of monetary policy that was released earlier this month from the RBA was expecting. And the most alarming thing is the middle chart. You can see that youth unemployment has shot up. And youth unemployment is typically a sort of a barometer of the strength you of the direction of where the labor market's going. So it's it's always the most volatile component. It tends to be sort of the canary in the coal mine.
Well, youth unemployment has absolutely shot up and it's gone up. It's over 11% now. Let's say it's 15 to 24 year olds.
Um, so based on the unemployment rate alone, if you just look at that one part of the RBA's key performance indicator, there's no way they'd hike rates again because it's going because unemployment is way worse than what they forecast at the start of the month. [snorts] At the same time, we also received inflation data this uh for for April. So the Reserve Bank of Australia does inflation now monthly. Used to do quarterly, now for the last several months now does a monthly series. And you can see that inflation the trim mean inflation was 3.4% which is still above its target but was actually marginally better than what it had forecast in it latest statement of monetary policy earlier this month was basically in line with its forecast.
So if you put those two things together unemployment rate way worse than what the RBA forecast inflation within its forecast that would tell you that the RBA is going to keep rates on hold. And that's not that unexpected because the latest minutes from the RBA, which were released, uh, I think earlier this week, um, if not late last week, I'm losing track of time, they suggested that the RBA board members said that they were, um, they were inclined to leave rates on hold to see because they considered the monetary conditions to be tight after three rate hikes and that they want to see how the data evolves and how their economy responds to their rate hikes.
So, they were already leaning towards keeping rates on hold. That was before those minutes were done at the last meeting which was at the start of the month. Since then the unemployment rate spiked. True man inflation's no worse than what they were forecast. So that just tells you to keep on hold. Um it could be that if the unemployment rate keeps rising that they RBA does just stay on hold anyway and and we could be at the peak. Now the financial markets have actually trimmed their forecast for rate hikes. So they were tipping uh a couple weeks ago they were tipping two two more rate hikes this year and an end of year cash rate of 4.85%. 85%. They've now trimmed that to a slightly less than 100% chance of one rate hike. So, they still think we get one rate hike, but they're not certain about it. So, it's sort of like an 85% chance we'll get one rate hike this year. Um, so the financial markets are now moving toward starting to move away from being uber hawkish on rates and that's that's sort of in response to the the unemployment data and the inflation data. So, that was interesting. Uh that's pretty much it for the data uh this week.
>> Um obvious yeah I've got the cycle stuff later but uh yeah that that that's that's the main um you know housing and inflation data that we've got this week.
>> Yeah. Yeah. I mean it's not looking too good is it? And I think that the main consensus as well is I don't know and I I thought this is interesting from KL as well because I sort of feel a bit the same about it and maybe I'm just mixing in the wrong circles but I don't know anyone who's really happy with this budget.
>> No. No it's not. Well, again, it's sort of um you know, Australians are doing it pretty tough right now. We've had uh years of falling real wages. So, yeah, I know I know they rebound a little bit last year for a couple quarters, but by and large, you know, the everyone's purchasing power has basically gone backwards, right, the last 5 years. So, we're getting less for our money than we were 5 years ago. That's there's obviously some people who have had big pay rises and who are doing better, but you know, typically speaking, everything costs more than it did. uh money doesn't buy as much as it did five years ago, but then we're still paying more tax every year, right? So, because this is the whole bracket creep story I've been banging on about. So, we So, we've gone backwards in our purchasing power, but we're paying more tax to the federal government because of bracket creep, right? Because we've still had wage growth, but and that's pushed us into higher tax brackets, pushed up our average tax rate, but that wage growth hasn't kept up with inflation, so we've gone backwards or cost of living, right?
And I'd argue that the inflation rate anyway is not that accurate for cost of living because a whole bunch of stuff that's not included in it. Um, you know, etc. Yeah, it's not really a cost of living indicator. It's just a measure of changes in prices that the, you know, they use. So, um, yeah. And so, you know, people are annoyed that they're going backwards. And then, and the government's obviously implemented three ways to increase tax through tax of trust, >> which I don't care about, be honest with you. I don't use one. So, those are a tax dodge uh by and large. I'm sure there's some legitimate uses for them, but you know, it it is a way to shelter some tax. Um then obviously negative gearing capital gains tax changes. So, the fed all these extra ways to raise money, but they're not giving it back to us. Like like they'll argue, oh, we're doing this oneoff, you know, $250 rebate for taxpayers and all this other stuff, but it's it's >> you're not going to get it for a year or so, and it's chicken feed, right?
>> Yeah. It's nothing. It doesn't make >> And it's not structural. It's not a structural change, right? So if they're going to structurally change the tax system to raise more revenue, they should structurally change uh you know index the tax brackets or whatever so that we don't just have to pay more tax every year even though we're going backwards in real terms. And the problem with it is Katherine like so we've gone backwards the last 5 years and we're going to go backwards the next year or two. It's literally baked in the RBA's forecast >> because we've got this Middle East this global energy shock that's driving up inflation to a level that's above the the um wage growth. So, we're going to go backwards in the next year or two, but we're still going to pay higher taxes through because our average tax because the because the bracket creep and our average tax rate is going to go up. So, I think people are sort of fed up. They're fed up with the waste, the excessive government spending that we've got, the um I mean, dare I say, people are getting a bit sick of the wokeness in everything now.
like I'm sick of that, but but they're also, you know, sick of the extra control of our lives that the government's trying to do with all this censorship garbage and, you know, there's a whole bunch of reasons why people are sort of getting fed up, right? And they're sick of big government. They're sick of their intrusiness in our lives. And I think that's one of the reasons why they're kind of a bit jacked off with the budget because they're like, well, you know, you just it's just a tax crap. Yeah, we we've had so many comments that have come in and I don't think any of them have anything positive to say. Um, apart from a few which I have nice and positive things to say about you, Le, but um we we've had one which I thought was was quite perceptive and and bearing in mind this this was uh made six days ago. Now it'll be seven days when this podcast comes out, sure. But um from macro V5QW who says, "House prices in Australia almost entirely credit driven.
Negative gearing has always let investors borrow more than owner occupiers because banks add the expected tax refund back to serviceability. Most investors rely on that boost, remove it for established properties as the 2026 budget does and borrowing capacity drops 10 to 20% immediately and the CGT changes, market um fear and tighter sentiment, prices fall. That's the ownership market. The rental market is completely separate. High immigration keeps pouring new tenants in who can't yet borrow to buy. They compete for existing stock. Vacancy stays crushed.
Rents keep climbing. Even if lower prices eventually pull some first-time home buyers out of renting and into ownership, that shift is slow.
Immigration driven rental demand is fast. Result, rents get squeezed even higher while prices soften. Two different markets with two different drivers. Um that I I I would largely agree with that. But I think so what I was going to mention is that Louis Christopher has been doing the rounds.
