590 | Property Shock: War, Rates & Tax Reforms, Reshapes Everything! - Chat with Nerida Conisbee

Politically it's unsalable. You can actually see the body on that. Where is the other body on that? You can see it in text polls. Manitupal City, Cardstone. You're leaving. You're tuning in to the Property Couch. Australia's number one property, finance and money podcast, featuring the Titans of the industry since 2015, where trusted by tens of thousands of investors on their journey to financial peaks. This show is powered by more. Thanks, Opti and yes, welcome to the number one property podcast in Australia, the Property Couch, where we do get the Titans of industry on the show. And today is no exception. We have some enormous talent on our show as our Couch Crew today. I'd like to introduce you to the Nerida Connersby, the Chief Economist of Ray White. Great to have you back. Thanks for having me. And we've got Evan Lucas, who is also our more ambassador, mate. Welcome to the couch. Thank you, thank you for your involvement. This is going to be a lot of fun. I know we've got some diverse views. And what a time to be talking about diverse views. We do. And just before we kick into it, because we've got a lot to cover off on today's show, economically, property outlooks the whole bit. Just a bit of housekeeping. The Masterclass, the $3,000 a week Masterclass, we have this great webinar that Bryce and I did. So if you want to check it out, it's at theprob��couch.com.au/masterclass. Check it out and you'll learn how you can build a $3,000 a week property investment portfolio. OK, here we go, guys. And how I want to frame this up is, at the end of February, I did a property market outlook. And in that outlook, I had a base case scenario, which didn't have an attack on Iran and basically the escalations in the-- I mentioned them, but I didn't have that as the base case. And I said, everything gets thrown out of the window, depending on the conflict in the Middle East. And here we are. Only really, two and a half, maybe three weeks later. And everything is out the window. So, Nero, I want to come to you first. I want to talk about what you did start to see at the start of the open. Let's call it February is the open of the new selling season in Australia. What was the confidence? What was happening in the market? And then I want to talk to you about what's happening now. Sure. So last year was a very strong year. So we had three rate cuts, obviously. And it did lead to a reacceleration of the market. So markets like Perth, which we thought would slow down last year, hit 20% by the end of February. Which is quite incredible. We saw Southeast Queensland very strong, even Melbourne, which has been very, very weak for quite some time, was starting to see a bit of a recovery. We were seeing a lot of strengths at the bottom of the market, the cheaper end. So that was definitely outperforming compared to the top end. So particularly in Sydney, where we're seeing the luxury market quite weak for quite some time compared to the lower end. But the interest rate hike in February was starting to lead to a bit of a slowdown. So to give you an idea of the slowdown, I've been in Perth recently. So it took the growth from 20% and your growth to 19% and your growth. So it didn't really knock the-- it knocked a bit of heat out, but it certainly didn't knock everything out of the market. So end of February, a pretty strong market, the interest rate rise was causing a bit of concern, but not much. And that was really where we hit at that point. And then we obviously have the escalation in the Middle East. It starts to impact on oil prices. So inflation comes back into the conversation. So what are we seeing now in terms of the data that we're seeing rolling through over the last, say, seven to 10 days? Yeah. So really it started not last weekend, the weekend before. And we track open for inspection rate. So we look at every single person that comes through our open home. And we can track it daily. So at that point, not last weekend, it was very-- it was very jittery. The market seemed very jittery. And primarily because not only were we starting to see a lot of challenges come out of the Middle East conflict, but also inflation. And then we also had the rate rise potential for market. And so people were starting to feel-- you could tell people were anxious when we had a look at the number of people coming through. It was particularly apparent in Sydney. So in Sydney, we'll typically sort of see on average three to four people per open home, sometimes high, just depending on where you were. But say on average three to four, that half. So we saw about two people per open home. In Perth, very different. So Perth is still averaging sort of six, seven, and Brisbane quite similar. So that was the week-- not last weekend, but before-- then last weekend, the rate rise came true. And then we started to see people calm down a little bit. So it didn't recover fully, but we started to see a bit of a stabilization. So that's where we are at the moment. It does look like people are watching and waiting. We do expect it to take a hit on growth. We don't expect year and year growth to fall. Primarily, we'll probably talk about all the other issues later. But we do expect it to knock a bit of heat out of the market, which isn't necessarily a bad thing, because I think again, coming back to markets like Southeast Queensland, Adelaide Perth, when they're running at 15 to 20% growth, it's actually-- And it's alarming for people. I think it's sort of at one point it's quite exciting. And then suddenly, you're like, well, this is-- [INAUDIBLE] Can I ask a question before we go any further? Last year, we saw inflation starting to move. For me, I actually think that's when it was interesting. But the demand policies that came in in September of '10 is the first homeowners changes. The 5%, you talked about the lower end of the market. Is that still there, considering that that support is there? And then there's also that FOMO/fear of the pay-as-ing market getting quite unruly with what's going on. Does that also coming through in your data? Yeah, look at seems to you. I mean, there's no doubt that that first home-buyer incentive has been fueling that cheaper in them. When we look at the price points that we just have out in every state, it does seem to be extremely strong. Last year, we had a lot of investor activity as well. So we had those three cuts come through, so that was holding out. I think that what is also supporting it is particularly in Sydney is-- we talk about affordability and the challenges of that, but it doesn't seem to be impacting the cheaper end. It's definitely impacting the top end of the market. So when people talk about top end, they think of 20 mil 30 mil. But realistically, the top 25% is about 2.6 mil plus. And that's weak at the moment. People are really struggling to afford to buy those price points. And if you think about it, it's the buying pool, the demand pool that lives down in that bottom quartile. So it's also to your point, it's where the buyers agents and the animal spirits from these investor buyers agents are playing the heaviest. And that's not also in our capital cities. That's also in some of our larger regional towns where they're coming in and they're coming in with 100 buyers or 200 buyers. And that's an interesting market. So we could do a whole another show on that. Now while we're in, I mean, I've been pretty vocal. I've been pretty vocal about what's going to happen. Places like Rockhampton and Townsville, we can definitely see that impact happening. Even have happened as they've moved on to the next thing. That's right. And we can also see in the number of rental stocks, you can see the spike in the number of rental stocks. So you actually will know that it's been investor led and it hasn't had fundamental own rocket pie demand led. So that's for me, because when I look at Rockhampton and I look at what's going in Townsville, you look at the economics behind it, and it's clear the push around the underlying fundamentals of the economics of the future of Rockhampton, the future of Townsville. My question I've