Current Market Insights
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Current Market Insights
Episode 72: GDP and Stealth Taxes
Hosts Ciaran O'Brien and Peter O'Malley delve into the latest changes to New South Wales land tax thresholds, dissecting how this "stealth tax" could reshape the property market by impacting investors, landlords, and renters. With a fixed threshold until 2027, Peter examines the potential wave of new taxpayers in a climbing market and the uncertainties of future assessments. We also explore the mounting pressure on the Reserve Bank of Australia to consider interest rate cuts amidst stagnant GDP growth and falling home values and as the holiday season approaches, we offer advice for vendors aiming to seize opportunities before Australia Day.
As always if there is a specific topic you would like for us to cover, please reach out and let us know!
All done, all silent, going, going, going.
Speaker 2:Go on, son, Congratulations. Welcome to the Current Market Insights podcast brought to you by Harris Partners Real Estate. Each episode, we chat with real estate author and industry leader, Peter O'Malley, to discuss the current property market conditions and provide insights to assist you on your property journey.
Speaker 3:Hello and welcome to another edition of Current Market Insights. I'm your host, kieran O'Brien, and with me, as always, is my good friend, mr Peter O'Malley. Peter hello, hi, kieran, great to see you. Great to see you for another week. Peter, let's jump in this evening, if we can. I saw that you have put together a bit of an article for your newsletter this week, which you know. For anyone who doesn't know, who does listen, the newsletter from Harris Partners is monthly and it is full of good information. But I got a bit of a sneak peek at an article you've written this month on land tax and some of the changes that the government have put forward in regards to how Lantax is calculated, in particular the threshold. So I thought we might start tonight's episode with you just taking us through, firstly, for our listeners, what is Lantax if they're not aware, and then stepping us through what are the major changes that have been announced and really how they're going to impact the market for us.
Speaker 1:Yeah, this announcement did come out mid-year, kieran, but it sort of just slipped under the radar because it was a very clever change that the government or tricky clever, I should clarify, tricky clever change that the government implemented. So investors pay land tax, owner-occupiers don't. And if your accumulated land holdings in New South Wales, that's not a national tax base, it's a revenue raising base, it's a state-based one. But there's two thresholds there's the general threshold and there's the premium threshold. And if your accumulated holdings of land are above $1.75 million in New South Wales, are above $1.75 million in New South Wales, you will pay 1.6% land tax on every dollar valuation over that threshold Right, and over the premium threshold you'll pay 2% over $6,571,000.
Speaker 1:Now the big change that's come into effect here, kieran, is that in recent decades land tax was judged by a floating threshold.
Speaker 1:Whereas the property market rose, the threshold rose as the property market fell on the rare occasions that it did. But it does fall every, you know, five or six years. As we know, the land tax threshold will come back a little bit. The new south wales government, in a scramble to raise some revenue, has introduced or updated their threshold as of the middle of this year that on january 1. The threshold that land tax will be assessed at for the general threshold is at $1.75 million, but it's going to be fixed at that level until 2027. It won't be indexed against the fluctuations of the property market anymore and at the time the Australian Financial Review reported that it was like a stealth tax, whereas the property market continues to rise and land values continue to therefore rise as well. The state government will collect an estimated $1.5 billion in increased land taxes from landlords, holiday homes and businesses, which the real estate industry, according to the financial review, warned could cost owners thousands of dollars a year and in turn be passed on to the renters.
Speaker 3:Okay, so under this proposal, you mentioned that the next period of assessment for indexation is 2027. So does that mean that the government is proposing to do this every three years, or is that a one-off indexation assessment? Have they given any kind of framework as to how it will be assessed moving forward?
Speaker 1:Their statement at the time said the New South Wales Treasurer will assess these thresholds by 1 June 2027 to ensure they remain appropriate for property owners and market conditions. So this is almost like reverse bracket creep, if you like. So stamp duty is a lower percentage of the sale price at the bottom end of the rung, but as you go up the value ladder you pay a higher percentage in stamp duty. Now what's happened in Sydney over the last 20 years is that that's never been recalibrated. That bracket creep so um. I've sold some properties three, four times now in my career and when I first sold those properties the purchaser might have paid the equivalent of 3.8 percent stamp duty and the last purchaser that purchased that property is probably paying something closer to five percent yeah stamp duty.
