is a complete debacle to national shame at these the right ways to achieve reform. It's saving just under $300. 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 podcast community. It is the Couch community for episode five, 98, where we are also dissecting the budget, the federal budget. But this time I've got two absolute elite experts in this area. So we're going to be unpacking all things broadly around the federal budget. We're a little bit of a property lens through that as well. So I'll get to that in a moment. Just some quick housekeeping for everyone. We've got a webinar coming up, which is property prices after tax reform, fact versus fiction. That is going to be on Tuesday, the 26th of May, at 7 o'clock, Australian Eastern Standard time. We already have a huge number of registrations. I'm sure everyone's interested in that topic. So to register to make sure you reserve your seat, go to the PropertyCouch.com.au/registernow. So yeah, we already have 900 plus registrations. We've got 1,000 spots, so that one will actually potentially sell out as well. If you're an in-power wealth client, I will be doing our special episode for you on Monday the night before. So check your emails. If you're not getting emails from us, please reach out. It might be going to your spam or your junk. So please, we want to make sure you're getting those. So just go to
[email protected] and we will send you the details. So you can come along to that special client event the night before. Also with these costs of living, inflation, and so forth going up. A couple of weeks back, I actually put a series of videos together around how you can find extra money, potentially thousands of dollars in your mortgage to obviously relieve the family budget if that's a little bit tight. So the details are in the show descriptions if you want to learn more about that. Series of videos of ways in which you can manage your mortgage and structure your mortgage in a way that will potentially release a little bit more cash flow in the short term. I wouldn't recommend you would do these things over the long term because we want to get debt free as quick as possible. But anyway, here we are post-federal budget show. I'm delighted to have David Robinson back. David Robinson is the head of economics and market researcher Bendy Go back. He's also the chief comments. Welcome back. Thank you for having me. And obviously if you don't know who David was, he also appeared in episode 5.59. What do the US and China's tariffs means for the Aussie property market? So that was back in August last year. So check that out. And of course, where David's drink is in the macro, derates the economic outlook specialist. So we are super keen in terms of hearing from David throughout the day. And of course, one of our regulars, Evan Lucas, who is a more ambassador. He is the host of exchanges with Evan Lucas, which is a podcast that you should all listen to. We get some of Australia's leading thought leaders on that podcast. And he's obviously a market commentator that everyone loves to listen to around investor behavior and all the psychology of what's going to happen. So I'm going to be interested in in terms of your views, in terms of what people are going to do based on these settings. All right, let me set it up for everyone. We obviously have had a significant budget. And it's definitely a lot more aggressive a budget than we've seen in the past. We've got negative gearing reforms. We've got capital gains, tax changes across the board. We've got trusts also as a means of raising tax revenue, housing focus with housing affordability. They think that's going to help solve that problem. We still have increased government spending. So it's not necessarily slowing, but there's a little bit of money that they believe that they can add back to reducing our current deficit. And of course, there will be higher taxes off the back of all of these policy settings as well. So that's what we're here to do. We're going to ask the big questions about, is it an aspirational killer budget? Or we're seeing both political parties spinning aspirations in different ways. So I think we're going to get into those particular sessions. So what I wanted to do is start with, in terms of how do you assess the headlines, David, in regards to what you saw in the budget? What were some of the key takeaways that you saw there? Well, Jim Charmers framed it as his most ambitious budget yet. His fifth one, not just his most ambitious, but I think he framed it as the most ambitious budget for a couple of decades. And maybe that's fair enough in terms of actually trying respect to tax reform. There was a lot that was trying to be done all at once, the five different packages. So fuel security, affordability, housing affordability, productivity, tax reform. And one of the packages was spending, saving more than spending. Yes. So that's open to scrutiny if that's actually true. But I think that was my main initial reaction as you're trying to do a lot at once in very turbulent times. And so it's one thing to be ambitious. It's another thing to be successful when meeting those state of targets and aims. Well, can I get a follow-up question for you? Did we need to do something? I mean, is our economy stalling through productivity and stalling through compliance and regulation? Did something need to be done? I think clearly we need to do something around productivity. And that's really been our Achilles heel. I think by a number of most other metrics, Australia's actually outperforming many of our economic peers, including in labor markets. But productivity is the one you can look at, clearly, and say, wow, we are towards the bottom of the tree there. So we did need to do something around productivity, whether or not this does enough and in the right areas is another question. And probably the other thing I'd say is, I'm someone who's been calling for bold structural reform for over a decade. So I'm loathed to sound too critical when, oh, finally, they're actually trying, bold structural reform. However, you then need to scrutinise, well, that's fine, but are these the right levers that are being pulled, are these the right ways to achieve reform? And I'm sure we'll explore some of that. We will, because there's obviously you've been calling for that reform. So I want to again double click in terms of what that looks like later on. Evan, what was a big surprise for you and what did you see in the budget? Yeah, so just pick up on David's point. I agree with the fact that five packages have sort of been lost. We're all talking about the tax policy, and I'm know that we're going to talk about the next hour. So I'll sort of somewhat leave that. The productivity one, I also agree with again. I think I've said it on this podcast and pretty much most times, I don't. David thinks the same way. When you hear the word productivity, the average person hears activity. And what I mean by activity is that they hear do more with less. That's how they hear that word productivity. Productivity is not that it's about enhancing what you have. How do you increase the output of your service or good, whatever it is that your business or institution does with the products that you have? So with this, and that's lost. And I do applaud the 10.2 billion dollars changes. So in the industry that you and I will talk about particularly is, you know, the streamlining, particularly around, you know, subbys and the regulation they have at 1600 bucks that don't have to spend on regulation. Good step. There was more to be done. But again, at least they've done something that was taken 497 additional annoyance taxes to go with the 500 plus last year. It's saving just under a billion dollars of wasted, you know, annoyance taxes. So that I applaud, that is more productive. But it's a so it's such a small part of this, such a small part of where this is. And yeah, we kept hearing this term as David has said, which is we are going to be a productive budget. We are going to be a reform budget with the reform part. And I'm not going to test if you're going to reform, do it or don't have my argument with regards, because this is again, you can see this is going to be a generational budget set up. It's not just what 2026 seven will be. It will be 2728 and 2829. They clearly have to talk about personal income tax issues. That's still a massive drag. You can't see the 250 weightau actually having any major impact at all. It's just tokenism. So from my perspective, I applaud them for doing something. It needed to happen. But again, and I'll use the word levers that David, I'm going to go a little bit further. I always talk about monetary policy being a sledgehammer trying to do fire and art. So they've only got one lever. Physical policies hammers doing finer. They've got several levers, but they are hammers. They're still blunt. And so there's no finance to it. And that's what we're at. So I'll follow a question for you then. We've already heard the Treasurer start to forward predict what he's got in the pre-election budget, which is okay. That $250 per person kicking in from one July 28.