Actually, anyone that is on Instagram, um he's a really good one to follow as well. SQM Research. Louie does really good little little sound bites um about, you know, what he's seeing in his indicators and he's got some brilliant leading indicators over at SQM Research and he was uh saying that, you know, he was laughing at the idea that rents would only go up uh $2. He he thinks that they're going to go up much more than that. The negative gearing changes are going to impact that quite significantly. And I think that's because of the trends that we're seeing in this comment. Um, so are you uh factoring into your own analysis a steep rise in rents?
>> Yeah. Yeah. But but not because of the tax changes, right? But because we've the government's ramming raming massive mass immigration still like still historically high and the budget's actually revised it up by 55,000.
>> Um so so obviously running a very high immigration policy into a market that that is getting more supply constrainted >> because >> that's the point. Yeah.
>> Yes. So, so it's not it's for me it's not about negative gearing or the capital gains tax changes. Like we we'd be getting this rental growth regardless and we have been getting that rental growth growth regardless, right? I I don't see it because of that. But to your point, I didn't know Lou Chris was got Instagram. So, I'm going to start following it because I want to get his sound.
>> Yeah. Yeah. He's he's good. He's >> Yeah. I It's funny because I'm on Instagram. I've never once seen one of them come up. So, I'm gonna have to actually search him out. But the um Yeah. So, yeah. Yeah. No, definitely.
We're going to And and and that comment was very good. Like I'm sure this um yeah, you're not going to get any any uh any debate from me about any of that stuff. It's I think the person nailed it on the head. Um hit the nail on the head.
>> Um there's one under it. 2% of migrants purchase a house within their first year, 40% within 5 years, 75% after 10 years. Don't know where those figs are from, but you know, >> sounds about right. No, no, >> they have a big impact on house prices directly as well as indirectly through forcing up rental prices. I think the argument that's being made is that if investors are going to clear out of the rental market quite quickly, which is sort of what we're seeing, right? We're seeing a lot. I mean, I'm hearing it and I'm I'm a little tiny little bit in the property sphere, you know, and and I'm, you know, in my own business, you know, people are talking to me more about selling than they are about buying. You know, investors have sort of disappeared. They're now >> It's already in Melbourne. It's happened in Melbourne.
>> Yeah. I mean, it's been happening in Melbourne for quite a long period of time, but it's been kind of like a slower trend in Melbourne because you still have those incentives there. But the, you know, the point is is when migrants are coming in and you've got investors exiting and those migrants predominantly are going to be um renting for a few years before they've saved up enough to be able to buy, then that's where you're going to see the pressure on rents is the fact that there are two things now combining that we had that anyway.
>> Yeah. Yeah. Well, but the thing about it is so obviously if an investor sells, right, they either sell to another investor or they sell to an own occupier. So if you sell to sorry, you sell to a >> Yeah.
>> a renter that becomes an own occupier, right? So So if you if if that happens, the rent you get you reduce the rental demand by one, but you also reduce the rental stock by one.
>> But you you you do you do with all else being equal except when you're pumping immigration.
>> Oh yeah, but >> you are constantly increasing the rental demand quicker than >> 100%. Yeah, >> but my point about that is even if the negative gear and capital gains tax tax changes happen that would be happening anyway >> because um yeah like so if investors sell out >> yeah well not but it's um but it it's wouldn't have any more impact on the rental market though the reason being right so if you've got 10 investors and then half of them sell because of the you imagine an economy of 100 homes I don't know I'm making this up or 50 homes and and you've got 10 investors and half 50 50% those investors sell because the rule changes and and you got 10 rental families because you got 10 investors. Well, half of those like those homes either will sell to another investor or they're going to sell to an owner occupier, right? A renter. So, at the end of it, you have five rental families and five owner occupier uh sorry, five rental properties because yes, you've reduced your your rental supply by five, but you've also reduced your rental demand by five. This is other things equal, right? But obviously if you're pumping in all these new people coming in every year, which we do anyway, um that's going to yes that increases rental demand, but it doesn't increase rental demand anymore. Like the equilibrium doesn't change because um yeah, we'll have fewer rental properties overall. We'll have fewer renters, not including the migrants because renters will become own occupiers. So that cancels it out. That means all the extra demands from the migration. But you get that anyway even without the um the tax changes like the the the whole point of this is the tax changes don't really change the supply demand equilibrium on their own. What changes is this excessive immigration and that's been going on for the last four years anyway regardless of these changes. Okay. But the fundamental problem is unless Australia does a Canada and it dramatically cuts immigration to a level that's below the ability to add homes, add build homes, like add new housing stock to the market. We're going to continue to have this rental crisis.
>> Like negative gear capital gains tax doesn't make any difference to that. Um it would be different if most negative geared investors bought new homes, but about only 20% of them build new homes.
Like so about 80% of it existing, right?
and and we're keeping negative gearing for new builds anyway, so that shouldn't really affect that. So, I I don't buy that argument that the tax changes make a difference to the rental market really. And and the reason why you just have to look at Melbourne, like I wish I didn't include the charts this week. I I've used them previously. I pulled them out of the chart pack, but um you know, Victoria's had a big decline in the number of rep rental properties across the state since the government massively raised land taxes. So the number of rental bonds in Victoria has shrunk for two years. So we have less investment properties, but Melbourne Melbourne's rental growth has been slower than most other places. And that just tells you that >> Melbourne's getting more first home buyers now because >> Well, that's true.
>> Yeah. So, >> as you said, the population has exodus has has gone from Melbourne.
>> Oh, yeah. Yeah. No, that that that that helped as well. But but um but the thing is I guess my point is it's an immigration it's an excessive immigration story not a tax policy story when it comes >> primarily it is I just think that the excessive immigration coupled with this going on at the same time is you know it's going to seem more of a the point is it rents were going we knew we know rents were going stratospheric anyway I think this is going to accentuate it because of the immigration coming in combined with the investor sell off as in you know we're going to have people that can't, you know, jump into the uh the buyer market straight away because, you know, when immigrants come in, they're not allowed to buy. They need to get their permanent status. They need to save for a deposit.
Um but >> it could it could have an impact in certain are so if I don't think in the aggregate it's going to make any difference uh because again investors will sell to a former renter and it it just nails out one less rental than we're selling to.
>> Oh yeah. Yeah. But that but that's a separate issue, right? That so that that we were doing that anyway. We're doing that irrespective >> but now but now we're doing it more because we're losing. Yeah. I mean I I understand what you're saying.
>> Yeah. But but but so I'll just so in certain areas though so like for example because we're doing this we're keeping Dina gear on uh new new homes not established.
>> We could have the rental supply being pushed into high-rise. a brand new high-rise cuz that's new property or or out in the fringe, but established areas that have established properties, there might be a shortage of rental properties there and over supply somewhere else.
So, so you know, it could shift in certain areas, it will have an impact, but I think overall it's going to be it's going to wash out just like it has in Victoria.