been asking about it, are we facing a new port headland in terms of the way that it sort of structures itself? - That's so, no, that was so. - But so that's what it means. - So if you look at Blancen's example, right? - Yeah. - So everybody brought into Glance and off the idea that the two trains coming from Central Australia on gas from Santos and Co was going to turn Gladstone into these incredible billions of dollars of investment through the port. - And away we go. Rockhampton has very similar fundamentals in the way that it's been invested. That gives me Gladstone vibes. And that is what I am certainly worried about. Well, because I remember this surge and it's got some of the baddest port headland. - No, I don't think it's bad enough. - But it's the same principle, right? - In the fact that you've got big underlying commodity-led investment and commodity-led economics that is driving the attraction to the property invest the cycle. We now haven't discussed yet about, okay, we've had two rate rises, but the market's factoring in three more. That's 125 bips by the end of this year. - I've been really vocal on this around the other reason is it's not a big huge swave of new investors. It's a concentration of a small swave of new investors coming in, but they were getting access to trust lending. So they were basically moving around. There was a loophole in, and that's what was happening. And so it was a concentration of around 10 or 15 buyers agency groups who were moving markets and they were getting not one property for a client, but getting two, three, four properties for a client in a year using these trust lending. And so we have seen, and that's why I wrote that white paper and send it out to all of the associations 'cause it was gonna be a major, and now, let's say two more rate increases, they were just level in terms of their servicing on those trusts. So they're gonna be underwater in terms of potentially, even with their so-called letter from the accountant or their own self-decloration. So that to me is a problem. And I reckon I wanna come back to that because when I think about capital gains and negative gearing impacts as well, they could be four sellers. And they're going to be four sellers into, this is what I always said was the risk in terms of going into those regional markets. If you don't have fundamental owner occupied demand, it's my opinion. It's not that simple. I just want to report, Hadlands, not the right example, but that's my risk. It's not even nice. Yeah. But it's such a stereotypical behavioural economics. It is more man, I'm coming to you now on a So let's talk about we've got an event that's happening on the other side of the world, but it's having a massive impact in terms of the supply shock that's coming through. So talk to me about your interpretation of where this supply shock is going to lead inflation and then where is that going to lead interest rates and then I'll get your opinion. Let's look at the only way I can explain it at the moment is that it has pretty much overhauled the first part of 2020. Like you need to put it into the same context. You've gone from around about seven to 800 ships through the straight up of Moors to maybe five per day. And three of them are Chinese. Correct. Right. And none of that, as we've just discussed, there is signs that China is one of the harder hits nations by what's happening with Australia for Moors considering that about 60% of their oil comes from that part of the world. They're going to have to start stockpile and they've already had been anyway, but they're going to stockpile goods. I think you're sending to understand the flow down and why I say it's to COVID. So if you look at somewhere like Qatar, it supplies 99% of Pakistan's entire entire gas. It provides around about 80% of India's total gas. You then also look at further than that. You look at things like synthetic apparel materials. Yep. Comes out of there. 80% of that goes to Bangladesh and Vietnam. So it's as simple as going down the chain that the manufacturing of those apparel goods that would come here. They're going to disappear in June July. Normally takes about four to five months from leaving port as a base product to final products on shelf. It's about that period of time. Now what about I'm hearing stories of ships being held at port or turned around as a means to store the diesel. Yep. To obviously for self interest and reserves. Cats feel as well. And so that's obviously having an impact on the delivery of goods and services and raw materials that are potentially coming into us. Yeah. So we have 38 days of diesel supply. Yep. At least that's what the official data tells us about. Again, if you look at the data coming from Singapore, particularly from tapas, is the supply into Australia has yet to be fully interrupted, but is interrupted. The catch for us is transportation. Yep. The majority of our transportation is long haul. Yep. And again, you look at agricultural products during COVID. They were the bigger inflation story. And so already you are starting to see that flow in effect. Because don't forget tractors, diesel, not just the trucks, diesel, but the running of all farming material comes from diesel. Can I give you an anecdotal answer? Yeah. And I don't want to stress people out too much because obviously, but it is a sentiment shift. My wife, her side of family, her farmers, Wheaton Sheep and in the wheat belt in Western Australia. And she was talking to a girlfriend who still lives in that part of the world. And they've got that cyclone that's now coming around the top of WA. And it's going to be fantastic for them in terms of wetting the ground so they can soak. Right. And so we're talking these are large farmers, right. So they got in some cases, they've got 30,000 acres and they do broad, obviously grain farming. Now, now one particular farmer down there, he needs 150,000 liters of diesel to soak. Yeah. Right. And they've got 38,000 and they cannot get. And and and so in timing of sewing when the moisture is in the ground can be important, right? Really important in terms of that. Now that's again, that's just one little example. Let's take that further. The other issue with what's going out of the Middle East is fertilizer. Yes. Right. So the fertilizers, the other part of that answer is that it's not just here in Australia. If you look into particularly North Africa, Middle East, Middle subcontinent Asia, planning seasons, April, April May for a summer period through June, July, again, over 50% of their fertilizers come from Middle East, come through the straight up of the mullets. Yeah. You've also then got all of what we're saying here, the short answer is this it's not just the supply of gas, it's not just supply of diesel. It's just the energy flow of the correct flow of other materials. And that's why it's COVID. Like it is, it's the only it's it's not the same, obviously, but this is the flow on effects. And if the war was to stop tomorrow, the time required to fix it isn't days. It's not weeks. It's actually months before the supply comes up. So are we going to have a period of higher inflation? Yes. That's what all modeling is showing you because again, simple economics, 101 supply and demand. We've got a COVID style supply shock that will take months to filter through. Even if the war was to stop tomorrow. And it's not. No. Nierita, in terms of building supplies and materials, are you hearing any anecdotal stories or are you seeing anything coming up in your data? Hey folks, Ben here. I hope you're enjoying the podcast. Now, if you want to take your property finance and money knowledge, even further, check out the new mind knowledge in more. We've packed my knowledge with over 120 plus free resources from free reports to educational video series to fact sheets on demand courses and heaps more. Get started today at the probablycouch.com.au/myknowledge. Yeah, so construction costs did calm down sort of start of last year. So we had that incredible spike during the pandemic where they sort of hit 20, 30% per annum growth. They did come back. They were starting to accelerate again. So showed up clearly in CPI. So when we