he obviously wants more and we know that these tax reforms are going to deliver tens of billions of dollars of tax revenues. I think he just didn't want to shoot that shot just now. He's waiting for when it matters, which is leading into, I mean at the end of the day, make no mistake. Politicians set policy about being re-elected. I mean, and you know, which is actually what it will be in next years. But, Judd, if we've done this, what's the follow-up? Because only the next election has to be before May 20, 20, eight. Correct. So, the next one, as David has pointed out, is kind of a big one, because they're not going to make the one after. But the forwards, if you look at the the forward tax receipts that they're anticipating, collect from capital gains tax, or the discretionary tax, that's over $100 billion in terms of, and they get one extra year of that being in the forwards. And so, that's what they can rely on. So, I suspect they're going to be promising, you know, personal income tax cuts, even more in the forward estimates in terms of, so can we get that poll announced? And in 2030, we're going to give you another 10% of your tax report. Can I pick that point up and put it to David? So, the other thought of what we're talking about this week is we saw the opposition's reply response about bracket-create and about indexing it. I know, you know, you know, I've won, David, you first. How do you see putting the political side to one area is the way to help bracket-create indexation, or is it something else in your view? My view is it something else. And there are a lot of things I do think, indexation is the right approach. The trouble with using indexation for tax brackets is if you do have a period of higher inflation, let's say think about the last, you know, the question of your crane creating a surge inflation. Actually, then you're going to have tied a policy to try and run an inflation, and you need fiscal policy to be aligned to monetary policy. So, it would be doing the wrong thing at the wrong time. So, indexing would work if inflation was happily and reliably between two and three percent, but I'm not convinced it would work optimally to deal with tax, with bracket-create in a high inflation environment. So, what would you do? Well, you need a government to commit to dealing with bracket-create. And I think this is probably what Jim Chambers is saying, they need to do it responsibly. So, it becomes strategic rather than just a formula of indexation. So, I don't think I've actually got the solution there, but I do see pitfalls in simply moving to indexation and that's it. Actually, I'd go to GST, but that's another problem. That was that was that was that, right? So, I think I've got to write that. Yeah, universal in the sense that we can do this. My, I'm quite a proponent of indexation. From the point of view, I completely agree it has an inflation problem, and I know that, which means I think you'd have to cap it. Are you setting it from core or headline? Ah, core. Core. You have to be on Twitter. Yeah, yeah, yeah, yeah, yeah. You have to be on core. And I think you'd have to cap it at three percent, right? So, which is the top of the RBA band. So, it's not true indexation, I get that, but it sort of at least mediates the high inflation. If you're running it four and a half or five percent, probably we're in 2022, 2023, where you, in a particular top tax brackets, if you're running it, that kind of level that's too much to go back to them. But the elephant in the room, getting back to the first question you asked Ben, which was, what did you take out of it and delivery, stayed away from the elephant in the room that when I was there, it was so obvious, neither, or any color of politics wants to use the C word consumption tax. None of them. And my biggest issue, I keep talking about it wherever I can, 56% of the new four-class it was going to be 62, 56% of total government revenue is personally contacts. I've argued forever that's too high. And any asset manager worth their soul would look at their portfolio and go, "Holy, I've got 56% coming from one revenue stream, that's a risk. What if we have a downstand, and unemployment starts to rise back to 6%, that 56% revenue stream is under real pressure. But nobody wants to talk about consumption taxes and bring that to you. It's not just GST, but that is the obvious way to look at it. And that's where I would put in the indexing or the adjustment to the GST via the inflation rate. So there's a way of doing that. And inside the OECD, David, we're actually quite low on our consumption tax, like at 10%, most of the 15% in 17 to 20 in some cases. So there is room to move there in terms of that story. Coming back to Angus Taylor's idea of at least having a go at it, because what we've got is a situation where yes, our income, our wages are taxed at a higher rate. And rather than bringing that down, what we've had is a situation where we're bringing tax up. I mean, what we'd like to see is lower taxes more broadly, but a tax on consumption makes a hell of a lot more sense. That's my analogy with the Hammers, right? So, you, you, you, Hammers, sizes are different in terms of what's going on. I mean, I'd almost argue that we're getting to a sledgehammer size in personal income tax and we need a chisel. We need a chisel. We need a chisel. And so the consumption is clearly part of it. I mean, the reactions and tinkering with super is another one that gets me annoyed in terms of how they're looking at doing it. There are better ways to touch super. Super is a great vehicle, but it has become a vehicle for the wealthy. And that therefore, you know, again, you could look at not necessarily an indexation model, but at least a tiered model like personal income tax with super anuation. Well, you show me the incentive and I'll show you the data. Correct. Yes. So that's my well. It's pretty, it's pretty simple right in terms of, in terms of what they're, David, we're for we move on to the next thing I want to talk about. What what they're obviously selling the story of, you know, intergenerational inequality. And is that a problem that they do need to solve? Like is, is the narrative in that storyline as great as what it is or is there a, or is something to do with people delaying purchase of housing because they're they're living their 20s and they're more active than they don't necessarily want to settle down? Is it a combination of those two and does, does does this budget solve that narrative that they're trying to talk about? 