Speaker 1:that's bracket creep at work right there. Where what the government have done with this one and that's why I say it's clever, tricky something closer to 5% stamp duty that's bracket creep at work right there. What the government have done with this one and that's why I say it's clever, tricky is that they've fixed now the threshold at a figure and they will be hoping that the property market continues to rise, meaning they collect more land tax from those already paying it, but secondly, they start collecting more land tax from those that paying it, but secondly, they start collecting more land tax from those that wouldn't be paying it. And you mentioned off-air that the government will have a tough time collecting the land tax that they currently do as a percentage of the budget. If they do manage to push everyone into apartments like they're planning to do. So they're more likely to hit the landowners harder to keep that revenue base there for their budgets.
Speaker 3:Well, yeah, exactly, I think you know, if the Minsk government does go ahead with all of these high rises, then you know, obviously individual lot owners don't qualify or may not qualify for land tax. I must admit I find it quite concerning that the government has been so vague on the timing of reassessments here, because it's obviously very deliberate. They're saying, well, we're going to lower the threshold to capture first-time land tax payers, we're also going to keep it low. They've never actually lowered it.
Speaker 1:They're keeping it on hold, yes, and then, as the market rises, it captures people where the floating index would never have captured Again. That's why I come back to clever, tricky, tricky, clever policy, because it's really, really subtle that people are going to sleepwalk into a land tax bill in years to come here and say I've never had to pay land tax before. I've only got a modest brick and tile home at Greystains. How am I paying land tax on an investment property in Greystains, for example? It's like. Well, the answer is the land value is 1.25 and the threshold's 1.75 million, but when you purchased it, you might have purchased it where the value of the land was lower than the threshold at that time, meaning you didn't qualify for any sort of land tax.
Speaker 3:Well, exactly, and if I use the wrong kind of phrasing there with lowering, yeah, correct, what I meant is it's capturing people that hadn't paid it before. But what I find concerning and part of the trickery here is that they're so vague about the assessment period, which means that it could sit at this low, you know, arbitrary threshold of $ million and 75 for the next 10 years, if they decide or it could be five years, or it could be 15, or whatever they they think is relevant which means that they are going to be capturing ever increasing amounts of land tax year on year from the same people year on year, with really no set framework as to when or if that will, there'll be any relief or rebate there for those people, and to me that's pretty shadowy and, as you say, it's clever, tricky and it's politics, but it's not good form.
Speaker 1:It slipped through and when it went through, it was really covered in the financial pages deeply. And when it was released, kieran, we didn't mention it in our podcast here, but it's just something. In doing some research today that I took another look at and it's like hey, that's going to capture mum and dad. Investors who are working hard, build up a bit of a property portfolio. They're inadvertently creating housing supply to a market that desperately needs it housing supply to a market that desperately needs it. They're not rich by any you know token, if you like. They're just hardworking people trying to get ahead and, amongst all of the other challenges that are out there at the moment, they're going to walk into a land tax bill.
Speaker 3:And I guess the important question I have for you then and you have touched on it with you know the impact, the flow on and the commentary in the AFR about this. But what is the impact likely to be? And I reference you know, changes to the way investments work in Victoria has had a pretty stellar effect on the market down there. For better or worse, we're going to see investors holding property that now potentially qualify and may end up owing land tax. What's the likely effect going to be? Firstly, in the rental market, do you think? And secondly, do you think that there is likely to be an impact on either the number or maybe the type of investor that does enter the market?
Speaker 1:Well, look, melbourne, have an anti-investor uh taxation position at the moment in victoria, yeah, and house prices in melbourne, which is also a city that's struggling with the population pressure that new south wales is, house prices in melbourne are down two percent, down 2% year to date, yeah, and that rate of decline is actually accelerating. So these do have big impacts on markets. Now there are people out there who don't see falling house prices as a bad thing.
Speaker 3:Plenty of them.
Speaker 1:Plenty of them, yeah, so I'm putting that side of it across. Factually, I'm not saying that falling house prices are good or bad. The reality is is that the taxation changes, which are more extreme version of what new south wales have done to, you know, capture more revenue from property investors is pushing house prices and property prices in mel down, and for all those acolytes out there who love the concept of the market going down and we've touched on them before is Melbourne seeing a rampant increase in?