have a look at the CPI figures, it was very clear that building the cost of building a new home was starting to accelerate. So already, we've started the year with challenges around construction and obviously with what's happening now in the Middle East is just going to create more problems. So not only will we have the labour supply problems, which are very, very apparent at the moment, particularly again in smaller cities, we are now going to have those supply chain blockages again. And it's an interesting one for housing, which we may discuss later, but on one hand, we do have rising rates and the slowing of price growth and then the other hand, we're going to have rising construction costs. So it does mean that replacement costs will continue to rise and it really does flow through to affordability that we can't build affordably at the moment because of what's happening with construction. Yeah, and we saw earlier in the week reports in the mainstream media through the ABC around suppliers putting our surcharge on their materials because it's just costing them more to, you know, like the sand, there was the story of the sand quarry. Obviously, the sand mixes in with cement to make the mortar and ultimately they're saying, well, you know, where's what was it? We were 5,000 litres of diesel a day and their diesel costs have gone up 35%, 40%, you know, a dollar. So that's that's material in terms of that. So they're basically putting a surcharge on those materials and of course the builders who are building a homes, they've got to cop it like ultimately, you know, leave your halfway built and you've got a timeframe to build that straight off your bottom line or you or ultimately you're passing on to customer which is how we'll see it show up in inflation in terms of those new construction material costs. So it's so just on that the other thing you just hired there is what was the problem during 21 22 which is sticky inflation. So most, most construction workers, most transport companies will try and absorb it for as long as they possibly can. Yeah. So again, that's a four month problem. So this show up of that inflation is not just on the headline right now with volatile items being food and fuel. The sticky inflation, the core inflation problem will come in June, July, August where it just cannot be, you know, absorbed any longer and it will appear and that's the rate issue. The other one is inflation expectations. And that is really going out. I think it's about five percent last week. It's probably high now. So I think that then starts to roll through in terms of people's pricing decisions particularly on the supply. Well, wasn't it last week that treasurer informed the treasurer, Jim Charmers, that they're modeling an expectation of inflation eating five percent now. Now if we think about they were trying to play down just under, yeah, well, just under five percent. I think high fours, but I think that's heroic now. In terms of what I mean, if we saw, if we're saying we've got a supply shock like we had before and what we saw headline inflation made about eight point five, was it eight point four? And the top of it got just no, yeah, just under headline. Yeah, back in COVID. So why is this going to be a three percent better because it because well, I suppose it's a rolling story right because if the Middle East world doesn't get resolved and oil prices do stay at $100 barrel and gas prices continue to stay high, all of that flow on in terms of the the other part of that story was around the plastics. for the plumbing, or that was now costing more in terms of the. - Yeah, I think Apple is an input cost in terms of that. - And gas is another whole story. - Oh, yes. - So, when we got to 7.1, 7.2, there was an argument that the RBAs partly went for that because they weren't fast enough on it. Rate were 0.1 of 1% during that start. And we're in a different cycle. - Yeah, I've got a question that because I look at New Zealand a lot. So, New Zealand, they moved hard and fast. - And it made no difference. Like, they still had the same problem. - And credit all the mean truth. - I think this is one of the challenges at the moment that. - It's huge challenge. - Monetary policy can't stop the war in the Middle East. And so, I think it's, I think, you know, does make people question like, why are they raising rates when it's probably not going to make a much difference? And I think it comes back to the fact, you know, perhaps 80% of what we're seeing is from the Middle East, 20% is not. Maybe they can control that 20%. I mean, that's all monetary policy is going to be able to do. But they have to do something. And I think this is the challenge that they're facing, that they have to do something. It possibly will force us into recession, we don't know. But if they sit back and do nothing, and let inflation take over, it becomes particularly alarming. - At the very least, they need a soft domestic demand. And that's what they're doing. - Well, that's the mechanism that they have. It's blunt, but they've got to do it. - Top-class traveling. That's the. - I would argue that's what they've let go. So, at the end of last year, that was coming. - Yeah. - Right, so I. When you the first one in February was coming, they had four wonders back in December. But that was coming because inflation took off in October. - Yeah. - That's what it was. - It's very quick. - And it was so clearly waiting to happen. - Yeah. - That it was there. So inflation took off. Again, it shows that domestic demand is there. You can see that in the data. You can see it. You can talk all about supply chain sharks and all that stuff. The majority of last year's inflation story was domestic. It was domestic. - It was domestic? - I don't know. A lot of us housing. - Yeah. - And so. - That's rents. - Yeah, that's the. - And I was also the cookers and bunkers. - Yeah, it's so. - Houses being built. So that wasn't really demand, maybe demand a bit. And then electricity. So that was also that. So I think. I mean, it's definitely travel. - So if you look at domestic demand, if you look at the movement that happened in retail spending, if you look at the numbers that happened in. particularly. - Traveled. - Yeah, well. I would call discretionary spending. So travel, cafes, all that material went through the roof in September of October. - But it's a third rate cart. Just basically was the tipping point. People actually. - It just goes to show you how tougher job it is. Because to your point. - You've got a whole lot of economy. - You can hold a whole new thing of economy. - You can crash an economy in terms of doing it the New Zealand way. - Yeah. - Or you can have a look at it doing the Australian way. But it was like an elastic band, wasn't it? Because we still had full employment. Off we went to the races. - Yes. - So once, we thought we'd got the Juney. - I get it. - The inflation journey back in the bottle. We're spending like drunken sailors. - Yeah. - Both publicly and privately. - Well. - Yeah, the public spending. - Yeah, it's been too much. - And it has been too much. - And construction. - Oh my God. - It's going to be a good time. - So I'm going to summarise this because we can start. - Okay, we can go for it very much. - So let's go. The impact on demand is going to be obviously downward pressure. That's really simple to see. And of course, from a supply point of view, you would like to think that if inflation's going to push interest rates higher and the cost to build and also the cost to transact, is going to get so much higher. Borrowing power is going to come down. So there's no availability to actually. All of those things lead to lower activity in terms of the market. I would suspect is what we're seeing. So now, combine that with the other big story that's about to roll out in our May budget, which is capital gains tax and also potentially reforms to negative gearing as well. So I want to start because this is where it gets really interesting. I mean, if we're talking about the challenges to the residential property market, this could magnify those challenges. So at this stage, all we've got is this muted change that we've been told Treasury