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 mind 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 theproblicouch.com.au/myknowledge. Yeah, so I think there's a few parts there firstly is intergenerational inequality. The much tougher ask it is now for a young aspiring owner to get into the property market. You know, is that a an economic problem or a more of an aspirational social problem? Yeah, exactly. And so I think individuals will have their own view on that. Yeah, we agree. But then the other part is, well, does this actually solve that? And I was slightly surprised when during the budget speech, I think it's in the papers as well, the number for how many new first homeowners are going to be in the property market by virtual release changes, 75,000 in the next 10 years. I mean, what? So 7,500 a year? That is not moving the dial. As people point out, it's just over 1% of the houses needed each year. So the 240,000 homes needed. So I'm glad you're raising that because I want to talk to this narrative right, because it is a sensitive narrative and it's a space that I'm playing in, obviously, with investment property and so forth. And it's been my life for the last 25 to 30 years. So I think they had very little wriggle room because of the unintended consequences of what was happening. So let's talk about that. So 75,000 new first home buys, getting an opportunity to get into market. They still need to save their deposit. They still potentially need that 5% or whatever that looks like. But this is where it gets quite nuanced. They know that the changes will reduce the amount of property being built in the Ford Estums by 35,000. So it's a net 40, right? It's a net 40. But there's less, so it's basically saying that we think that there's going to be less investors coming in. That's going to be replaced by first home buys. And there's going to be less stock for them to buy. So less stock, obviously, because the other risk here is if they had a go on for grandfathering, then non-grandfathering, there could have been a run on the market. And then two-thirds of voters don't want to see the property, the value of their home drop by 100,000 or 200,000. That would have been catastrophic for them. So they've got this. So why didn't they do some form of gradual phaser? Why didn't they? Because the other thing that I've been speaking about, and I've want your views on this, this magical five-year level where properties go from negative to positive to the gear. And I'm trying to find, particularly in the post-covid world, where that data pays out. Now I think what it is.
is because interest rates 2021, 22 and to some extent start of 2023 were 2% right? So you're low interest rate, put your property positively gear quite quickly, but rates have now gone up and that's not the case. Most investors will probably interest only their first one, two, three, five years for you. So I can't get this five years. So obviously your biggest cost as an investor is the interest cost. So to your point when interest rates are low there's less cost base there, but I can tell you also that the amount of cash that you put into the deal also is your LVR. So a great rule of thumb for anyone who's listing on the community, and I'll say there's many more times over the decade we've been doing the pod, is that when your loan to value ratio gets to around 60, 55 to 60%, your neutral to slightly positively gear. So that's a good rule of thumb. So now if you would a borrow 105% because you're using the equity in your family home, then it's going to take around 12 years for you to be back to neutral or negatively gear. Depending on how quickly that's why I can handle it. I can work out. Well, and if you've got money being allocated to your family home and paying off your non-deductible debt, that's how long it's going to take. But if you're debt free on your family home and you can put money in offsets and so forth, you can run that down pretty quickly. So, and if you obviously, and this is where some sprucars start to play, they go, "Well, now let's go and take you in a regional town or we're still a mining regional town, and where the yields are higher." And so ultimately the property is more neutral to get. And so they might take three or four years to get down to lower it, but you run the risk of getting blown up from your capital growth point of view. So why even do it in that particular? So a good rule of thumb is seven to eight years. Five years is probably the area early where it's going to start to get to neutral. But it's seven, and then if you've got a lot of debt and you've got a bigger, big principal base of debt to pay off as well, then it's going to take a little bit longer. But this is, it's sort of lead into a really important message and I want to get out to the community. This is the feedback that I've had over the last seven days when we did last pod. And that is that a lot of people assume that negative gearing's gone. Now, let's make something clear. You can't look up the tax act and see a terminology called negative leg hearing. It's not a thing. All we're talking about here is any cost that you make on an asset or a loss that you make on an asset, you can offset against your salary income. Okay? That's what negative gearing is. Now, what they are saying, and this is really important for everyone in the investment community, you might be a bit panicked at the moment, is that upfront benefit is now referred to a deferred benefit. So in other words, what's going to be happening is you can accumulate those losses and you carry them forward each year. Until such time as the property does become positively geared and you can then offset that. So you will get that tax benefit. Just not upfront. And I think, you know, whilst I've got the microphone on, I appreciate the opportunity to talk about this. It just means that teachers and nurses and those people who did rely on having a little bit of extra money, having a little bit of extra stimulus early from a cash flow point of view, they're going to be challenged in terms of being able to invest in property. And meanwhile, negative gearing, or as a short phrase for that process, is still there for, well, new builds, current for shares, some margin lending, it's commercially unincisely. Yes, that correct. It's only on existing residential property. So commercial properties. Yes, that's right. So there's still a lot of, so we do, I mean, yes, I mean, everyone's going to be rubbing their hands if they're commercial property specialist. But I would be putting a warning out there, people. I mean, there's a lot of rubbish commercial property out there in rubbish locations. And so please, you know, like at the end of the day, residential property is an essential need. Commercial property is not. And so you're making lots of losses if you don't everyone turn it into, you know, you know, and then you have to keep dropping your prize and dropping your prize to actually get someone in your factory, but it's in the middle of nowhere or whatever it is, or in a lot of cases, your office building, you know, in service services, services of God, what we're doing right now, which is the invention of technology is going to make service businesses an online thing, the need for a commercial property is under threat. Well, and we haven't even got to AI yet and how it's going to reshape correct demand in the way we're shopping in the way society is what people still need shelter as an essential. So, and so finishing off Treasuries forecasts, we saw that they thought it was going to move property prices down by 4%. And we saw rents running in a grow by $2 a week. Now, they are in my mind, rubbery figures. Rubbery figures, heroic figures. Well, when I look at the global Australian property market, I could make a story for that. But there are going to be winners and losers in