>> I think eventually it will eventually it will. The um the interesting thing of course and we discussed this last week and uh Steve um put has uh 6718 has made a point with this and this is that people are not going to be rushing into new or they'd be very silly if they're rushing into new property just for the negative gearing and the tax benefits because new properties just do not go up in value. prices are falling, >> you know, the prices will the prices will fall for two or three years in a townhouse um before they go up and in apartments they can fall and stagnate for uh many many years. So, you know, Steve is saying your your point is spot on regarding negative gearing. Why send a dollar to say 47 cents unless you pick it up with capital growth. Yeah.
>> Um that is also taxed at 47 cents in the dollar. Negative gearing is just an extension of normal accounting rules.
You pay tax on the ne net net of your income streams. If one part of your business is losing money, you can subsidize that for a time, but eventually you need to to fix to fix it or divest it. Um, but uh the the the thing and I think this is why because there's a few comments here saying, "Oh, Le, you're getting so famous now." Which you absolutely are, Le and it couldn't be more welld deserved after years and years and years of banging on about this uh every single day. um you're you're so well qualified to talk about it and you are the only economist that I know has come out and had a chat about uh budget bracket creep sorry and the blonde masterpiece um is very happy with you here and says I totally agree that my biggest issue with the budget is the slap on the face 250 bucks of your own money back and ignoring the indexation of income tax brackets they don't need any more money I even want them to backdate income tax brackets three to five years.
>> Yeah. I mean, look, I I I mean, they never do that. Let's be honest. But look, the simplest solution is just to index the tax brackets by 2 and a half%.
Right? That that's the middle point between the RBA's inflation target. And over you'd think over a 20-year period, inflation should average about 2 and a half%. And the reason why I say do that rather than just index it by the headline inflation rate which is you know if we were to do that at the moment you'd be getting they'd be getting shifted up by about 4% or something or whatever it is the headline inflation rate 4 and a half%. Um so the reason why I don't think they should do that is it that becomes proyical. The reason what I mean by that is when you get a bout of high inflation because of you know high cost push inflation from high fuel costs or something >> and the RBA is trying to slow the economy the last thing you want to do is index the tax brackets by the amount of the inflation rate and over stimulate.
So if they increase the tax brackets by 4 and a half% or whatever sorry just I've got a brain fart I can't remember what the headline inflation rate is about 4 and a half%.
um you then would give taxpayers obviously more money and then they go out and spend it and then that that circumvents the RBA's um you know uh ability to tame inflation. So it becomes proyical and also means when you got an incredibly weak economy. So say we're in recession and inflation's tracking at 1%. Well, you don't want to then only index tax scales by 1% because you're not giving enough stimulus to the economy. So what you do is you do 2 and a half% and just leave it at 2 and a half%. It means that when you're in a high inflationary period, people don't get indexed as much as the inflation rate. So, you're not putting as much money into the economy. But then in a weak period, in a recession, you overstimulate. So, you give people a bigger um increase the tax scales more than what the inflation rate is because you're in a recession. And then that gives people more money. So, it ends up becoming like a economist call it an automatic stabilizer. uh whereby during a boom or sorry inflation boom I should say not a boom we don't have a boom in the economy we got an inflation boom during inflation boom you don't put more money in the economy because of the inflation boom and during an inflation bust or recession you don't uh you know take money out of the economy you end up putting so you you you want to work at o at at cross purposes to what the or at uh counteryclical to what the economy is doing to help the RBA out >> I hope that made sense >> yeah yeah yeah it makes total sense I think this is another point which has um come out and and you know I I've I've read comments about it before but I haven't heard much uh spoken about in the media about it. Um but this is from uh Stony CC. Apologies in advance for the um swearing in this in this >> Oh just just uh uh maybe someone get demonetized just do don't fully swear just um just do F.
>> Um I will do that. Yes, that's what I was thinking. Um I think that the CGT is getting too complicated. what which is what is scaring people and tax accountants are getting are getting hit with questions before they have a chance to analyze what the rules are alternatives and what they need to do for their customers while at the same time complicated tax systems will skyrocket skyrocket tax accountant fees so yeah without clear direction being put forward things will go up it's all just this is sorry this is just CGT all the taxes are getting complicated and I believe that this is deliberate. You f up your taxes, the ATO fs you up. The government is going to clean out your money any and every way they can. This is the that that that the vibe behind that comment is the vibe behind every social media post that I see, which is that the government is going to do everything that they can to uh rob you of your uh of your money.
There was another good one down here somewhere.
>> Yeah. Well, can can I just give a like a quick example, you know, of of the my thinking on it and this is so I'm often asked to do, you know, extra work, right? So, you do a consultant report or whatever and >> and I'm like sometimes I'm just like it's not worth it. Like you do to do a consultants report >> uh like say do a report on XY Z, right?
They'll go, oh, you know, we'll pay you 10 grand or something.
>> Yeah. to basically give up your weekends for the next two two to three months and work your absolute backside off to write a massive report. And I'm like, well, I'm the top margin tax rate, right? So, I'm lucky enough to be on that, but you know, I'm almost at the peak earnings of my life, but also the peak expenses of my life. Got two teenage kids, you know, expensive. Everything's expensive when you're when you're this age.
>> And I'm just like, well, why would I do something and give up work really hard because I already work super hard at macro business and then do all the media and all the other stuff I do. I don't have much spare time. Why would I do that when I've got to give up 40?
>> Well, what's that? $4,700 of that 10 grand has to go to the federal government.
>> So, basically, Elbow is, you know, it's this meme, you know, Elbow is now a shareholder in my company. Once you get to the top marginal tax rate, and if you're like me and you work um, you know, you you can do take on all different jobs and you're in the same situation. When when you get that top tax rate, you're like, why would I bother? I've literally got to give up just about half of this and give up all this time and work my butt off for for $5,300, right? And end up working, you know, an insane amount, giving up weekends for the next two months, all this sort of stuff. It's just not worth your time.
>> And that that's why I think I think honestly the tax rate should be should, you know, top out at 30%. really >> and and we should we we you know we should broaden the tax base and get it in all these other areas that we could like consumption and you know land resources and all that sort of stuff all the efficient areas because like I I've literally knocked back work which is pro which is productivity that the economy doesn't get >> because it's not worth my time to do it.
It's like it's just going to be too too taxing on my time and it's and and the payoff's not big enough.
>> Yeah.
>> Right. So, it's not worth it. And think about, so I'm just one person, but there's probably tons of people through the economy >> who just go, "Well, no, I'm not doing that. I'm not going to do extra work because it's a disincentive to do it because I, you know, the the payoff's not big enough." So, the federal government ends up getting nothing out of that instead of getting, you know, say three grand and I get to keep seven.
>> Yeah. Yeah.
>> It's ridiculous.
To >> totally agree with you. I mean, I've just written a report and and I felt the same at the end of it as well. It was like tons and tons and tons of work. I had to scramble around negotiating for the fee of what I was going to get paid for it and then you know your GST and it you know and and your tax that you got to pay you sort of come out of it and unless it's good for your career.