is modelling a 33% reduction in the discount of capital gains. But if it was just that, we need to know something around that. So the first one is around grand fathering. So are they going to grandfather it? So if you bought the property, you'll still get the 50% or is it going to be effective from a certain date time? And then finally, the big question here is on, is it going to be only on property? Because how I want to look through the lens, I want to look. I want us to get both of your opinions around the existing property owner, the existing landlord. What are they going to do? And then ultimately, then what's the behavior of that prospective investor? Where are they going to take their money in the future? So in terms of. If I would say to you that there's no grand fathering, which is the intel that we're getting. So effectively, potentially from the night of the budget, no longer will you get a 50% discount after 12 months. You're only going to get 33. What are you going to do as an existing landlord and an existing owner? Are you going to sell or are you going to basically hold onto your property? So it's come in. So yeah, OK, so it will hold, obviously. So I mean, this is a. I mean, again, we can talk about this for a long time, but there's a lot of concerns we have about it. We don't. On its own, we don't think it'll make a huge difference to the property market. But if it does start to lead to particularly negative gearing changes, we're very concerned about a few things. One of them is rents. No, we know what happens to rents. We've seen it in Victoria when you start to see a wholesale reduction in investor activity. We're also worried about transaction volumes because if we look at the lead up to the 2019 election, we actually saw a crash in transaction volume. So for the wider economy, that's, you know, in terms of the property industry, that's what it does rely on. Absolutely. And then looking at where we've seen wholesale reduction in smaller investors, which is the US private equity steps in, and particularly Blackstone. So, you know, like, I think this is the thing that people don't understand that if a void is created, someone's going to have to step in. And people kind of think, "Oh, yeah, well, everyone will become homeowners." Like, that's not how it works. No. That when we look at what's happening in the US, there was a lot of anger towards institutional ownership of properties. And again, you look at a first-home buy at the moment competing against an investor. It feels very unfair because they do have more money. But you go up against Blackstone ad noxion. You are not going to win as a first-home buy. And, you know, and I think this is, this is, and also I think the other, even more, I mean, again, I could talk for ages, but even more broadly, there's a feeling that, you know, I will live in institutions own rental properties and rents will be cheaper. No, they have, like, they have seriously wanting a return. And when we look at build-to-rent in particular, they are trying to get overmarket because they need to make these things stack up from a yield perspective. OK, corporate property is the way I look at what happens when you get private equity involved. And to me, Nair has point exactly, if you look at institutional investing in corporate property, the rent increases without fair or favor, they are always looking for a certain yield return. On-going maintenance of properties, all those types of things. So you look at the ones that I, you look at some of the big listed reats and the rents that they chase, and where that's ended up putting them. I mean, you can see even the Australian listed ones that they have a certain yield, they have a certain, so you now have occupancy rates, because again, the corporate market's different to the residential one I get. But if you want to just see what it would be, you can see that the way that they run the corporate structure would just move into the retail residential structure. They need a risk of adjusted return. Yeah. And if they're not going to get that in capital appreciation, they're going to get it in yield and rent. So, and the frustrating bit from the sort of everyday investor is that the governments are also giving them 40-year land tax exemptions, and all these things to actually get them out of the ground. Yeah, so the tax incentives go somewhere. I think the other thing too, is I still struggle to understand why people seem to have a problem with an investor and in 10 rental properties, but an institution and in 10s of 1000s is okay. So, you know, it's funny things I could say, they don't want their neighbours getting a tax vac. They're okay if you don't have your big company. Oh, that's right. All Meriton having hotels around the world, which are short term rental accommodations. But so, I agree with that statement here. Now, wouldn't it be interesting if they had a window? Let's say their policy setting says, and it's effective from the 30th of September. So, you know, so now you can get your 50%, what's going to be the behaviour then? I reckon it's any longer that. I think they're going to talk about it for years. So, you think-- - Hi, I reckon we can think of a grandfathering. - I mean, I'm hearing on the ground. - This grandfathering can't work, right? So, I need to put my hand up and go to my selfie. Grandfathering does not work. It is, again, a knock distortion. We've just talked about the way that I always argue that tax is a behaviour move, right? So, you are going to find avenues to do what you need to do to get around the tax policy. That's just been the way it has been for millennia. I mean, my biggest issue is, as I've spoken offline, income tax policy in this country is part of the reason why proper investing is so attractive. If you can offset your personal-- - Yeah, no, I can't. - The way really. - Correct. So that's, when I answer this question, you need to look at it from my view, which is that the lever you're pulling is to pull another behavior over here. So it has been an attraction to do this for the income reduction that comes with personal income. - They've got a revenue problem. - Of course they can't wait, they can't wait till two years to actually start getting an increase in revenue. - No, no, but that's why the rumors are that it's effective and maybe-- - Politically it's unsalable. - Right. - So that would be-- - It's gonna be, it's a thing. - So, and only on property. - Grandfathering is a massive problem. You cannot do it, but they're gonna have to give some-- - They can't do it immediately. I'm sorry, indefinitely, I think you can. - Correct, yes. - So, and normally that again, the flip side is that, you asked the question before, Ben, about a new property investor. They're gonna get the new system that I once don't. Again, that's the distribution issues with-- - What's grandfathering? - Granting's proposal was it was gonna be staged. So to bring it back down to 25%, they were saying it was 10 each year. - But so the reason-- - So it gave you a little bit of time and it didn't distort the market for a period of time. - I don't know, we just said it, no, it's really like-- - 'Cause the other thing is this, the other thing that has been discussed is instead of the 33%, which you've just discussed, is going back to the Hawkeening era on inflation linked only with a two year grandfather. So, what they were excited you was that, if you bought, let's say 2010, 'cause the best I can give to you, you are technically 50% on the old system, because the accumulation of an average-- - Oh, isolation. - 2.6% is the average inflation rate, which means your accumulation has got you to 50%, if you bought it in 2010. It's about 16 years, it's a total to get to half. - Okay. - So that's the next example is that, they grandfather the existing scenario for two years, but they will take it back to the old system that it's inflation linked. So if you, this is the other thing we saw at the start of the podcast, which is, can you imagine those investors that have bought into Rocky, that have bought into Townsville, that then also have a scenario where the capital gains tax discount is-- - But I've been warning-- - I've