terms of, you know, the winners being potentially the agglomeration economy centers, where there is going to be pressure and demand for jobs and so, and then you're then you're going to have some regional towns, which in my mind are going to be, you know, the victims of such a policy, which is probably not about them. Well, we've already got really uneven property market, you look at WA and Queensland booming, not just by virtue of resie property prices, but just look at jobs growth. This is world big and even tazzy. So, it's a three-speed economy and then you overlay these tax changes to some of those differences and they potentially accentuate them. Yeah, and I think, I think the timing of them too with higher interest rates off the back of higher inflation. We're already going to see Melbourne and Sydney, you know, having a troubled time in terms of holding appreciating values. So, we do think that over the course the next three to six months, those markets are going to be more challenged as all of this settles down. Because the next question I sort of want to take from that, so to David, is we are in a higher interest rate environment. There's a possibility of a fourth rate rise in 2026, some even forecasting another two. Yeah. A flow of capital now and the cost of capital. What's that not just doing to the resie market, but the overall economy as a whole plus now with the changes seen from the budget? What's the forecast from Bendy Girl about where this takes us? Yeah, it's a good thing. Well, and one of the things I've been talking about for a while now is that the neutral rate is moving higher. Yeah. So, you know, we've already had three RBA hikes. We've got one more in our forecast for this year. But that scenario does look very different if the war keeps going for longer and then suddenly you might end up in a recession. But parking that, if there are a few reasons why the neutral rate is moving higher and it's basically the private sector going ahead to head for the next investment dollar with public. So, capital becomes more expensive. So, on that basis, again, ignoring the scenario where you're going to recession, we actually see the possibility that neutral rate is above 4% next year and therefore that this period of slightly higher interest rates becomes embedded for a while. There are a few drivers of inflation there. Not just tech investment, but deglobalization and even transition to net zero. So, there are a few of those mega trends that seem to suggest not just higher inflation or higher rates, but higher neutral rates. So, that's a different environment to what we've been in for decades where we've had falling neutral rates. The good news is there's strong business investment in all of that. But then the counter is, well, hang on, what does this budget do to business investment? So, it's at a challenging time that it's all happening. Yeah, can I pick up on that? Because obviously the NAB surveys post the latest rate rise was whacked in terms of sentiment. Confidence came down a couple of notches, but overall, Sen. did have a quite a significant fall. So, if you think about cost of energy in this country is a complete debacle. It's a national shame in my mind in terms of what it does because obviously it flows through in terms of all the costs that we pay. Fertilizer, diesel, all of those other things. We're going to have a food spike in terms of inflation around food. Is that part of the reason why you're only sort of maybe forecasting one more rate rise because you think that everything else is hitting us hard. So, we're spending. So, I mean, we already had an inflation problem coming into the Middle East conflict. We're already basically at the best-equipation. And that was, and I'm sure we'll get back to productivity. Our potential output basically gives us a growth speed limit of 2.1. And GDP growth is at 2.6. So, there's the productivity imperative. But then if we think about the Middle East conflict, higher energy prices, inflation being analogous to cost of living, that's going to be a broader headwind to demand than just rate hikes. That hits everyone. The rate hikes are only hitting more which hold, basically. So, that should slow the economy down. And that, for my reason, is one reason why I only expect one more hike this year. That's in this cycle. Then we start getting into what happens when the dust settles on the Middle East conflict. I start thinking about what is the. technology investment boom look like. And actually, I think that's probably slightly higher rates again, but for growth reasons rather than for damaging inflation risks. - I was going to say because the counter to that is obviously, you will potentially be able to do more with less writing in the sense that it's meant to obviously deliver incredible productivity. I mean, we saw out of the US, Scott Besson last week after investigating their productivity numbers because everyone thought the years there, their numbers looked a little bit inflated in terms of level of productivity. But we validated by several economists doing a review of that. I mean, it's quite incredible the level of productivity that they are able to do. - You can see clearly in that US data, 2023, generative AI hits US productivity goes from here to there. - Yeah. The only way I can say is the equivalent is the introduction of the tractor. So the introduction of the tractor taking people off the land to be able to do a massive increase in agricultural work. It's the same equivalent in terms of the only way I can relate it back to a behavioral change as a complete structural change in everything is what, you know, generative AI is going to be there, vertical as the tractor of this generation, that your ability to output your service is six, seven, eight times stronger. - Amplified. - Of the back of it. - You're the first time in history where manufacturing intelligence, correct. - And you're saying, - And you're saying, - And you're saying, "And you're following all of us." - That's where the point that David's making is that, and your point, which is still the same amount of work in terms of the actual hours, but the output is that much higher. That's productivity, right? So correct. - That is, the activity's the same, but the output is bigger. - Which should be good more leisure time. - Yeah, correct. - As long as we manage the transition well, because they are disruptive, that transformative, and we get a manager. - And so my flip side, I was just, sorry, it's gotta be sheer, doesn't it? - Yeah, but also the flip side that people come back to me on my tractor analogy. How many people lost their jobs off that? So if you look at how many people working on the land in about 1900 to 910, to post that, was significant, but what we also find is that, when you have a big structural impact, the disruptor as David just talked about, the re-skilling of the population happens rapidly too. So the vertical was jobs that I have today will be different. They'll be all invented. And so this is, I think, where it's lost is, you're gonna hear the big headlines, massive job losses. It's not necessarily, the job lost is, you know, a computer expert now becomes a computer thinker. I