>> Yeah.
>> It's it's you know unless there's a personal incentive from that point of view it's just not worth it. And that has been the core of the argument through economists for centuries which is about not taxing earned income but moving taxes to unearned income which is this idea of moving taxes onto land and and um you know and you know mineral resources and super profits banking super profits and so on and so forth rather than taxing people's earned income and and but one comment I think here which is is kind of quite interesting is um alleandro Uh, Bry Bertie, sorry if I get these names wrong. Leaf, don't you think they're keeping some kind of adjustment to fiscal some kind of adjustment to fiscal drag for next year or just before the election as always be a oneoff because they sell it as them doing something extra while really it's the bare minimum.
>> Oh man, I I love hearing that term fiscal drag. So fiscal drag, I haven't heard that since university. It's basically that's bracket creek, right?
Actually, you know, the treasury used to call it fiscal drag. So I think that that's the official term for bracket creep. So just in case you're a non-economist, whatever and you don't know what that means. So the person's just referring to bracket creep. Yeah, I think they're right. I think the government will use this as an investment as a as an election bribe and they'll go, "Hey, we're, you know, we're going to give you we're going to increase the top rate to 200, you know, going to kick it at 200,000 instead of 190 and they're going to increase the tax scales a little bit and give us back some of the bracket creep they taken over the last, you know, 5 years." um and they'll use it as an election sweetener. But what we really need is governments to just index it and that way and and and by indexing it means they'll have to be more careful with how they spend our money because as I as I've said before and this annoys me about the way it works here. Um in Australia they've got a guaranteed route to just making more and more money every single year in the budget. bails out their poor decisions, their poor expenditure because a they import hundreds of thousands of people every year in immigration and that those most of those people work and that increases their personal income taxes, their base.
So they go, "Yeah, immigration's awesome." The federal government doesn't pay for most of that. Most of the cost of that goes to the states and, you know, other areas of the economy. Um, so the feds get all the benefit from the tax revenue side. And then B, we got this fiscal drag bracket creep where every year by doing nothing even though we've been going backwards after inflation for several years just because of inflation effectively, we get pushed into higher tax brackets and higher average tax rates. So they can do nothing and the share of our income that's paid in tax goes up every single year. Like it only goes up by a fraction of a percent every year, but over a 10 year period that adds up. And I said in the um said I said previously in the federal budget they said that 52% of federal taxes this year came from personal income taxes and they forecast that by 2030 it's going to be 54.5%.
So they're actually forecasting that their share of taxes that come from income tax is going to rise by 2 and a half%. In the next five year or four years so it's literally in there baked into their forecasts. So they can be, you know, completely waste our money uh on a whole bunch of BS. Like there's now $15 billion of offbudget expenditure now in the budget. So that's stuff that's not in the um I don't know if I've talked about this before, but I'm going to go for a very quick rant. won't be too long. But so if you go back about 20 20 odd years ago when the Howard Costello government was in and we basically got down to almost zero federal debt and that's because I mean part of that was because we had obviously commodity boom but also the the government flogged off a whole lot of assets like Telster and all this other stuff. So part of that was taking our assets to cash converters and getting cash for it used to pay down debt. Um Peter Costello to his credit um he didn't want to count that all those asset windfalls from Telster and all this other stuff as budget revenue because it was a one-off right it was it wasn't uh regular revenue. So he created this term called the underlying budget deficit. So what that is that's basically your day-to-day government spending and tax and that was actually done for the right reason. But what the governments have done in the last, you know, decade or so is they've reported this underlying budget deficit, but then they've pushed all this expenditure off balance, off off budget into these other areas. And there is an alternative measure that's buried in the budget called the headline budget deficit. And that's basically the cash flow version of the budget, which is what really matters over the long term, right? It's cash in versus cash out. But what they what they report and what the media report, it's a bit like when you use GDP versus GDP per capita, right? GDP on its own is useless. It's a BS measure, but it's what everyone reports when per capita is what should be reported. That should be what everyone focuses on. The federal budget, they report the underlying budget deficit, which is basically your ordinary taxes versus your ordinary expenditure. That's sort of layman. It's a bit different than that, but that's sort of what it is. And then they got the headline budget deficit, which is when you factor in uh all this other stuff, which they've managed to push all these offbudget vehicles. So, for example, when you know the snowy hydro for example, massive blowout in that project, we've got all the other renewable energy projects.
It's all hidden billions and all this different slush funds and all this other crap that's completely non-transparent.
Um the hex, you know, the student debt forgiveness, they pushed that off balance sheet as well. um all these other areas. They basically have worked out ways to push all this expenditure into these special vehicles and all this other stuff that sits off budget which is not captured in the underlying budget deficit which is what everyone reports and that's the government that's the thing that the government holds up and goes look we're going to be in surplus in 10 years this sort of crap they've actually managed to push about $15 billion now into these offbudget vehicles and it's just become so non-transparent now Chris Richardson to his credit the former you know partner at Deote. He now does his own um consultancy called Rich Economics.
>> Uh he he's been like one of the main guys who's been pushing to basically for for the headline budget deficit to become the main measure now because the governments have become so dishonest that they've they've now using this bogus measure that was introduced 20 years ago for the right reasons but is now being used to hide the budget spending >> in a non-transp a non-transparent manner. So anyway, that that's a quick rant, but yeah, we got 115 billion bucks sitting in in these off off balance sheet, you know, funds and all this other crap that the government does to to to hide the debt basically.
>> Yeah. Again, something that that people don't don't discuss or talk about. Um, I wanted to read out this comment because I think that a lot of property investors feel like this. I certainly come across many that feel like this. And and um this is from Wally 7444.
We must have said something in last week's podcast about property investors because he's got uh not doing anything as a property investor. How about the huge amount of interest we paid which we which we only got by working hard and all the repairs and improvements we made for the tenants while keeping the rent almost stable for 10 years. We are evidently bad people and should be taxed on the small gain we make even though it will be negative after the interest we've paid. You think we should be sacrificed to those young people who spend all their money on travel and clothes should get a home for a cheaper price. Clothes and clothes should get a home for a cheaper price. Who is selfish in this equation? Um, I do know a lot of of uh investors that have kept rents stable that that didn't rack up rents and and you know, I mean I can I can name handfuls of them that over the years that I've spoken to that kept rents that didn't rack them up when they could which is why I think that you kind of miss it that when because cost start going up. there are a lot of properties that are under rented where they can >> Yeah, that that look that that's possible and and I guess you know cuz Louis Crystal I know in one of his articles he said he he thinks that we're going to get a big spike. I was like oh I don't think we will but I guess we got to find out right and we don't know until you you don't know until it happen until you actually observe. So he he could end up being right and I could be wrong. I hope I'm I I hope I'm not wrong cuz if I am wrong, it just means cuz I you know I care about rental affordability and and it's going to get worse if I'm wrong.