Speaker 3:either you know, renters buying houses or available rentals at affordable prices, or you know I can only imagine that if you've got investors having to move out of the market because of these aggressive and potentially unfair taxes, that really they're just reducing the rental pool for everyone across the board.
Speaker 1:Well, that's what will happen in New South Wales as well, and land tax has played a big role in a lot of people's investment strategy in a negative sense over a long time now, where people have gone for a national portfolio in many instances because land tax is state-based. Anastasia palaszczuk tried to make land tax in queensland um national based. I remember that, yeah, and that blew up in her face and she was actually shouted down by the other at a national meeting of the premiers. So it's a big issue. It does impact on how people view investment properties and we have sold properties for people over the last few years fairly regularly who are selling to escape the land tax and re-diversify out of property or in property, but out of New South Wales.
Speaker 3:Yeah, which is not a terrible idea. Final comment there, before we do move on, I wonder I'd love to get your thoughts on something that was kind of floated to me maybe, gosh, it must be six or seven years ago now but something that I think has got more traction, particularly overseas. But thinking about Sydney and thinking about the rental crisis here, would it not make more sense to uh, potentially look at a more aggressive vacancy tax for foreign investors to capture some revenue? If they're concerned about, uh, you know, lost income and and debt investments, as it were, then potentially, you know, hitting investors, like you say, who are mom and dad they're not. You know these are not large retail investment groups that are, you know, suffering through land tax payments here, they're not. You know these are not large retail investment groups that are, you know, suffering through land tax payments here, they're. You know people potentially work their whole life to get a superannuation investment you know put aside. Would it not make more sense to try and capture some revenue for all the vacant properties across the city?
Speaker 1:Look, I know we sound like a broken record on this point. If you want to help the housing crisis, stop inviting so many people into the country when there's so little available housing for them. Government punishing the people that are already in the market is not the solution. Whenever the property market ceases to be a free and fair and open market that people can buy a piece of real estate and do as they please with it the moment that stops, we're all in trouble yeah, no, that's certainly true.
Speaker 3:You touched on as we move on. Then you touched on briefly uh, the house prices in victoria and I know that core logic have recently put out their home value index, or their updated index, which is one of the the statistical tools they use to assess the market. Just briefly, is there in your read through their index report this month anything particularly noteworthy or outstanding that our listeners may get some benefit from?
Speaker 1:Look, it was reported when it was released on Monday of this week, kieran, that house prices in Sydney pulled back 0.4% for the month, making them down nearly 1% or 0.8% for the quarter. So we touched on in September, I think. I said if the auction clearance rate continues to sit below 50%, you will start to see price falls in Sydney by the end of the year. And that's what we're seeing now. The reality is, even for those vendors of prestige properties that have sort of powered through this interest rate cycle, I've noticed more of those failing to sell in the last four or five weeks than I've seen in the last sort of four years since the worst of COVID. To be honest, that market has enjoyed the liquidity boom that's gone through our economy since late 2020. And it's been easier up until recently to sell a house for six million than an apartment for 1.2 million. So there are some changes in the property market. At the moment vendors are, you know, sort of talking it away. It's seasonal. I'm not so sure it is seasonal.
Speaker 1:I think, coming out of the October long weekend, there was a shift, shift in the sentiment in the economy.
Speaker 1:That's anecdotal.
Speaker 1:I don't have the data that others have, but if you do go to the GDP number that was released today, it shows that the Australian economy is slowing faster than anyone forecast. That number came in under most people's forecasts of where they thought the GDP would land just 0.3% for the quarter. So if you look at yes, corelogic's numbers, which shows that Sydney house prices are falling, melbourne house prices are falling, In fairness, apartment prices in Sydney are doing a little bit better than houses at the moment. I guess that's an a an affordability thing where they um, they were actually up 0.2 percent for the month. But if you do go to um the melbourne apartment market, for example, that has dropped 0.7 percent in the last quarter as well. So the reason we're drilling in on melbourne is that sydney and melbourne being the two most popular cities in the country, both have now have falling real estate markets the wealth effect, the consumer effect, the spillover. Then the GDP number comes in lower than forecast. You can see here that the pressure is building on the RBA for a rate cut.