don't know what you wanna call it, but that will be the change, is that the AI will change your job title, rather than actually take it from me. - Hopefully. (laughing) - Well, I think also, hopefully, big tech and businesses and everyone should realize that that abundance needs to be shared. Like in other words, you know, if I run a business and the business is successful, I want my staff to be able to share in that. It shouldn't just go straight through to the shareholders, it needs to be shared around that. I mean, there will be some, - Yeah, so there's a perfect point. - But that, because, you need consumers. If there's no consumption out there, we don't really have an economy. So that point has been the quick question about, that point, which is, that's the exploit part of angle of the behavior. - Yeah, well let's see what happens, because if you look at shareholders are, under economic theory or at least business theory, you go to the point and you catch all the fish, and there's no more fish. - Yeah, correct. - So that's the exploit. - That's a bit dumb. - And you're supposed to maximise, shareholder value. - Maximising shareholder value. - So staying shareholder value. - Correct. - That's probably the, - And that's where it is. Like the growth of the company, the growth of the business has to be not just sustainable. - Yeah. - But the longevity of it, there are many businesses that you can point to, that chase technology tried to exploit the technology, and then have ended up in the waste here, because they've gone too far. - But bringing that back to the budget and the whole past. - Yes, so actually, it should be, that scenario should be very positive for government revenue. The question is how they share that. And you know, I don't want to get down the rabbit hole of universal basic income, et cetera. But if, yeah, exactly, if labour markets are decimated, well then it's going to be over to, - Who cares about monetary policy, it's all going to be fiscal and government and welfare. - Correct. - But the point I was going to make is, when you look at the budget papers, there's really no, - No, no mention. - No acknowledgement. It's like it's not happening exactly. - And, well, good reason for it, because to produce intelligence, the energy is significant. Like, you know, these data centers are just energy beasts, like to create these tokens, and we are just not ready for it. Like we have no solution as part of that particular story. But I want to, I mean, it's taken as a couple of minutes to circle back to your neutral rate. - Mm-hmm. - You know, like I'm curious as to the neutral rate being in the sort of low-for, like threes in my, I had it sort of still around 3.5. The only reason I had that is because the level of debt, I still think in terms of household debt, it's manageable. But I actually feel like consumption and so forth will be stifled a little bit by that. And so when I think where we get down to, it'll probably, depends on how bottom, you know, how much we bottom out, right? If we do go into recession, then the neutral rate's going to be three. - That will move again. - Yeah, it will move again, right? - And look at the neutral rate, was down in the probably low threes, maybe up to three and a half. Yes, a recession changes that. - Yes. - But I think the RBA made the point in the statement monetary policy and in speeches that they run a number of models for their estimates of neutral and they eventually dropped one, which I think was dragging it down. Because, and part of that is because consumption is holding up despite everything happening. And so we're not seeing consumers pull back. - And that's an excellent point. And how much of that do you put to the retirees and the baby boomers who are actually enjoying the spoils of the wealth have created and are spending it? I mean, like at the end of the day, they've worked out. They're out there traveling around Australia and spending like drunk on sales because they can. - And they're turned to deposits. - Would you say a little bit better return? - But the RBA had made the point that, when they put up rates on terms of the transmission mechanisms, the fact that the cohort of borrowers have less cash, that's maybe third in the hierarchy of why they're putting up rates that are going to influence the exchange rate, the cost of business, et cetera. - Really important points. Thank you. And yet everyone consider that, what David just said there, at the end of the day, there is always forces of demand and supply moving to try and get into balance and certainly bringing up that cash rate also influences that from a business context, not just from a consumer context as well. But which obviously leads back into your point around business investment, if it's going to cost me more to invest, I might not do that. And we're starting to see that in terms of, we obviously do your mainly in households and so forth around renovating and those types of things as well. Because I want to bring it back to the housing story. In your sort of analysis, David, in terms of around immigration, population movement and human capital, where do you see these budget settings around the property side of things? Can we sort of explore that for the next five or 10 minutes? - Maybe the two points I'd make initially, firstly that when we, if the objective is housing affordability, then tax fund, we can do things. But it's really supply. So did this budget to enough around increasing supply? We tried a few things. There are a few line items there, but arguably it should have done more. But the second point around populations are valid one and we saw the oppositions reply, trying to align population growth to dwelling completions, I think it was. You know, my view is that we should have a population growth or a net migration target of say 1% of total population. We're 28 million, that would be 280,000 a year. I think that's about the right number. As opposed to setting it to number of housing completions. - Exactly, yeah, exactly. So I'd go on a relative growth scale and I think the intergenerational report did some modeling around that and showed slightly higher levels of migration a bit of for the economy that's slightly lower. But the other point to make there is, it's all very well to put these numbers in the budget or to have a target, but are they actually going to hit them? How well are we managing that number? I think it's a better question than, or a more salient issue than just, have we got the right target? - It's interesting, right, because the sales pitch is negative gearing on newly built and first acquired for the, you know, the developers building it, it's the first buyer who will get potentially that advantage. Our analysis over the sort of first 10 years of a new versus an existing property in a comparatable market is that it will underperform by around 1.5% to 2% per annum. And the reason for that is because the long-term gain that you experience in property is actually the land value. It's not the improvements on the land. So a really good rule of thumb to work it out is to sort of say, if you've got 60% of the value in what you're acquiring in the land and 40% in the improvements.