>> I [laughter] mean I I've always said this at pro because you you can't blame property investors. You can't fire the arrows at property investors and a lot of people sort tend to do this particular the ones that aren't that haven't don't own property particularly the young renters will say oh you know these these property investors and it's kind of painted as this idea that you're sponging up rental homes and and you're not giving anything back to the community kind of concept. And I've always said, you know, when I was working at Prosper and we would, you know, advocate for for changes to take speculation out of the property market is that the one to fire your arrows up is government policy because government policy has channeled many people into into that sector. They've taught people, they breastfed people on the notion that the way to get wealthy in this country is to become a speculator and own a property or two. Um, and so people that have been doing that for years and said, "Okay, we did that, but we worked really hard to do it and interest rates were were really high when we did it and we had to work two jobs or whatever else and now we've got a tenant in there and we were good to the tenant and we renovated." There's quite a few comments here of people that have said, you know, we renovated the home, we put solar panels in, we did everything that we could, and now we're getting hammered on the other side of it. And that's why, you know, I think that >> well, the anger, it's not just that. I think that the fact that the government lied as well. They lied. And so even if they come even if we get to the next election and this is why I don't think that they're going to get back in again.
I'm I'm in complete contrary to uh people that I talk about got a good friend who works in Treasury who's convinced that they'll get back in that the polls won't swing against them because we've obviously got this split now between one nation and the coalition. Um but you know they lied and so anything that they come out next time and say you know even if they come out and say okay we're going to give you income tax cuts and we're going to we're going to you know solve the bracket creep and everything. Why would you trust them?
>> Yeah I mean let's be honest they lie on everything. Right. So you know before the 2022 election I've got several articles where Elbow was saying yeah oh we're not going to return to high immigration list of stuff. Well look what's happened right? We've never had immigration higher. And they deliberately when after they got elected in September 2022, they did the jobs and skills summit whereby they used that as a Trojan horse to ramp immigration. Like they literally did it and it was explicit. Um so you know they lie on a lot of stuff. They lie with their housing targets. You know, oh we got 1.2 million. It was never achievable, right?
And then you know Clare O'Neal's up there all the time saying you know um still crapping on about how it's all about supply. It's all about supply and you know not ignoring the demand side through immigration all this other stuff. And then they lie about, you know, the renewables. Oh, renewables are cheaper. Renewables are cheaper.
Renewables are cheaper. They keep saying it when they're not. Like, you [laughter] know, just look at South Australia, right? It's the Australia's renewable superpower. 75% of its power comes from renewables. Most expensive power prices in the world. And despite the fact I'm just going to a very quick rant, which is not not related, only 30 seconds or so. the default the default default market offer was released um this week by the Australian energy regulator and that basically cut uh power costs across Queensland, New South Wales and Victoria does it separately but they also cut theirs as well.
>> Um they're all three coal coal powered states. The one state that was that's renewable that doesn't have any coal South Australia basically got no price cut right and then Chris Bowen gets out there and goes see renewables are bringing down your bills. the Australian energy regulator has cut by, you know, whatever um after years of price increases. And the reason why we got the cut was because we had mild weather. So the weather, we had a very mild summer except for a couple weeks over over January. And we've had very mild weather this year or in the last 12 months. So as a result, when you have mild weather, you have fewer extreme days. You get less um times when power prices surge because you get extreme demand, all that sort of stuff. We had less of that. So the wholesale prices fell, right? So it's that that's the reason, but it's hilarious that the the so-called renewable superpower state of South Australia has a the most expensive power cost in the country and b was the one that basically got no price cuts uh when all the the coal states got price cuts.
So and then and then Bowen's line to us going, you know, renewables are the cheapest source of energy and then and then basically saying that that's why the power prices went, you know, fell, which is complete BS. It was it was mild weather. Um but you know yeah they lie about everything right >> um you know so yeah but to your point on the negative gearing right I don't blame the investors that part of the reasons why people negatively gear is because they're t they're taxed so damn hard in their earnings and it's one of the only areas where you can reduce your earnings and then hopefully make a return at the other end right that's reduce your taxes and again if you >> if we reduce the top the tax rates we flatten them out to 30% or something and then got taxes elsewhere there'd be less incentive to negative ly gear and to do all these tax minimization schemes, which is what cuz it's it was it was one of the only legal tax minimization schemes that was available for wage and salary owners. Like if you just got a regular job, there's very few avenues to actually reduce your tax. You can put your money into super or you can neglect gear or there's not many options. So that's one of the reasons why so many people are doing it because they're getting fogged on their taxes, right, >> on their income taxes. If you fix that that problem, you fix a lot of other problems.
>> Um and and a comment in the similar vein, I won't I won't read the whole comment. Um Gina Ray says, "I don't agree that investing in housing is not a productive asset. We continually work on our houses and maintain them, and it certainly feels like work. Also, I'm pretty sure our tenants think it's productive. Houses don't just sit there and do nothing. They require ongoing effort and expenditure. If you think shares are a better alternative, I ask how. Usually people invest broadly in companies all over the world. So I can't see this helping Australia as much as local property investment. And let's be honest, there are not many people who want to put their money into someone else's startup business to help fund their retirement. As you've noticed, the problem really took off after immigration was ramped up. So why punish investors? And then it sort of goes on on with that. I mean the productive part of of real estate is the housing which is why the argument is always if you're going to tax anything tax land because that's the unproductive part of housing.
You don't I mean this is the this is the argument and again we did a lot of work on this across Australia but the argument was um regarding the how rates are um assessed whether they're assessed on capital improved value which means that the more money and more investment you put into making your house look good which improves the whole look of the neighborhood uh the more you get taxed on it or whether you're just assessing it on site value as many um uh localities in Victoria in you know Melbourne used to be used to be assessed on site value and someone assessed on capital improved value which allowed a number of studies to be done on the difference in the economic outcomes of the areas that [clears throat] were just impre uh just assessed on site value and the land value rather than capital improved value. And of course, if you assess on land value, there's more of a stimulus than to use the land and to improve your property because you're not going to be taxed more for doing so. So that's that's would be my comment to that. But what >> mine is mine is um okay. So if you're take me for example and I've got I don't know a million bucks to invest.
>> Mhm.
>> It does nothing for the productiv productivity of the nation for me to go to turn up to an auction on a home built in 1940s. I'm just picking one a typical Ash Burton house where I live like a 1940s house that's been around for years and just buy it like borrow heaps of money. Oh, so yeah, not not even have a million dollars. Let's say I borrow I've got 100 grand in the bank and I borrow 900,000 or whatever to buy this house.
What's that doing for the economy? I've just taken out a $900,000 mortgage to buy a home that was already built to basically let it out to someone, right?
It doesn't do anything. Um, so that that that's what I mean about unproductive.