Speaker 3:So I'm glad you mentioned the GDP numbers and obviously we had planned to sort of talk about them a little bit more. But I actually think the only thing I really want to get from you about the GDP announcement is, you know, related to rate cuts. So I saw a bit of a summary on Reuters regarding the GDP figures and how they were tracking quarter on quarter, as you mentioned, but also how they were tracking year on year and that the immediate kind of impact when they were tracking quarter on quarter, as you mentioned, but also how they were tracking year on year, and that the immediate kind of impact when they were announced was a downturn in the Australian dollar and the ASX fell. You know, it was a bit of a market freefall for a moment there and one of the comments I saw was that obviously there's now pressure to initiate or look towards a rate cut and I saw some commentary suggesting April.
Speaker 1:I think that's the money market shifted from mid-year to april okay.
Speaker 3:So we, we spoke. I think three weeks ago was the last time we really touched on, uh, the possible rate cut period, uh, and we, you know we talked about how, uh, the cpi numbers were not as favorable and that we were looking at potentially, uh, you know, pushing back to august initially, you know, july, then august, etc. Etc. And you had said that the money markets were mid-year. So, if they are now shifting forward, do you think that there is either going to be significant enough pressure on the RBA to make a decision themselves or do you think that they are still going to just kind of hold their firm? I'm going to call it an equivocal position, because they don't really commit either way at the moment.
Speaker 1:They're just sitting on the midline. They've only committed to being data dependent and that's really smart play from them because the data is changing and that's giving the RBA room to say we always said if this happened, we'd cut. So the RBA do have the freedom to do that. Where Philip Lowe telling people in 2020 and 2021, there will be no interest rate hikes until 2024, that's not data dependent, that's a promise.
Speaker 3:And a terrible one. It's been an expensive mistake.
Speaker 1:Yeah, well, so yeah, it's been done to death that one, but just to parallel the different messaging there. So Michelle Bullock has given herself all of the room that she requires to increase rates if she felt the need. Leave rates, as is if she felt the need, which is where she's been for the last what 12 months, or cut if the data allows and if you follow where the data's going, house prices in Sydney and Melbourne are off. The GDP has come in under expectations. Headline inflation's falling. About the only thing the RBA are missing at the moment, before they say, yep, we're good to go, is underlying inflation is still pushing up. And that's the one where they changed their rhetoric. If you wanted to be cross about the RBA on anything, they had us all focused on headline inflation, which came in at 2.1 a couple of weeks ago, and then they changed tact and said, yeah, but underlying inflation is 3.5% and still edging up, so we're going to basically stay on hold.
Speaker 3:Yeah, well, I saw just on that point, you know further commentary again only a few days ago about the trimmed mean or the underlying inflation, as you say, and it made a point that the government's energy rebates and some policy decisions had given the illusion that the you know, the inflation figures were more positive than they are, which, as you say, is obviously misleading if you're not reading deep enough into the commentary of the RBA. But you know, I certainly don't see it as doom and gloom and I'm not sure obviously the money markets don't either if they think that we're starting to.
Speaker 1:The GDP would have been negative today, by the way, if it wasn't for government spending oh, absolutely the government is the most active player in the economy at the moment and we, you know, when you hear about big government, we're really in that space at the moment of big government. I saw something from Shane Oliver on social media here where he referenced the fact that the Australian government's now governments are now 27% of the economy.
Speaker 3:Yeah, well, I saw I think it was one of the figures was the government in the last 12 months had contributed something like 0.6 of the 0.8 GDP figure. And then I love the final. The closing comment on that line in the article was Australian households have done nothing, full stop, yeah, which you know is sad. But it also made me laugh a little bit that you know that's the environment we're in, where there isn't free cash for households to just spend and promote the GDP.
Speaker 1:Yeah, it's a tough time. Here's Shane Oliver quote for quote here, so I don't call it out wrong on him. Public spending now at a record 27.5% of GDP. Yes, it's kept the economic growing. That's a bit not written well, but yes, it's kept the economy growing, but it's meant that inflation and rates have stayed higher for longer and partly explains the ongoing slump in productivity.
Speaker 3:Well, there you go. I'm glad you're not going to misquote him, but shame when you listen to this. We're not attacking your typing there on socials.
Speaker 1:Let's just blame autocorrect. We'll blame autocorrect that's for sure.