then that usually boasts really well for long-term capital growth and performance of that asset. But when you buy something brand new, usually in terms of, and especially in regional towns, the dynamics is completely in inverse in the sense that because of the transport costs and all of the extra costs, the actual house is worth or the improvements are worth around 60% of your outlay, and the land is cheaper. It's around 40%. So you're exposed in that. And so it takes a decade or two before obviously the dwelling and the right downs of that, before the land becomes that. So that's why investors buy existing properties and existing houses, particularly as they go into markets and they find there's a couple of reasons. But one of them is obviously sort of the location around its exclusivity and its guests. So I won't unpack the whole story. But in terms of when you go into an area where housing is 20 or 30 or 40 years old, you're picking up the land value predominantly, and that's what bodes for the good investment. So the question is going to be can labor and will the property sprukers be able to convince people to go into those markets for the negative year in-bend. In other words, to make a loss so you get a tax gain. But if we can prove that the tax gain is not as good as the actual overall long-term compounding return, will they stimulate that potential and new supply from an investor? I'm not sure. I mean, it's all around. We'll show you the data, but we people are convinced of a quick gain or to save tax. And they don't do their research properly. They might still buy into the idea of buying in a new housing land package or an off-the-plane. You go back to first principles, which you said before, showing the incentive, showing the outcome. You then also look at what are the incentives. The incentive obviously is wealth creation, asset appreciation, etc. So even with, I mean, again, the numbers we talked about before about the slight slowdown is the 4% and the housing, but they actually expect net, a 2% gain. What they're also showing is that even with slowing investors down, because it's not going to stop them. And I think we need to point out this isn't going to stop investors. No, I wouldn't have thought so. No, I wouldn't either. It's just going to move them through the courtyards, right? So instead of chasing, you know, 4, 3 and 2, probably not necessarily most people touching the first, the top of a quarter of the housing market, it's going to push them down. Because obviously they're not going to have the same borrow capacity. Yeah, I think that's the big one. Yeah, yeah, yeah. And I will cover that in a minute. So I'm going to change that. And your point was pretty much what I was going to say, which is again, you're not chasing the asset that you can see. It's the asset underneath that matters, which is the land value. Again, Australia has a highly, highly dense populated country. Yep. And we are the six largest land mass on the planet with 0.5 of the total global population. 35% of our population living in three capital cities. Yeah, and I think it's 67% in total. Yeah. Right across the whole country. Yeah. So when you start doing those numbers and that's the demographics and the layout, you're again, that is the point, right? So you are chasing where the capital wealth creation is coming from, which is the dirt underneath the property and the dirt under the property is still going to have the highest density in the urbanized areas, particularly the developed, longer term urbanized areas. People need to live where they work. Yep. That's the short answer of all of this. Yep. So from the unintended consequences, which is the third of the thing we're sort of turning around, I actually think all that's going to do is just push investors down the scale and it's going to make that sort of half a million to a million dollar sort of area in property, even more congested because they can't go to 1.1 or 1.5 because the negative gearing and their affordability will ask over that question in a minute means you're just going to have more investors in a much more concentrated area. Which I'll get. So it's like I've been talking about the impact because obviously your calculators have denoted gearing ad vats from a borrowing power point of your own. We're now starting to see some of those lenders change or remove that ad back capability. Are you familiar with what's sort of happening from a borrowing power point of view? Yeah, but look, it's not, we haven't made public comment on this. Perhaps the only thing I add is, we're talking about population growth, we default to it being in the capital cities. I think that there's a role for driving a better distributed population growth. And I think about the hubs, just talk about Victoria for the moment, in Bendigo, Valorat, Jolongshire. So there, and when we think about housing affordability, so clearly the regional hubs have a role to play there. I also get the benefit of doing business and commerce with the major agglomeration city, right? Because they're so close and the working, I have a choice to get to work. Whereas the remote regional, that's not a liability that I have in there. Yeah, that's another market. Yeah, that's another market entirely. But to your point, Evan, I agree, you may well see the, I think it's likely that we will see depreciation in house prices to the extent that comes by virtue of the tax change. There's more so on that top end. Yeah. And that there will be this solid centre that is highly sought after. So can I, can I tell you what sort of being, I've been liaising with a lot of the property people that I, that I rate, who know a lot about the behavioural stuff as well. Some of the interesting observations that we've had so far now, you have to be proven, but just obviously hypothetical conversations. So if Borum, how does come down for the, the nurses and the teachers and so forth, but they still want to invest in property, they are ironically going to be competing against the first home buyer. Yeah, of course. And so unfortunately that 75,000 target to, you know, you're actually driving more competition into the first home buyer market on the fringes of the city. And so that could be interesting in itself in terms of, you know, will it make housing more affordable? I would probably say no. The other interesting part about the assessment here is, governments are just low to go after the principal place of residence. That's a tax haven. And it's become more of a tax haven now than ever before. And so what we are also starting to hear hypothesis around is that, well, I'm just going to upgrade or upsize into the better land where the land depreciation is. Stronger and just take that advantage because at the end of the day, if they're going to refuse to tax the family home, then my games are going to be tax free. You got more incentive than ever to invest in the next. More incentive than ever. So I'm sorry. I'm sorry. My biggest take out is that if you're in the renovation game or in the new in the construction game, you just got it upside. As in there is going to be more and more people that go, okay, the property that I own, the way I get ahead now is to redevelop that. So long as I'm within a good proximity of the city. I still want to upsize into the right bit of dirt in that because again, owner occupier appeal. So there will be competition still to push in towards that. And that that will trickle down like it always does. But so there will be there will be buyer markets in that owner occupier. What I'm sorry. Let me rephrase what I'm saying is that. The owner occupied it was probably looking at the investment property to continue to build