The other unproductive thing is the fact that Australia's land values, residential property values like in aggregate across the country is now like 12 trillion or something is just insane.
like it would make no difference to the productive capital the productivity of the nation if that was if that was worth six trillion, right? So if if we never let our housing stock inflate in value like it had and it was worth $6 trillion instead of $12 trillion, household debt to disposal income was 90% of incomes instead of 180% of incomes, >> I'd argue we'd be more productive economy because a lot of that capital that's just pushed up housing values would be invested elsewhere in the economy >> and that' be more productive. and and and just sorry one last point in the early 1990s Australia's banks lent two/3s to businesses >> and one/3 to well just under one third to housing and the rest is personal loans right now it's completely flipped around right so so you go to now versus the early 90s >> and now banks lend about 2/3 to mortgages and only one/3 to businesses and personal loans so it's like 25% to businesses and one and the rest is personal loans that that to me is a bad equation so if we went back to 1990 and the total value of the housing stock relative to the economy was I think one and a half times GDP >> and now or maybe it was two like my memor is sort of it was under two like back then now it's four times GDP so it's roughly it's it's doubled as a proportion of the economy well how's that made us better off right and and now we've just got households that are severely indebted we got a banking system that has become overly reliant on mortgages now mortgage lending rather than lending to businesses which actually create stuff um I that that's what I mean about been unproductive.
It's not that the house in itself is unproductive. Of course, it's not. Like, I'm living here, you know, provides me with shelter. I run macro business out of it. I'm taking this podcast in my crappy man cave, which needs to be bulldozed, but you know, it's good enough for now. You know, that sort of stuff, right? That that provides productivity. But if this house this house probably worth about 2 million bucks if it was worth 1 million and I'd bought it for half as much as I did.
Well, it'd still I would still be taping this podcast and I'd still be I wouldn't be talking about housing though cuz we wouldn't have a bubble or you know we probably wouldn't be talking as much about housing affordability, but um I'd still be running macro business and all that stuff. So yeah, it's product like it provides me with something. But having a housing stock that's worth four times the economy and having households indebted to the tune of 180% of their incomes on average is less productive than if the housing stock was two times the economy. Households are carrying half as much debt. The banks were lending 2/3 of businesses instead of one/ird to businesses. Um you know that would be a more productive economy in my view.
>> Yeah, I I totally agree actually. I think it's I think it's more than I think only about 10% of bank lending last time I looked went into uh business but I might be wrong on that. But I I mean I think the point here is that when you do work you know when you do have a property and you do work on it and upkeep and everything that is a productive part of owning real estate is that the you know keep keeping the upkeep with the property. But totally agree. I mean the tax system has encouraged people to invest here for speculative gain rather than you know as you've seen swaths of of land in in America where people are primarily investing for the rental incomes you know and the rental uh yields there you know are sort of 13 14% um gross even even more than that in in the US but of course then you will have to buy very low as well. You buy for like 50,000 100,000. Sorry I'm scrolling through these comments as I'm talking here. Um, oh, there's one note here. Hey, Katherine, I absolutely against negative ve gearing for some and not for all.
Either we scrap it completely or we allow owner occupiers to deduct mortgage in interest against income too. I also think the claims that acting negative gearing will increase rents is misleading. Rental yields will increase because prices are falling, but landlords don't set the price of rent.
The rental market does. However, anecdotally, I know of many landlords who are not charging market rent to keep good tenants and simply because they are happy not to raise it every year. And remember, that's very different from what you would get if you had black black rock, you know, a company like Black Rockck coming in and buying sways of rental properties and bill to rent.
You know, the the rents would be would be indexed. But ultimately, I think it's entirely possible that below market rents will increase to the market rate and this will lead to claims that rents are increasing. Unfortunately, the average Aussie will draw the wrong conclusions when this occurs.
>> Yeah. Yeah. I mean, it's a pretty fair point. It's um Look, look, I don't agree we should allow own occupiers to deduct their mortgage interest >> because because that that'll just pump more money into the housing. Like, you know, as I've said, we've already got a housing market that's 12 trillion dollars, four times GDP roughly.
>> Do we need more capital going into the housing market?
>> Like, I don't think so. That's just going to increase people's capacity to pay.
>> Yeah.
>> Um like you know can you imagine so we've just talked earlier in this potty about how >> this simple change natively native gearing on established homes has reduced borrowing capacity by about 30%.
>> For investors or it's up to 30%. Right.
So can you imagine the reverse of that >> if the government said oh you know what from now on own occupiers can now basically negatively give their established home right >> borrowing capacity is going to go up >> right? So it could go up by 30%. For owner occupiers and so if we reverse that on investors so they got their 30% back >> and then we allow owner occupiers to their negatively gear so their borrowing capacity goes up by 30%. That's just going to inflate the hell out of house prices. We're going to have bigger mortgages um more capital more of the nation's capital or you know through the banking system going into housing and it's just going to distort the economy even more. like we've already got, you know, some some people joke well they used to joke about New Zealand being this, but we, you know, they used to say New Zealand's a housing bubble with an economy attached.
>> Well, that would literally be Australia.
Like Australia is basically a houses and holes economy already.
>> It would just become a >> Yes. Yeah.
>> It become even more of a houses economy.
>> Um because we borrowing capacity would increase straight away. Um unless they bought in a whole bunch of other things to counteract that, that would be the impact. So, I think that would be really dangerous policy.
>> Yeah, I I agree. I probably probably wouldn't go for that. I I totally agree with you on that. Um I totally agree with you on that.
Actually, it's interesting. That's what I was thinking. I knew I was thinking of something I was going to talk to you about because the last time the borrowing capacity was slashed this much was when we had the Royal Commission into the banking sector.
>> Yep. And uh we had a huge credit squeeze and that really produced a very significant downturn.
>> That that sorry that that was the one that Kotality said was the biggest in 40 years.
>> Yeah. Yeah. Now and and that was Yeah. I mean that that was really uh quite significant at the time in 2018.
>> Yeah. And and and now now we've got >> cycle now.
>> Yeah. Well well think about now. So now we're starting from a higher >> base because prices are so much more expensive now than they were then. And we've got interest rates. The cash rate now is at 4.35%.
>> Yeah.
>> Uh markets still think it be 4.6, but if it goes to 4.6, that's the highest cash rate in 15 years. Well, that's a lot higher than it was in >> 2019ish or 2018 19. We met the Royal Commission and the um their credit squeeze from Apperon investors and that sort of thing. Uh so, you know, if prices fell by 8.2% 2% then nationally and we've got these tax changes and everything else and the a much worse starting point and much higher interest rates that's and you know potential for unemployment now to shoot up because of you know the the monetary tightening AI slowing economy blah blah blah um that to me tells you it will be the biggest decline in 40 years.
Yeah. I I mean I I absolutely don't think it'd be too hard to do that. I think >> you have to go back to the Great Depression to find what happened, you know, all the the 1890s or 1840s. Um I was I was just smiling at this comment.
