Letter to PM on Residential Property Prices and Foreign Investment Laws
on April 30th, 2010 at 9:46 am
The news that the Rudd Government was rolling back its changes to Australia’s foreign investment rules on housing came as we were still on The Walk. Just prior to starting it, I received a note from Dr John Daffy, with the following letter from him to the PM attached. I asked John whether I could publish his letter on the blog, and he agreed.
Just as the absence of statistics on foreign purchasers means we’ll never really know the impact they had on the market, we’ll probably never know how many individuals like Dr Daffy sent similar letters to their MPs and the PM; but judging from the rapid backflip on that policy, there must have been plenty.
Prior to the change, 50% of “off the plan” apartment sales could go to non-residents; after it, 100% could; now we’re back to the 50% ratio. So the changes restore the status quo on that point.
But they don’t go far enough. The property lobby forever asserts that the cause of high house prices is undersupply; here’s a simple policy measure then to increase the supply of apartments for people who actually live in Australia. Why should only 50% of new apartments be reserved for local buyers? Why not 90%?
Allowing up to 10% of new apartments to be purchased by non-residents should more than cater for warranted purchases by globe-trotting non-residents in our globalised economy. I suspect that allowing a further 40% to be purchased by non-residents caters more to the property lobby than it does to the jetset.
Dear Mr. Rudd
Re: Australian Residential Property Prices and Foreign Investment Laws
I write to you to ask for an explanation as to why foreign investment laws have been changed in Australia allowing non residents to purchase residential property (otherwise known as family homes)
This decision has resulted in approximately 30% of family homes in inner Melbourne being sold to people who are not residents of this country and has been a major factor in increasing family home prices dramatically, in what was already the most expensive real estate in Australia’s history relative to wages.
Successive governments have also inflated prices with home owner’s grants and approximately 5 billion dollars of tax breaks per year for landlords at the expense of potential home owners (with negative gearing) Successive governments (State and Federal) have also dramatically increased immigration and ensured outer suburban land is artificially more expensive than it should be due to a number of policies which limit supply.
The Rudd Government has played a major role in increasing these prices to the absurd levels we now have with the average person completely unable to buy the average home in this country. So much for working families. It has managed to do this with the first home owners grant, a flood of foreign investors and changes to the superannuation laws.
The recent changes to the superannuation limits were “spun” as “closing a loophole” whereby the “rich” received a tax deduction. The net result of this policy is to drive people in to negative gearing in property and further inflate house prices away from the average home owner who pays the full interest on his loan( with no subsidy from the Australian Taxpayer). The Rudd government is obviously convinced that the home property market needs to be inflated even further and is very willing to support the banks in this pursuit.
To add further insult, people who are saving for a deposit on their home have the interest on their deposit taxed at their marginal rate (keeping them further away from a rising market.) They may as well be subsidizing their own landlord who is invariably getting a tax deduction.
I have watched in disbelief as governments have done EVERYTHING they possibly could to pump up house prices. Foreigners’ buying our family homes and further inflating prices is the final straw. Allowing people who don’t live in this country and do not pay tax to drive Australians out of Australian homes is a national disgrace.
I call on the Rudd government to roll back immediately the foreign investment laws which allow this national disgrace to occur.
Yours Sincerely Dr John Daffy
Just to add to my previous post.
The demand is real and exist but I did not address issues about deliberately releasing land slowly to sustain these high prices. I did not even address huge intake of migrants or other issues such as opening the property market to non residences.
In reality the demand can be manipulated for decades and decades as we have seen from 1980 to now. However, I strongly believe the end is near. Not sure whether this can carry on for 5 years or 10 years but people were saying 2008, then 2009 and 2010. Already 5 months into 2010 and still think not this year.
TITINT, Aac, Marco2, ak, and mickeyc,
Thanks for your thoughts. Great discussion.
Mickeyc, I feel like I failed in my quest. Nevermind…It’s been fun trying.
Some interesting data – dwelling approvals up again….charts are now looking quite steep. HERE COMES THE SUPPLY…..(I may turn bearish yet!!)
http://www.abs.gov.au/ausstats/abs@.nsf/latestProducts/8731.0Media%20Release1Mar%202010
Also found another link which puts australia’s price / income ratio into perspective. Not sure about the source though. Has anyone seen this before?
http://www.numbeo.com/property-investment/rankings_by_country.jsp
ak @ 121,
You said
“However I would be careful with using the word “permanently”. Some of the processes which enabled the change in relative prices of housing compared with other goods and services are reversable in the long run – especially the availability of cheap financing.”
I admit my economics is not strong, but the availability of cheap credit moves the demand curve does it not? The effect on supply curve would be to lower the cost of production (lower cost of capital) and shift it to the left?
But I take your point on the supply curve. I was a bit extreme saying “permanent”. Government can always subsidise land again (as they did prior to the 1980′s) and the supply curve could shift back to the left.
bb,
In my opinion the availability of cheap credit dramatically increases the purchasing power of home buyers.
Cheap financing didn’t make the houses cheaper – quite the opposite. It made them larger and built using more expensive materials what offset the dampening effect of lower financing costs on total production costs. Buyers actually wanted to increase their exposure not to reduce it.
I would not be surprised if the era of cheap credit may be soon over. Then the supply curve will also shift back. People have to live somewhere after all.
http://www.bloomberg.com/apps/news?pid=20601010&sid=aMbfBKW.uKn4
Spot on!
ak @129
Just expanding further, if the property spruikers claim there is a shortage of property and thats driving home prices upwards, i assume then as house prices are falling, as the GM from Residex said on radio ABC yesterday morning,60% of houses on the market have dipped 3% so far this year, i assume we have a housing oversupply!!!