been warning them that it's going up, that their buyers, agents aren't telling them the full story about the risk. - 'Cause they're interested before that, right? And I want to actually sort of really hit this hard. The industry that we are in is a transactional industry. - Yeah. - So they're incentivized for the transactions. - Oh, of course they are. - And all of us are. That is the caveat with this, and where I come back to the behavior of it, is that the government knows that it's on a winner politically because-- - The-- - The change of the narrative. - The change of the narrative. - It's unfair. And your transactional problem is not our problem. - Yes, but I mean, there's a better way of doing this. And that is, take the speculators out who are being taught this trip-- - That means regulation. - Well, no, no, no. - You have to, you can actually-- - Where is the other body on that? - Where is the other body on the-- - We can set it in tax policy because the reality is, if you have a staged, like what the picker policy is, where you say basically over five years you get back to the 50%. So all of a sudden, 'cause these buyers agents are saying, we're gonna take you into a regional town, and we're gonna go in there with hundreds of buyers, and we're gonna pop the market up, and they call it a trading mechanism. - Right, and so there, it's called-- - GameStop, here. - Oh, it's speculation. You don't want speculation. - So take the speculators out, but to your point around behavior, if I know that I'm a long-term investor, I'm looking for that passive income, and I'm looking for to hold these properties over the decades. - Correct. - And so this change shouldn't hurt you. Reward me, yes, reward me over the long period of time. - Do you think, I don't know, I don't know if they're thinking that deeply, like I can hear you. - They are. - I think that's, I think they're challenged up. We obviously think about it quite incredibly deeply. - Because we're subject matter to-- - You can look at it, you know, I was on the economist round table a few weeks ago, and I tried to bring up CGT, I did bring up CGT, but there's so many other things going on, and there's so many other things that they're considering, and that was a few weeks ago before the Middle East conflict really accelerated. And if you think about now, there are so many other things for them to think about, and I don't think they're thinking that that-- - Well, these are the interesting. - And the impact on, they're certainly not thinking about the impact on the rental market to the degree that I think a lot of other-- - So that's not their problem. - No, but they're right on that area. They're not thinking about it because my point is the tax makes problem. They need to, they need to. - That's true, that's true. - That's the thing of the tank that's always-- - They need to, they need to. - So we are getting very granular for good reason, 'cause we're in a certain industry. They are thinking the macro at all. - They're thinking of revenue. - They need revenue. - They're broke. - But if the revenue impact is quite minimal, like I think, and I think this is the other thing too, which we're worried about that, again, they're testing the waters. They'll see what happens. They make changes to this. There's not a huge outro. - Just before we get into that. - Can we also point out, this isn't been plagued into corpus yet. Right, so all of what we're developing is-- - Yes, no, 100. - Completely hypothetical. - Yes. - Do need to point out also we have a very conservative decision-making prime minister. And it's very probable that he just goes, no, we can't afford to do that. - Timing is too great. - Timing is too. - It's time to issue and summarize that. - All right, what about only on property? Like ultimately, the government has had a narrative of 1.2 million properties built by X time. It's not a demand problem, it's a supply problem. They've said it multiple times. I mean, every one of their leadership team there and the federal front bench has basically said, it's a supply problem. We've all agreed in the industry, it's a supply problem as well. If you turn it off and you say that it's 33%, or 25% or whatever they settle on, but you get 50% on shares or other investments. What does that mean for a prospective investor? Where are they gonna allocate their investment capital? - It's behavior again, right? - Just something else. - It's the incentive to choose the incentive. Again, the industry on the other side, and I can put my head on on that one, is gonna turn around and say, the love that particularly business likes to put on property is that, yeah, but we're a productive asset. (laughing) And which is fair? - No, it's not. - Yes, it is. - They are a productive asset in the fact that it was actually output to it. But there's also the other way of looking at what property does, is it is a wealth creator, it is an income generator. The output of it as a business though is technically under theory. - Can I make a case? - Go for it. - Let me see if I can make a case, because I was asked by a journalist on the fin review about this particular thing earlier in the week. What people don't understand is that if I'm in a town or a city, and I wanna set up a business, and I wanna employ people, those people who might be coming to that area, don't buy outright, straight away, right? And so this whole concept that it's unproductive when human capital movement is essential for economic activity and economic growth. I need to get, I need to roof over their head. Now I can't, let's say I'm thinking about setting up a factory or opening up from the Asia into Australia or whatever it might look like. And I can't house my people in Aubrey, Wadonga, 'cause there's no accommodation, right? So let's say I'm doing a transfer hub there, I'm competing with Izzy or whatever it might look like. So all of a sudden, I can't rely on new supply coming in in the next 12 to 18 months, to almost 36 months. So if it's Greenfield, it's gonna take three to four years before I had that stock. So whilst I appreciate that it's not productive in the economic sense, in that short term, you've actually gotta understand the reason why rents get to $2,000 a week in broom and Newman and all these areas is because there is literally no accommodation. - Yeah, that. - And so the point I'm making is you're not judging productive use of just that. You've gotta judge it in the sense that it brings the workers to make that production. And if you don't have the accommodation, you can't have the workers. It's a simple fact. - I think even if it comes back to the fact, we know it deeply and we understand that. But you look at it at a macroeconomist, they're looking at input output, they're looking at very overbroad and they're like, well, this stuff is not an out-of-the-stay. - The other flip side I put to you is that don't forget 65, 68% of our population during the capital cities and that the requirement of the housing, you're talking about, they will discount that straight out. You're talking about regional town. - No, discount, they shouldn't. Because you can say, you can't. - But they discount out of me. - So you agree about agglomeration in terms of the power of that from an economic point of view. - Yeah. - But I also, I also say. - But if you put it on equity, it's the other difference here that we're not talking about is gearing. - Oh, look, agree. So, this is the flip side also, is that? - I'm not saying that you can't get on the side of the room too. - But I'm not saying you can't get higher productive use. That's not what I'm saying. - I'm coming back to the 50%. - Yeah, yeah, yeah. - Right, so the reason property is also so easy to take off and what the concern is if you take it off other asset classes, most other asset classes, in fact, pretty much all of them don't use gearing. So you are going away with gearing, your hundreds of thousands of dollars profit will be a fraction of that in equity, because nobody gives. - Oh, great. - Yeah, but maybe they'll start to gear. I mean, this is the other thing too. - Yeah, well, that bad. - Yeah, well. - Who knows? - Because again, the risk. - But if