I actually had to It was uh uh Mr. Eric Eric Eric Andy who says, "I actually had to stop watching for a minute because I was laughing so hard when you called the housing minister of flock." Um so there's one for you. There's some brilliant comments here that I would read them all out because some of them are really funny. Um, but I and maybe we should end with this one because we're going to shoot over the hour and then we might get comments saying, "Oh, you've been rattling on for way too long." Uh, but uh, Method 341 said, "Leath, I would love to hear your thoughts on the AFR article called Are Migrants Driving Prices?" That was garbage few days ago.
>> Um, oh, obviously it was arguing that they weren't pushing prices. Is that right? Because you >> Yeah. Yeah. And I think I actually respond to that person. I apologize.
>> He said, "I might write an article on macro business."
>> You know what? I completely forgot. I might have to do it for next week cuz I just forgot about it. I just forgot about it. Um, yeah, it was complete garbage, right? So, it was the usual thing.
>> Cherry picked a whole bunch of charts saying, "Oh, look, migrants aren't pushing up prices. It's all this other crap." You know, how is it that at the start of the pandemic prices went up when immigration turned negative? Well, maybe that's because uh interest rates got cut to 0.25%.
Um, you know, the usual garbage, right?
And then they got the great institute in there and you know the usual flogs. But um yeah the thing about it is um I've never argued and I don't think you have or anyone else has ever argued that immigration is the only driver of house prices. There's one ingredient right? Uh so you know you got borrowing capacity, interest rates, tax settings, sentiment, uh incomes, like there's a whole bunch of you know bank of mum and dad. There's a whole bunch of stuff right that that um and 5% deposit you know government policies like 5% deposit schemes, first home buyer grants. It's just one of those factors. But um in my article next week, I probably will put a chart. I think I've shown it here before where I've done it and Jared Min's done it with separate data and I managed to get the same result but using I think World Bank data basically or OECD data. If you plot the change across the developed world since about 20200 I think and and now or the most recent data we've got growth in house prices versus growth in population. there's a very strong correlation, right? So, so, so stronger population growth countries, they've experienced stronger house price growth countries than those with softer population growth, >> right? Stands to reason. So, that that just tells you that internationally does have an impact.
>> Um, it's not perfect. Like obviously all this other stuff has an impact as well.
>> Um, but the bigger impact, as I've always said, is rents. Like definitely has a much bigger impact on rents because rents aren't impacted by borrowing capacity. they're not impacted by, you know, uh that you you don't leverage rents through the by by borrowing, right? So you don't take out a mortgage to buy rents. So that it it's not impacted by tax settings. Um yeah, it it so it's more of a pure supply demand market. Supply being number of homes built versus demand being number of renters, >> right? It's more of a pure market. And there was that period last decade where rents did fall or rental growth fell quite heavily between 2015 2020 because we had that massive high-rise apartment boom and 60% of apartments are rented versus only about 20% of detached houses. So the supply of apartments is does matter for the rental market as does immigration. So that's the supply side is mostly apartments. The demand side is mostly immigration. And at the moment the supply of apartments is very weak because we've had the massive run up in costs. And now since the pandemic got built, we got labor shortages, labor, we got builders competing with big build infrastructure projects, renewable projects, all this stuff. So the capacity is not there to build these apartments >> that the renters typically go into. At >> the same time, the government's running mass migration, which is driving up rents. Now, that article didn't talk about that really at all. It was all about just the prices. So, they so they cherrypicked the starting point and they BSD a lot of stuff to basically say, "Don't blame the migrants." Like, no one's blaming migrants. We we we >> I hate when they say, "Oh, you're blaming migrants." It's like, "No, I'm not. I'm blaming government for running an excessive level of immigration that is above the nation's capacity to build housing and infrastructure." It >> it doesn't it doesn't take a lot to to um understand that. Couple more comments. I'll read this one out because I do know I need to do this. Katherine needs to improve her background and get rid of the team's meeting blur and put together a respectable backdrop. Perhaps raise the camera up to eye level so she isn't looking down. Invest in proper microphones. I absolutely do the reform Samuel. Um, and it's a it's a Zoom blur.
It's because my office is always a mess so that you don't have to see the mess that sits behind me.
>> Well, I I tell you what, I've got all this stuff in the background to cover up my disgusting wall. [laughter] So it's >> it has been a long time since since we started using a Zoom a lot where I have not invested in a camera and I've just clicked record and blur. So um point taken reform. I'm so I'm sure many people other people think that as well.
So that's why I'm reading that one out.
But I thought I would finish with this one because I think this is one where we kind of overlook it and and there's this concept that young people really don't do this a lot. And in my line of business, I come across it all the time, but uh this is from Ross um Perry, who says, "My daughter is 23. We live in Sydney. She and her boyfriend have saved 50 50k. They want to buy something like most other people. A few months ago, I suggested rent vesting as a way to start. Maybe buy a house in a country town, work up to a bigger deposit. So, Labour have now just killed off off killed that off and made it completely pointless. So, all you smirking budget lovers, what do I tell them now? this policy has not helped them at all. Looks like just a grubby tax grab.
>> There's people that are upset about it.
>> Yeah. But but to their point, right?
>> So, you know, why if the government done the same thing but had then cut their income taxes so they could actually save more money because they weren't giving so much away to the government. Well, then you wouldn't be as annoyed about it, right?
>> Well, well, I I agree. I mean that that that is the core point about this is if you're going to take speculation out of the property market, you have to compensate it on the other side with we shouldn't be taxing people's labor wages. That is my my opinion. Actually, there was a comment on that. I couldn't find it again, but but Steve Paul came back which which I think this kind of encapsulates this argument. Came back to Ross and said, "Wait for houses to drop.
Make sure their jobs aren't going to be replaced by AI. Financial reset is coming. They're going to rug pull the middle class to separate them from assets. So he's saying wait till they drop and get in and then Ross Par has come back and said so you want everyone who's worked their ass off to lose value in their house. Lots of hardworking people have recently bought property to live in. I'm sure they'll be thrilled at the thought of their house going down in value. Seriously, you know, this is the corporate move which I keep saying nobody wants what is the point of buying property >> when you price going downwards. in Germany because I've written a lot and I've done lectures on Germany and how they do it over there and of course and and you would know this um from those people that came over. Do you remember that time those people from Texas came over and we met them in the city and went for a walk with them and they their idea was you know we don't buy housing we can afford to buy the house in a in the best neighborhood in Texas on you know on a single income and um but they don't buy until they're ready you know until they've coupled up and they're ready to stick their kids through school and that's kind of like how it operates in Germany as well. you you rent for a long time until you're at least that's how it was. I don't know if things have changed.