I agree, cheap money encourages more debt driving up home prices. Population growth is not the main driver.
Robbo
I agree about cheap money and its conitation to debt it causes inefficiencies, unproductiveness and results in the mess we are now in. All, Banks Lenders and Borrowers played a part. Responsibility may be attributed to the smart versus the dumb. It is immeasurable. Who is smart and who is dumb under the law? Degrees I guess depending upon the level of the transaction. Common denominator -Wanting to gain something in advance of earming it = GREED. A very human trait.
We’ll see just how we adjust to the enevitable correction for in simple terms there must be one just based on the imbalance of what I have just stated – One smarter party taking advantage of a dumber party with both thinking they are going to win, when only one can. Common denominator=GREED
Govts also contribute for their GREED is power (and wealth their pensions from the public purse)
It will be interesting to see just what unfolds within the next 12mos to 24 mos.
I have sold everything at 65 years of age and having been a punter (not horses or gambling just business, a goer all my life if you like)I watch with interest for no matter how much the housing market goes up it is wrongly based and eventualy cash earneed will relplace asset leveraging in a productive form of earnings. I don’t think in the scheme of things that the time is too far off say 2 years outset.
“a) Greece will default
b) Key banks in the Eurozone will be seized by governments
c) Euro will devalue a bit, to the benefit of EU exporters
d) The EU admin will use their control over private banks to change financial regulations
e) The US will follow”
hi frank,
the greek debt problem is a bank impared assett problem. the imf and the
“a) Greece will default
b) Key banks in the Eurozone will be seized by governments
c) Euro will devalue a bit, to the benefit of EU exporters
d) The EU admin will use their control over private banks to change financial regulations
e) The US will follow”
hi frank, let me try again, i accidently hit the wrong key.
the greek debt problem is all about the potentially impared assett exposure german and french banks among others have in regard to greece. so i doubt very much if key banks in the eurozone will be taken over by governments. the whole purpose for the imf and eurozone bailout of greece , is to bailout the banks that have exposure to the greek sovereign debt problem.
from my understanding of ECB(EUROPEAN CENTRAL BANK) banking operations , the NCB’S (NATIONAL CENTRAL BANKS)control currency issue, in this case euro’s, and its there responsibility to co ordinate monetary policy in a manner that allows them to achieve the ecb mandated interest rate target. now in the case of greece they are running deficits that are upwards of 4 times greater than EMU(european monetary union) mandated targets.
so they have broken the rules, but my curiosity lies in what would happen if they keep breaking the rules, and keep running large deficits in defiance of emu guidlines in order to reflate their economy. lets not forget the the greek central bank is responsible for currency issue, not the ecb.
they would have difficulty in co ordinating their interest rate regime with the rest of the eurozone, but so what.
so rather than take on some harsh imf policy regime and potentially dismantling their automatic stabilsers, they just keep flouting emu rules and there treaty obligations, run large enough deficits to counter act any deflationary forces, issue no bonds , and dare the emu to expell them.
i have to dig into this bit further to see if its a plausible scenario. it may not be. but we are talking about a legal framework , so it may not be worth the paper its written on.
so you may be right the greeks may default regardless of the imf stepping in, because the austerity measures will certainly undermine social and political stability, which may foster a breakaway movement within greece anyway.
surely allowing greece to run large deficits for a sustained period of time allowing the emu to underwrite the assett exposure of those german and french banks to greek sovereign debt, is better than a potential political and socail revolution in the republic.
the US situation is totally different, in that it is sovereign in its own currency, so it is at no risk of insolvency. furthermore it is the global reserve currency. the US government can honour its liabilities in a blink of an eye, in terms of making portfolio adjustments of various investors bank and treasuries accounts .
if greece wants to play by the rules it has no such sustainable options available to it, since it has signed itself up to devolving its currency sovereignty.
im just musing out aloud on this situation, and im prepaired to accept i may be wrong about the greek situation
“Spot on”
hi bb,
jim chanos gets a mention. he became notorious for aussies, in putting mac bank at the top of his shorting list a few years ago. at the time i agreed with him, because i had been on about the dubious dealings at mac bank for years.
well, mac bank is still around, and may be still around for awhile yet, so we both have that one wrong for the time being.
well, chanos is now worried about china, so he is shorting us.
the link is to someone who has a more optimistic view on the china situation
http://www.abc.net.au/lateline/business/items/201004/s2867068.htm
it will be interesting to see who gets it right.
mahaish.
Talking about the Mac Bank and others. Page 8 of the AFR Wed May 5 “Big four stick to script” by Jane Searle.
The article in breif discusses the “margin” between deposit and loan interest narrowing considerably with the latest interest rate hike. The article states “Macquarie Bank analyst Tom Quarmby said the big four banks had recognised that “it’s a pointless exercise to cannibalise each other’s term deposit rates and no one except the consumer wins” ‘A period of irrational pricing is ending as banks like the Commonwealth and Westpac slow mortgage growth, while all banks have increased the term of their funding” he said.
I love the part where he basically says it’s a pointless exercise to have competition when only the consumer wins.
It just about sums up investment banking, a statement that Goldman Sachs would have been proud of “To hell with the customer, What about us”?
mahaish,
IMO, Macquarie was saved by the goverment gurantee (ie: us!). Without that, Macquarie was gone….and they knew it.
As we see now with Greece, soverign problems are harder to solve, especially with a pegged currency.