you're not going to be a negative-gear property and you can negative-gear equities, like, oh yeah, maybe I'll have a look at that. - I mean, people don't at the moment, but he's just say they won't. - And I'm loving this moment. - And then again, I'm going to do the other flip side is Asick, Afkha, Donalow. So this is the regulation side. So, coming from my world, having seen the Banking Royal Commission, having seen the GFC leverage and gearing has been part of the reason why it is almost impossible. possible to use gearing in other asset classes because it's created financial bubble. It does and it is a danger. I agree. And thank you, but I can tell you in running a financial planning business, if someone comes in with a high risk appetite and they're accumulators and they are clearly stating that they want an aggressive strategy, then you will potentially see. You can do it. I don't agree with it either. I mean, I'm, I'm, I'm, I'm saying, you do not gear equities unless you want to lose your paints. Because ultimately that's the risk of blacks one of instance and so forth where you magnify that. And same with property, everyone, if you want to gear into property, you want to make sure that you gear into a more liquid market. Yeah. And a less volatile market in terms of what you're doing where the biggest city has traditionally been lower volatility as opposed to obviously the most extreme volatile markets in property are mining towns. Our boom bus cyclical type of towns. Well, I was back to it's 2004 peaks. So there you go. There we go. There we go. 2022 years for its back. Very good. Now, I'm going to pivot. We're going to talk about negative gearing now because I want to, I want to round out this tax debate because I'm loving it. So thanks Evan for being the devil's advocate applying and you know, sort of still maddening. It's good. All right. So again, the mood to change us and we don't have a lot of data on this one. Up in terms of intelligence around what is, but it's mooted as two properties at any one time that you can negative gear. Right? So let's go through the detail. So that would mean that in each tax year, you would only be able to choose if you've got a multiple portfolio, which two properties that you would choose to negatively gear. I'm fascinated by this concept in terms of what it would mean to existing investors. Do you have an opinion on that? I can't even further back. Again, this is the same with what we're hearing about with the idea that they're going to put a land user tax for cars. How do you, like, the monitoring of this is going to be so expensive to do what we monitor it now for each of our problems. So there's just so many. You're just going to have to get your accountant to work out. To work out. But that's not that, like that answer is exactly the problem. Right? That's exactly why at the moment, for me, if there's one that isn't going to happen, it's the negative gearing tax. Think that's the one that's potentially, it was literally thrown out into the public sphere two or three weeks ago, again, as Nereda said before, testing waters. And it got really muted response. Like it did just, and it isn't going to move the dial in terms of the, I mean, you're talking about there's 800,000 individuals that have two investment properties or more. And realistically, you can boil it down into several thousand that this is really moving the dial in terms of a tax take. And they will find other ways. I mean, Nereda is just highlighted straight out. For me, the negative gearing tax talk is the one that won't get through caucus. It's part of what they have done with their own, you know, flex back from 2019. That this was probably the biggest problem. So I, for me at the moment, this isn't my concern. It's a talk in his discussion. CGT is a bigger one. I don't think that I don't think that I don't think it's a big deal. But let's run the hypothetical. And this is the one we got. This is the one we got because remember, he's been very clear because he's also had a lot of pressure on terms of doing tax reform with the mandate that they've got. Right. So he's under a lot of, you know, media scrutiny and pressure to actually introduce reforms that's going to lift productivity and get money moving in the right direction in terms of into areas of investment that are more productive use. And that's the angle that he's going to use. I promise you, he's going to do that. So in terms of the existing landlords, if I've got four or five properties and and four of them are negatively geared, how does this hurt me from a cash flow point of view? Well, it's a problem. It's a big problem. I'm going to be able to hold on to it. Well, particularly new investors rely on it. We do rely on it to bring a constant stream of rental properties to market. So this will change it. I think they're not even extends to, we know a lot of young people are using rent besting as a means to get into the market. Yes. This will, you know, I mean, not that, you know, if it's grandfather, I mean, look, it's so hypothetical at the moment, but we don't know. We have no. You think that would engage in the industry, wouldn't you? Like you'd think Jim, Thomas, Treasurer, engage with us. Again, what is the macro problem? No, you know what I reckon it is. I think you look at industries like oil and gas, you look at mining more broadly, you look at banking, they're very good at lobbying together and they're very combined and they will get together and make sure that what they say gets through. I think the property industry is to disjointed and we've noticed it with this CGT issue. Like everyone's kind of coming in from different angles. And like finally yesterday we saw REIA, copy council, UDA come out together with a joint statement. But it's quite late, you know, like it took a while. And it wasn't that point. It wasn't that really striking. No, and this is a thing like they weren't in the year. Like they shouldn't have even had to get to that point to make the statement. They should have been talking to government. The back channels. Yeah, the men in dark suit. I'm sure gas industry has been talking to the politicians. That has been showing. That has been on mainstream television about how important the gas industry is. And they still say they want to talk. They still do. To this day. So again, my argument is 2019. It was very clear that change to these two policies in the next decade or so is more than a live event. It's going to happen. So it also comes back as he said to the industry, the coordination is poor. The gas industry is known. This has been a problem since 2010. And they increase at the petroleum resource rentaxes. You know, you really simply want to say it. 2010 under the Henry review, all of these points that we're discussing right day, which is 16 years ago. We're all put in. Yeah. All of them were there. Well, Federal Labor took it to the 16 and 19 elections, you know, in terms of reforms and settings around new slivers as existing and all those types of things. And the other problem that we're fighting is that there's a goth with the mission here, which is it's that time. Right. There is. I don't know. The electorate is there. Yeah. The electorate has got to the. So that's what I mean. Yeah. So it's that time that has been building for that is the difference. Yeah. But you know, I think you take it back to 2019 though. The media will like this is negative gearing is going to change. You know, you need to vote, but this is a key. And then of course, labor like pretty much lost off the back of that. And this is a some of the, you know, a lot of the commentary coming out on in media at the moment is very pro-changed to CGT. Yeah. We should do needing investors at evil. You know, like there's this very, at least messaging is coming out. And you kind of like, and you know, I was thinking back to, it was the same messaging. It wasn't. But the other one that got the old of vote was the actual dividend tax. So when that, that so if they. In 2019. Yeah. If they stripped out the dividend tax and just went with the property tax, they believe that they would have got a lot. Yeah. Interesting. So, you know, and I even remember