>> Yeah. But I mean unfortunately like you know we we don't have long-term tendencies here and you wouldn't want to do it cuz it's just it's so insecure. So it's all right if you're young but you've got families and that you don't want to be renting like >> and also in Germany when you move in on that tenency the place is gutted you know so you have to like put your own kitchen into it and everything else. So >> yeah and you get like 10 year lease or something like that. But yeah completely different system. Um, look, I mean, fair enough, but I don't I I understand that point of view. If you've just taken out a mortgage and like one of these new first home buyers who use the 5% deposit scheme, you don't want to see your home fall in value, right? Because it could be negative equity and then you also have the annoyance of I just paid this, it's worth that, I could have paid that if I waited, right? So, so that so that's that's pretty annoying.
>> But, I mean, I I I personally don't Sorry, my alarm's going off. There you go. Um, I I I personally don't um I maybe I'm different. I don't know. I don't really care the value of my house.
I I've paid this house off. So, I'm lucky enough, fortunate enough to be in that situation. And I think it's cuz I've got two teenage kids and I'm worried about them. So, I'm sort of a has been, right? I'm 48. I'm a hasband.
like I've already had most of, you know, I've obviously still going places, but but I'm already here and I've already got the house and I got the, you know, the wife and all this stuff. I'm like the dude from um letting the days go by, letting you know that fantastic song by talking heads. I'm that bloke. I'm worried about my kids, right? Cuz so they're they're they're teenagers, got one 18y old, one 15y old about to turn 16. If the housing market, if the house prices in Melbourne don't go up or even fall a bit, I'm actually happy because it means that they'll have a chance to get into the housing market at a reasonable price. And if if if say Melbourne's already flatlined pretty much for 5 to seven years, it's basically got done nothing. If we get another 5 to seven years of that, it could be that by the time my daughter buys or if she buys in a decade, she might actually be able to buy relative to income for the same price I purchased at, >> which would be great because that actually But if prices keep going up, Yeah. Okay. I'm richer on paper even though I'm just living here. It doesn't do anything for you. But also means as a parent I'll have to help them more because they're going to need bank and mom and dad to be able to buy >> and that's going to make me worse off, right? So, you know, if Melbourne prices double in the next 10 years, well then I'd have to somehow find a way to kick my daughter a million bucks or something so she can or 500 grand or something >> to get her in the housing market which then is going to negatively impact me because I'm not going to be able to retire. Um >> just on that because there was on social media of people saying well you know now the bank of mom and dad won't be able to do it because you know we're getting all our uh you know capital gains is being taxed and differently and everything so that they're not going to be able to help their kids. So how does this help the kids because now they're having the money taken off them. this whole thread.
I mean, Ross Perry, you've got like a whole argument going on here as I scroll down with people coming back saying, you know, you're very negative, thinking so negative you'll never get anywhere with your investments, which is I mean, so it's quite a funny argument that's going on here. But, um, yeah, people saying, you know, we don't want you investing in country towns and buying property because that's pushing out the people from there. It's it's an ongoing argument, but we really have been we pushing it this week and we we haven't even got through all the um uh housing cycle data, but we didn't >> Yeah, sorry. We we we keep we keep promising that, don't we? And um but see, it's not cuz it's not time sensitive. It's like one of those things where, you know, um I can I'll have to pull it out before the next quality data comes out, so I have to update it all.
But um yeah, we definitely I've got them I've got them here. Well, I'll definitely run through them. I just think, you know, we end up just having such a good chat about all it's such a hot topic now at the moment. Just this housing correction, impact of the budget changes, a lot of debate. It's worth having these these discussions on it while while it's hot because in a few weeks time it might not be hot and then we can talk about the non-timesensitive, you know, stuff.
>> Yeah, absolutely. And you know, it's really good going through the comments and thank you to everybody who engages with this content and leaves comments.
We really do appreciate it and you know it's great to sort of get your opinions and read out the good and the bad. So keep them coming and we will be back next week and next week we will we'll make time to go over the um cyclical data that you've got and uh anything else that's come up. Do you have any final words for us? Uh Le >> No. Um just uh yeah, grab grab the popcorn, enjoy the ride. If you if you're sort of like me who doesn't really care what happens to house prices, like I don't sort of like I'm not, you know, I'm not invested in it, so I don't really care. Like I'm I'm I'm an observer of of what's going on. So I don't really Yes, I own this house, but I I don't really care. Um it's actually a pretty good time. It's actually a great time to write articles. So for um macro business readership always goes up whenever whenever there's a down cycle in property. Even though I'm not writing the clickbait I used to write. I'm I'm pretty being a bit more factual about it.
um you know not doing you know warning blah you know that sort of crap I used to write but um yeah it's it's it's a really it's very interesting time and I think also not just the I I think as we've said we're going to be in for a pretty big housing correction. Uh I mean all the all the factors are lining up now. It could change like the government could come out and uh reverse track and then you know throw a whole bunch of stimulus and whatever and you know and it could that that could stifle the the downturn but as it's standing right now all it's a perfect storm building right so we've we started off at a super expensive level of home prices. We've now had the RBA tightening partly because the government spent too much at the start, but now it's caused by external factors because of rising energy costs and everything. So the RBA is tightening. We've got very you got historically high interest rates. Well, high in terms of the last 20 years. Um, and then we've got now a weakening labor market and now we've got these tax changes which just came out. Let's be honest, they came out of nowhere, right?
3 months ago, nobody thought these tax changes were coming. And then it became a rumor and then the rumor got steam and then it became like it was almost a certainty and then we actually end up getting them. Massive change in the market. And I really encourage people if you want to sort of get a real time read on what the industry is thinking, go and follow Tom Panos on YouTube cuz he does great shorts and stuff. Now he he's an auctioneer in Sydney and stuff and and I actually really like Tom and I respect him because he's he's fought cancer like four times. He's been to the brink of, you know, death from what I've heard and he's come back every time and he's a really sort of positive just one of these guys who just always walks forward, right? He's one of these guys like he can be getting he's just always moving forward sort of guy, which I I respect those sort of people no matter how tough it gets, he just keeps moving forward. But he g he's given some great sort of insight into what's going on in the industry and what the thinking is and on the ground and you know, if you want to get a sort of boots in the ground feel, he's a really good guy to follow. And yeah, I just think this this period that we've got now is going to be, you know, we we could look back on this in 5 years and go, geez, that that was a that, you know, that was a very interesting time. Bit like the Royal Commission was an interesting time at at the time. But I think this is just going to be bigger than that cuz we've got the negative gearing changes. We've got the capital gains tax changes which were being flagged at that time but never came through. And then we've got this, you know, these high interest rates and now we've got obviously the war in the Middle East and we don't know how long this thing is going to drag on for. Now we've got the AI rolling out across the economy which is threatens to just push up unemployment. So yeah, it's it's grab your popcorn. It's going to be a good fun ride.
>> Yes. Uh if if we weren't um in the middle of it, it would it would be uh a bit more fun. Anyway, we call it a day there and uh we will uh reconvene next week.
>> Sounds great.
>> See you then.
>> See you.
>> Okay.
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