their wealth and continue to go ahead. Has probably had the investment idea slightly knocked out and worked out that your capital gains tax point that you've just had there been there. It's probably better to renovate, upgrade my property to accelerate the value of it. So you've got the property of the dirt underneath it. And then flick it if you've got problem. So you can go for it. But again, we're talking about the unintended consequences. Have not. Like my answer immediately is if you have, you've actually the way you accelerate yourself now is to actually develop your own occupied property. Walk out with our capital gains and then keep upgrading your own personal home. But you're already on the market. You're those that are still found themselves in no mess. Households that don't have enough income to get stronger borrowing capacity. They are going to compete on the run. And they're still they're going to have to judge to buy the house and land package on the fringe. Or they're going to judge to basically buy the existing and put potentially their smart money in the dirt rather than the improvements. That however, what we're all sensing for the for the more you know the double household income double professional 253,000 plus household incomes. The other big story here is they those investors are going to be looking for the 40 year old untouched free standing home that's next to all of the prime. Yeah. And they're going to they're going to potentially buy that and sub sub divided into a duplex. Because if they do the development, they'll get the negative gearing benefit in terms of that. I was wondering when we're going to come to that because this is the debate that happened last Tuesday when I was in camera was. Do what's the next step is that which is okay. I can't think of the gear anymore. But if I buy the 40 year old house on you know a 400 square plus size right in the cities maybe up. Council happy at the moment to subdivide you put even one new build so you put two townhouses on one of those negative agreed once you put your property price of residents off you go. Yeah. And that's so the government will actually argue that's a positive thing. It's a positive to supply. Yeah correct. So they're sort of happy that they're getting that something they're also circumnavigating the NIMBY issue. Yeah. So yeah. [BLANK_AUDIO]
I saw that too, I was like, hang on a minute, the incentive there is to buy the rundown property on the street that everybody wants to get into, knock it over, subdivide it, negatively here, one part of it, live on the other, get negative gearing in a way you go. - But is it gonna create a two-tier market? - Of course it is. - Like ultimately, in that area now, you can buy an existing versus a brand new. Now, if you're a time poor professional, you don't have time to run a small side development company. So will you buy one of the, the developer, the builder who becomes a mini developer now, who's doing these subdivision semis? Are you gonna-- - Unintended consequences. - And this one comes up as being available for negative gearing, so you got a two-tier market. - Yeah, I'm an unintended consequence. - Those people who are gonna buy them, you need to understand, well, there's gonna be a premium to play, but also when you work out what that premium to play compared to the negative gearing, you're gonna get up front versus a deferred negative gearing. You're probably paying for that loss in the pro-shape paying up front. So maybe it's not, so this is where we, it's fascinating to me. - Yeah, and so again, all of what we just talked about, hypotheticals, I get to look at it from the behavior perspective inside of you, but this is what's happened from Tuesday. - Yeah. - And again, all budget changes, all big, big changes, had that, they'll argue that, you know, the unintended consequences of the Howard Costello, 50% CDD discount has led to one of your bug bairs, is the population speculation. And we had to go back on it. My hammer example is where I'm coming through from this, is that this is exactly what the granular thinking will happen. There will be those savvy people that go, okay, this is the way I can get around it. This is what I can do, you know, we are in between companies to buy companies to do. - So we even talked about it, we talked about it corporate, clearly that's the next step of. But I also think just quickly, David, before, the speculation in property is gone. So thank God for that. Like these people who are trading property, who are artificially inflating property, and we're turning them over in two or three years 'cause of the quick gains they got in the regions. That's gonna be gone. - Yeah, that's a good thing. - And it's a damn good thing. - And that gets back to the social, yeah, property is for a roof over your head. I was just gonna also round out the discussion around, and so I agree with the comments around subdividing and so on, but you touched on the fringe. And, you know, the peri-urban areas are still very strong. Like you, I was in back a smash, one of our community banks the other day. - Meltenberg. - That's what a great turnout for a discussion there, I mean, Gossford later in the week. And you're seeing really strong jobs growth, lower unemployment compared to the urban centres. In those regions 'cause it's livable, you've got room. So it's interesting to see how demand for property evolves there. But to your point, it's, you know, the main focus has got to be on your principal place. - Well, look, and the reason why we have high values in property is because we have higher wages in those larger centres. And that's why we, you know, that's why potentially we get a bit of a head of ourselves in the regions when the wages are lower. So how do you justify some of the prices in there? They're moving away from fundamentals and more into a motive pricing. - Something like that. - We're seeing that as some of the capital cities too. - Oh, yes, but I mean, you know, one of the things - My old hometown. - Home town of Adelaide. - Well, yes, there's no doubt that there's, and that's because price expectation, people think. So I think we need to reassess that. And we need to move back to fundamentals. And that is if you have a strong economy with specialisation, you get higher wages, higher wages lead to better borrowing power, better borrowing power usually shows up in aspirational decisions around where you're by what you're by. All of those things are that economic flywheel. But I want to come back to the question you have before about it is a supply issue. What other things do you think we should have seen in the budget or would be available around helping with supply? - Yeah, I mean, the budget tried to help with supply. There was money for infrastructure funds, housing Australia Future Fund, skills recognition for migrants. I think that's good. - Yeah, fine. And that's why I'd bit shy away from some of the comments around population growth. Like we need, we need, we've killed migration. - And we do, but we just need better matching of the skill set to the task. - Correct. - So, it's the same with capital, right? We need capital inflow. We need, net migration inflow. - Exactly. - Exactly. So I'm not sure what the solution is to fixing the supply. We've got the one and a half million target through the national accord. Maybe it comes back to productivity in the construction sector, modular. There's, there's all, but ways of doing it. - Correct. - But I'm still not convinced that the budget spent enough time on enhancing those ways. - It tried. - Yeah, I agree. I think it's part of the whole puzzle. So I think we need to go back to the, you know, what was announced, been