my dad who basically doesn't vote. He just basically don't give votes every year. But he just said that that one, and you know, a golf club and everywhere around all the town of Erong, they were like, that's it. That's the one that triggered them to say not voting labor. So I think that was the one that we're missing. So we do know that the narrative is getting stronger for change in the space. And Tim Charmer's even two weeks ago at a, at his economic speech that he delivered where he did talk about, you know, Treasury's forecast around productivity, which was, you know, glimmer to say the least in terms of what that was going to look like. He actually said, it's even more important that we do it now. And so I don't think so. So if we're sitting here saying, it's not the right time. And it isn't the right time. But I don't think that's going to change it. But it's never the right time. So we're going to change it's hard. And nobody likes to check. So again, I just want to finish up on my point. You've got to go back to what this is about. Right. So this is about, we've got 27% of, yeah. But it's 27% of GDP. We've got a structural issue with government spending. Yep. They know that they're going to have to make hard decisions. And you can hear they're going to do that. Yeah. But they're also going to have to live spending. Yeah. They also need to diversify their mix 62% comes from personal income tax. Yeah. We've had too many ways of diversifying the tax mix that they're going to close. The it's time is there. Don't forget, if you look at in this is 2021 sensors, the average age for a first home owner went from 28 to 34. Right. That is now becoming a massive headache problem. Six years difference between first home ownership is making it even harder to get gen Z's are absolutely now driving the problem, which is they are missing out. And they've got to write to say that. I think they, if frustrating me though that they see that it's either me or an investor on a property. It's not that I get that. It's politically palatable. And I think too. That's the one. And also on the productivity problem. We know the sector with the biggest productivity problem is construction. Yeah. And if you go up to South East Queensland, it's absolutely a labour issue and they cannot get housing for that labour. And so you need to fix housing. You need rental housing. You need accommodation for all these people. But negative, a change to negative gearing will actually make that worse. Which is why. Again, how we're thinking of it very, very deeply, but I don't think treasure is. Okay. So three things you're going to hear in terms of the budget. Spending reform. Yeah. Then you're going to hear about productivity. Yeah. And potentially some and shine. just to the business tax rules or corporate tax. And that might be offset by a gas, super profits tax. That's on the agenda, and finally, the intergenerational inequality. That's what you're gonna hear about, and that's where the property story comes in. And that last one comes in. That last one is going to sit at top. But you know what? Because the biggest political pool of voters is now Gen Z Millennials. Of course. So that's the story. So, you know, as the baby boom is unfortunately a dying off, sorry, baby boom. But as they die off, they're obviously the biggest voting pool, and that's where Labour are going after. So strategically, at the end of the day, politicians just want to be really. He's the question for you. Where's the biggest concentration of wealth, though? On a per capita basis. Oh, it has to be with where the common population is. Yeah. It's Gen X's. Yeah. Right. So if you actually even out the population to be even Gen X's, other ones. Well, they're also gonna inherit the. Correct. But if you look at the ones that are most affected by the change that we've just discussed, they're Gen X's. Good point. Good point. All right. So here we are. We. It's a supply challenge. So we're hoping neither Gearing doesn't get touched. And if you are going to touch capital gains tax, we've got a better policy setting. You should look at it. All right. Then, and Neri, you mentioned this earlier, property turnover. So transactions is what you were talking about before. How important are transactions to state government revenue in terms of stamp duty revenue? Yeah. I mean, it's incredibly important. I think two. I mean, I think people. You know, people talk a lot about price growth and how price growth. It's obviously damaging for affordability, but you know, people kind of like a government center, not be too fuss-buy, but. Because they're incentivised by it. Totally. Totally. Let's not be nervous. We're incentivised by it. You know, we know when prices rise. You transaction volume's increased. So, you know, then that leads to a flow on effect to the economy. And you start to see greater employment for real estate agents, you see it for movers, architects, people tend to buy a new car when they move house, weirdly, you know, there's a lot of and state government revenue. So, it is a big issue. If it does start to grind down, that is a challenge. Because you see what are they going to do? They're going to go hand in cup to go to the federal government. So, you've killed off all of our revenue. You need to now give us more than just the GST, RESTHU. We're all. We're going to have to have GST. Or we're going to have to tax the constituents of our state, high taxes, because we're not getting the revenues that we used to get through STEM duty. So, that's why this is a fascinating story. - In terms of what you're talking about. - We quickly talk about GST. - Sure. I'm loving that a bait cell, let's go, there, how are we going for time? We're all right. - Okay, we've got time. - We've got time. - Yeah, we're good. - The GST is the fascinating one. Because the other thing we've been saying about is the blending of politics and policy, the blending of real action versus the macro theory. - Yep. - So the GST is a fascinating one, because the political argument against it is that it's a regressive tax. It's blanket, it's on consumption, and it disproportionately hits the low-rend of town. This is again where my argument comes is that when you're doing tax reform, you have to do it holistically. You can't do it piecemeal, and you can't do it one-for-one. But the GST is clearly the most efficient way. - Most efficient way. - It actually changes most efficient. The caveat, unfortunately, in this country, we just, the reason I brought up with state taxes is that under the original setup with the Howard deal, to get rid of retail tax, wholesale tax, et cetera, all those horrible mismatch of all these 33 and 10 and 15 and was to have this one consumption tax. - And Stamjit, it was meant to be in there as well. - Yeah, and you've got to carve out. Which is not, I mean, to her narrative point, Victoria, 48% of state revenue comes from, transactional property taxation. - And as well as 52% of total tax take is property related to Victoria. - Like again, what drives out the wall is that again, nearest point. If you're an asset manager, let's put the Treasury Department to the one side, but that's what they are, they're an asset manager. If you're exposed to 50% income from one stream, we all sit here and advocate that that said diversification risk you need to get away from. GST is the exact example, right? But what needs to happen is that it needs to stay at the fed level. And that's the catch with the legislation is that under the current legislation, all GSTs then carved out back to the states. But if you were to raise the GST by 5%, on last year's numbers, it had raised $43 billion. That would cover and a little bit more the entire NDIS. So the five biggest impact is on the federal government is interest, let's put that to one side. - Right, and that's important. Don't put that to one side. Did you just hear what Evan said? The biggest cost to government is actual interest, the cost of interest on our debt. - And it's only getting worse. - It's gonna get worse. - So all of this money that we're paying in taxes is actually going to interest cost because we spend too much. - Age care, health care, NDIS. And