Comments on: Is Australian Residential Property the Last Bubble?

By: David Hocking

David Hocking — Wed, 05 May 2010 02:12:08 +0000

A good article but here’s more. Governments are the drivers of the unaffordable real estate market as it is they who benefit most. Firstly, when you buy a house for say $735,000 (as I did recently) I was slugged a massive $34,000+ in stamp duty, which is nearly 5% for no increase in value in my property. If I sell it in a year because I am nervous about the market or (heaven forbid) I lose my job or get sick and can’t afford the mortgage (which is also rising) then I have to sell quickly. Here are the figures:

Likely sale price in 12 months in a declining market (if I’m lucky) $750,000 (I’m being kind to myself here). So, on paper I’m $15,000 up on my buying price – not bad? I get slugged Capital Gains Tax on my non-profit of $15,000 (I’m assuming that the government do not take their stamp duty into account when calculating my ‘profit’).

Out of the very generous estimate of sale price of $750,000 I will have to pay an agent at least $15,000 plus advertising costs, plus legal costs and other things like that totalling at least another $5,000. So, I’m down $20,00 to sell my house, I’ve been taxed on the imaginary ‘capital gain’ to the tune of say $5,000. My $750,000 sale is now worth $725,000 (less any mortgage payout and associated costs), which leaves me down at least $30,000 on my estimate. But government statistics will show that my house of $735,000 (original purchase price) has increased in value by 2% in 12 months.

Of course I’ve left off the stamp duty of $34,500 so my loss is really in the order of $50,000. Not to worry though as the government will make another $35,000 in stamp duty on my sale. I lose $50,000 and the government makes $70,000 in stamp duty plus another $5,000 in CGT.

So what does this all mean? The $735,000 house rose to $770,000 (or roughly 4.5%) not due to market forces or inflated building prices but entirely due to government charges (stamp duty).

A check of price rises of a residential dwelling over say the past 35 years (the period between the time I purchased my first home and my third home) the average price of land has gone from $5,000 to $250,000 (50 times) while dwelling costs have gone up from $25,000 for an average 4 bedroom home to around $200,000 (8 times). These are very rough figures but I think they pretty fairly demonstrate where the problem lies – and hence who is responsible for the bubble.

Governments make money of real estate in a number of ways – GST on building costs, land sales, stamp duty. However, there is another motive for higher land prices. All of the established homes are taxed (rates) on the basis of ‘unimproved value’ of the land. So when they inflate new land prices our established land value follow.

I think the Americans call this a Ponzi Scheme. It has to catch up with you in the end. I wonder who they’ll send to the clink for this debacle?

By: Dean Morel

Dean Morel — Mon, 19 Apr 2010 11:45:56 +0000

Hi Kris
What’s going to happen to all those Chinese buyers when the Chinese property bubble bursts?
Many futures are possible, here is but one. Interest rates continue to climb in Australia, local investor and buyer interest decreases, then the Chinese property bubble bursts and they are too busy licking the wounds to worry about Australia. Property prices start to fall here, panic sets in an after an initial 20% drop prices stabilise, but show no real gains for seven years.
Out of all possible futures there is only one that I find unlikely and that is housing affordability will continue to fall, i.e. prices are almost certain to become less in real terms. JMHO.

By: kris

kris — Mon, 19 Apr 2010 08:31:17 +0000

Have you discounted the government opening the second hand housing market to foreign buyers? As I understand it, foreign buyers were only previously allowed to buy newly built housing. I would say that housing in Australia will become unaffordable to Australians as your graphs show but still look very attractive to Chinese buyers. Both HK Chinese and Mainland Chinese will eat up our market until it becomes unaffordable for Australians.

By: mical parado

mical parado — Thu, 17 Sep 2009 07:23:55 +0000

Hi,

Just found your blog on Technorati & Digg upcomming news feeds and read a few of your other posts.
ISeems good contents,Keep up the good work. Look forward to reading more from you in the future.

Thanks,
Michael

By: Vote for this article at blogengage.com

Vote for this article at blogengage.com — Thu, 21 May 2009 12:05:45 +0000

Is Australian Residential Property the Last Bubble?…

My partner is keen as mustard to invest in residential property. Being an outstandingly nice guy, I too wish to benevolently allow someone to pay off a mortgage for me. Professionals and amateurs both have strong opinions on where housing prices are h…