announced in January with the changes to, you know, the 100,000 new homes for first homeowners, sort of grants and funding. I mean, they announced over the weekend that there's been 51,000 new homes for Queensland, with a 20,000 set aside from first homeowners, the $2 billion fund. Because this is the other question that David's alluding to is the chicken and egg. Is that the infrastructure the government needs to build so that the private sector can then build the housing near it? Or vice versa. Because again, if you're going to build all of these, you know, peri-set-set-ups, gas, wires underneath the infrastructure, the cul-de-sac. So this is also the big conundrum, having been slow over the last 20 years to actually see the, and it's not just property, but it's a lot of industry as well. Where does government sit? And the government sits is about the land around where the actual infrastructure needs, the issue it is. So I think that's all part of where the budget's at. And again, why I said at the start of this, this is the start of, I think, a two-step budget system. Budget next year will be another fairly large reform in terms of what are you going to take to the election, because personally, come tax, but also the supply side is cutting more red tape on allowing more-- Exactly. I was just about to say, bureaucracy-- That's huge. So let's talk about Angus Taylor's reply. Let's give them a couple of minutes. There was a couple of things that did catch my ear when I was listening to what he had to say. The building code over 2,200 pages wants to get that to 200 pages. That is meaningful reform if they can pull it off and keep property safe and construction safe. I think that's important. I think that's-- And the other one in there that really did catch my ear was a restructuring the Corporations Act. That has bloomed also in terms of red tape compliance. I know our business hundreds of thousands of dollars on additional compliance. So is there anything in those two things that you think is worth going after? I didn't have a strong opinion other than any reducing of bureaucracy is good. So what was this? A $10 billion package around bureaucracy. The business council of Australia made some sensible comments. They said, that's great. But you're just scratching the surface. There's 160 billion. You've just done 10. I agree with their observations. It's the start, not the finish line with respect to bureaucracy and productivity. Well, once we finish the big builds that are going on in federal infrastructure land and state infrastructure land, we do need to give those people other jobs. And the best jobs we can give them is building houses, more building iron. Whatever it is, just build residential accommodation because that's going to be the secret source for Melbourne in my mind, instead of then agreeing to building big white elephants such as urban rail loops that are going to cost $100 billion that's not going to get used because we're going to have autonomous cars that are going to take us from point to point by the time this thing's delivered. But the reason why they do it is because they need union jobs. They've got to keep unions happening. So the question there is, stop doing that and start fixing or incentivizing the property market. There's no question that the big build projects have been to the detriment of the private sector trying to get a lot of stuff done. Totally, and the wages explode. And they've got a bit unlucky with, again, the Russian invasion of Ukraine hit, supply, suddenly materials are through the roof, everything costs more. But it's exposed an issue. Yes, the final comment is, the budget is not the panacea that I think sometimes the media and how I'm involved with that sort of pin it up to be. It's just another step. And my final comment is there's going to be more and more ideas. At least, I think that's my positive outcome from all of this is that it's at least started the ideas going to become action. So you don't have to agree with it, or you can't agree with it. It's only a first step because there is going to have to be a David just finished up there. Not just one step. There is multiple steps and multiple paths to be created to get ourselves back into an area that actually makes us more competitive. David, from your point of view, any final comments, anything we should have touched on that we haven't quite hit yet? I think that's most of it. Again, I'm pretty optimistic about the Australian economy in the medium term, but we've got a few different problems to deal with right now. And so we need Canberra to get this right. But I am also bullish on the tech investment, I hit tailwinds.
We're just going to have to get through the current headwinds. How problematic is our energy story? Yes, well, you could spend hours on that. Is that the number one issue? Oh, it's pretty harm the list. And again, I'm critical of both sides with where we've landed. We needed a sensible sense of where we just couldn't find it. Wasted 25 years. Exactly. And you look back to '07, I think both, Brad and Howard were in favor of an emissions trading scheme. And we didn't get one. No, because of the Greens. Yes. Thank you, Bob Brown. I'll never forget you for doing that. You were the start of problems. Anyway, on that note, I want to make it too political. You know, I'm allowed to talk politically. I don't have any sort of ramifications on the back of that. But there it is. There is a lot going on. We too are optimistic in terms of the long-term prospects of this country. But the economy is the number one thing that creates all the opportunity that we've got. So we get the economic settings right, the drive, prosperity and growth. It helps alleviate all the other pressures around taxation and services as well. So if we still see smart economic decisions that grow the economic pie, we're all going to be better for it and our living standards are going to improve. At the moment, our living standards are stalling off the back of the way in which the current settings are. We've got supply constraints, which is limiting our GDP growth targets to capping out at 2%. That's just unbelievable considering the biggest economy in the world can potentially grow at 3.5, maybe even four times GDP. That says a lot about the settings that we've currently got. So we do expect our politicians to do more because it's their number one job. And off the back of that, we can provide for education, for housing and health and services as part of that. But gentlemen, I appreciate you coming in and having a debate around that and putting a lens on how it impacts the property market. So we're not necessarily going to see major falls in the property market other than obviously the cyclical challenge that we've got with higher interest rates. But let's hope that the government continue on a reform agenda and hopefully get our tax settings right. Keep going, private investment because private investment is what we need to to grow the economic price. Thanks gentlemen. And I look forward to having you on in the future. Thank you. Cheers guys. Until next week everyone just remember knowledge is empowering but only if you act on. Bye for now. We'll see you next week. 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. Check out all the links in our show description. And just a quick reminder before you go. The first thing we cover on this podcast is general in nature. It's not considered to be financial advice and we certainly recommend that you seek out professional advice before making any financial decisions. Once again, everything mentioned is linked in the show description. Ready when you are. Catch you next week.
PodcastTranscript AI