Speaker 3:It's contributing nothing to this conversation as we wrap up. Then, pete, you touched on very, very briefly the market conditions, anecdotally, and what you had kind of seen across, uh, across the the hustings, just to to give our listeners, we we didn't do a market wrap last week, uh, and we. Everything you've said tonight ties into what I think we talked about and I'm I'm hazarding a guess at three episodes ago, because I'm doing this on the fly. But, uh, you talked about the fact that we had entered a silent downturn and we've now really got the data to back that up, correct, you know, consistent sub-50% auction clearance rates. We have GDP figures that show we are underperforming CPI. The trimmed mean is overperforming where we want it to be. So, given that we are really in the silent downturn that you so aptly coined, I guess what is the market actually showing us and what is the auction clearance rate doing now and is there any signs that we are starting to see a bit of a recovery?
Speaker 1:No, not really. The final clearance rate last weekend on SQM researchers numbers was 46.1 percent and that was from 1424 scheduled auctions. The week before the auction, clearance rate was essentially the same 46.6 percent from 1423 auctions. So nearly line ball for the last two weeks there, which is which is interesting when you think about a city of five and a half million dollars and the housing market has performed both in number of properties going to auction and clearance rate essentially near identical week on week. The same week last year 1405 auctions and that had a had a clearance rate of 48.7 percent. So it's not unusual to have a sub 50 percent auction clearance rate at this time of year.
Speaker 1:I do note that in the marketplaces that we service that stock levels have halved and those buyers that do want to purchase something will absorb the stock leading into Christmas. If there is any meaningful discussion that rates will be cut because of this GDP numbers that maybe some buyers will feel like it's time to take the leap and and jump into the property market, while you know there's some good, good stock on offer. That remains to be seen. We might see a Santa rally in the property market, we may not, but look, I think any vendor who wants to sell and he's prepared to meet the market can sell, sell. But there is been a shift this quarter, there's no doubt.
Speaker 3:Given then that we're in the last few weeks before Christmas and the national kind of shutdown period, I guess, for the property market per se, do you think that there's likely to be much more activity before Santa flies into town? Or do you think now any vendors who have dragged their heels a little bit or a little bit unsure are likely to push into the new year?
Speaker 1:Look, I think agents will shop listings to qualified buyers off market before Christmas, as we're doing. You won't see anyone really launch a new campaign from about this weekend onwards, and then there'll be some vendors that are back by mid-January. There'll be other vendors that are locked and loaded to go on the market late January Australia Day onwards. Yeah, the way it's looking, there will be a lot of stock on the market in the new year.
Speaker 3:Given that we? As a final point, then, given that we normally say you know, the real estate market has those cycles that we touch on all the time, and one of them is the Australia Day Long Weekend, given that a lot of vendors just notionally or traditionally will likely come on after that, do you think there's any merit for potential vendors to get organised now with their agent and get ready to come onto the market early or mid-January to capture some of that kind of quiet period.
Speaker 1:I think it makes a lot of sense. There's a lot of vendors that are doing that.
Speaker 3:And do you think there are enough buyers around at that time of year to actually execute on this? There's enough buyers.
Speaker 1:The notion that people go on holidays for all of January is a nonsense. People are back at.
Speaker 3:Go tell that to my wife. She thinks that we're the only ones not going away for all of January.
Speaker 1:Well, you know, I know people who are going away over Christmas and the new year, but most people are back at work by mid-January. And it depends what you're selling as well. Kieran, I don't think I'd sell a family home in the first week of January or launch it in the first week of January. But if I've got an apartment with broad appeal, for example, and the buyer could be first home buyer, downsizer, investor, executive couple, I wouldn't have any dramas listing it in early January. What happens if you don't sell it in early January? You're on the market in late January. It's hardly a crisis.
Speaker 3:Exactly right, look. Really great discussion today, peter. I think we've talked about some important topics. I will put a link for our listeners to Peter's latest newsletter as well. That has a bit more information on the land tax changes, if you are interested, and, as always, you can reach out to us via the podcast if you do have any questions or anything in particular you would like us to talk about. But, as always, peter, thanks so much for coming in A really really great chat today. Thanks, kieran, all the best and thanks to everyone for listening to Current Market Insights. We look forward to speaking with you next time.
Speaker 2:Thanks for joining us on the Current Market Insights podcast brought to you by Harris Partners Real Estate, the podcast providing real estate insights you won't find anywhere else.