they're the three that I want to just probably cover off at a discussion point with regards to demographics. Then yeah, you've got the health side and you've also got defense. So defense is the other part of the problem. - And that's causing housing challenges too, just as an aside. - So here, do you have an opinion on raising the GST? - Not particularly. I think what Evan's saying is it's spot on. It is clean and it does solve a big problem. - It taxes, it's a big issue. - Because what I should have finished on again, 'cause I said the point and then didn't even argue it, which is if you do that, the flip side is that you can actually probably scrap the lowest tax bracket. So you can get rid of the 50% tax bracket, bring it up to 60 grand. And therefore you've got a flat tax to people of 50%. That's what it is, 'cause it'd be through consumption rather than through personal income tax. I mean, again, talking about incentive and what I have a massive problem with at the moment, next year the tax cut to bring the lowest social economic group down to 14%, watch superannuation tax, 15%, where these the incentive then to stay for your future if you want the lowest social economic group. Putting money into super is actually more tax inefficient than. So this is what I mean, the piecemeal problem cannot keep going the way it is. - Make you got my vote on G. - I don't have to. - I've been a strong advocate for it. - I can't believe. - Try to make a poll. - Maybe eight or nine years, or a. - But this is the political problem is that the flip side, the time it is income tax is described as progressive tax. It's not progressive at all. The infiltration of political talk and language and lexicon into the economic and tax side is distorting the view as well. - A broad-based tax on consumption is a damn good idea as well as. - Scan an avian country has been doing it for decades. - Correct. - Very well. - And as long as you have that critical safety net, not, and we're not talking about middle-class welfare. We're talking about a safety net for our most vulnerable and most need in our community. - And you probably overdo it, but that's a good thing as well. - Not a bad thing at all. It's not a bad thing at all. Okay, let's bring this home. So we've gone through the whole story. I want to conclude, so is it a good time narrator to be considering a major tax reform in the property space, given everything that we've just discussed in terms of what's gonna happen over the next 12 to 18 months? - It's probably a better time three weeks ago. You know, I think now I. - I could have dropped the budget three weeks ago. - It would be quite a different time. I've got no doubt that things are given how much things are escalated. I'd say that they're having to consider things quite a bit differently than they were then. - And now you've got. So we've got a situation in terms of that. We've got to supply challenges. We do have intergenerational challenges around housing. I don't, we're not disputing that. In terms of leveling the playing field around and investor versus an owner-occupier trying to buy or a first-home buy or trying to buy, in terms of their service in calculator, they get a bit more access because they can add the rent in terms of how much borrowing capacity they can get. So there's potentially some settings you could do around that as opposed to a, you know, this sort of hard setting that you're looking at in terms of tax policy. I also think that we've got to take into consideration what the owner of property owner-occupies think about. They're two thirds of the market, right? So either owning or trying to buy a property through a mortgage, those people are two thirds of the market, right? And then you've got a third of the market as roughly renters or first-home buyers are coming in. Now, I wonder how they feel about the risk to their price of property. And I know Grapp and have done some modeling and I know there's been some other modeling done. And a lot of that modeling looks between sort of two and eight percent in terms of where values might decrease off the back of these settings. Now, of course, we don't know the details, so we can't do the precise modeling and Treasury has probably had a goal to it. But I wonder whether, you know, households that are owner-occupies, where they'd be happy to sign up to policy that might reduce their value of their home by 2%. And if they do, that's around around numbers $20,000. Five percent is around $50,000. The value of the house will depreciate, or if it does drop by 10% with these settings, considering the timing, because that's what we-- you know, we take a long-term view, Italy, and itself out. But in terms of the direct hit that we might experience, and I know, Narity, you were saying that you still think we might scrape out growth in the next 12 months, but just certainly subdued. So single digit. And in some markets like Melbourne, it's [BLANK_AUDIO] we now might be challenged with a flat market in terms of what that looks like. So it is going to be interesting, but I think that is a point that everyone needs to say that you can't look at property and isolation just for investment because at the end of the day investors should be price takers, not price makers in the property market. But as I said, that has changed over the last five or so years with this next generation of social media and what's been happening with then pouring on this idea that you can make quick riches in property and that's been really damaging in terms of the industry perception as well as the consumer perception on property, these greedy property investors as well. So it is an important story. Government, if you are listening to this or Treasury, we'd love to be involved in the consultation around what you're doing from a policy setting point of view because these policy settings do matter. We absolutely need to get the speculators out of the market. But you desperately need long term investment from everyday Australians to supply the critical rental accommodation that we need in the market. And if you get the settings wrong, you will not get that outcome and you will impact the most vulnerable through higher rents and potentially through those higher rents. You're also limiting the ability of first home buyers coming into the market. So it's going to be interesting to see how this plays out. I love the debate. Thanks for coming in and talking that. And I think you've had a fly on the wall experience in today's podcast because it has been two tightens of the industry, understanding the mechanics of the economic movements associated with that. And that is what we get to discuss and debate in terms of the thought leadership that you're seeing here as well. So thank you both for coming. Thanks for coming in. That's great. Awesome. And until next week, just before I go, a couple of bonuses. There's two breaking news episodes if you want to learn more about the capital gains tax and negative gearing reforms and the policy settings that pick up, which is the property investment, property investors, council of Australia. So we represent the landlords and on the chair of that association. So I've done two breaking news episodes that you can see one in February, one in early March. Check those out if you want to learn more and get more educated to be in this debate. And we are what's going to happen to capital gains and negative gearing. But until next week, remember. It's not just about taxes, empowering, but only if you act on it. I can. Hey folks, opt to here your smart money sidekick inside more. Just one quick thing before we sign off. If you're new to the property catch community, welcome. One quick tip to help you get the most value from the show. Our first 20 episodes cover the foundations we build on every week. And yes, listening on one and a half speed is totally acceptable. If you're short on time, download our free binge guide. It distills those episodes into one easy read with heaps of visual diagrams alongside free tools inside more. You're all in one financial home to help you organize your money and plan your next best move. 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