Episode 89 | Australia's home ownership crisis | Brendan Coates, Grattan Institute

Big issues that should keep policy makers awake at night!

We pick the brains of Brendan Coates, Household Finances Program Director at the Grattan Institute. 

Brendan’s research focuses on tax reform, economic & budget policy, retirement incomes & superannuation, housing, transport infrastructure & cities. He works in a think tank with a bunch of clever people with access to all manner of research that allows them to tackle the big questions & problems facing us as a nation.

Here’s a preview:

• Home ownership crisis - why so many young & poor simply can’t afford their own home.

• Why is the government & our politicians afraid to make big reforms to Negative Gearing, Land Tax & Stamp Duty?

• Home Buyer Saver Scheme - is it all it’s cracked up to be?

• Who’s to blame for the lack of housing built to meet the demand of homeowners?

• Australia’s aging population - should inheritance tax be modified?

• Super increases - will higher super contributions exacerbate the problems of an ageing population?

• Why Australia’s housing stress will mean a rise of homelessness.

• What can be done for everyday Australians to assist housing affordability?

This is such a great episode, packed with so many insights, we hope you enjoy listening!

WEBSITE LINKS:
Grattan Institute Housing Affordability re-imagining the Auystralian Dream

Lessons from the national Rental Affordability Scheme

GUEST WEBSITES:
Brendan Coates - Grattan Institute, Household Finances Program Director

Work with Veronica? info@gooddeeds.com.au
Work with Chris? hello@wealthful.com.au

EPISODE TRANSCRIPT: 

Please note that this has been transcribed by half-human-half-robot, so brace yourself for typos and the odd bit of weirdness.

This episode was recorded on 11 September, 2019.

Veronica: You're listening to the Elephant in the Room Property Podcast where the big things that never get talked about actually get talked about. I'm Veronica Morgan, real estate agent, buyer's agent, cohost of Foxtel's Location, Location, Location Australia and author of a new book "Auction Ready How to buy Property even though you're Scared Shitless.

Chris: And I'm Chris Bates, financial planner, mortgage broker and together we're going to uncover who's really making the decisions when you buy a property.

Veronica: Don't forget that you can access the transcript for this episode on the website as well as download our free Fool or Forecast Report. Which experts can you trust to get it right, www.theelephantintheroom.com.au.

Chris: Please stick around for this week's elephant rider boot camp and we have a cracking Dumbo the week coming up.

Chris: Before we get started, everything we talk about on this podcast is generally nature and should never be considered to be personal financial advice. If you're looking to get advice, please seek the help of a licensed financial advisor or buyer's agent. They will tailor and document their advice to your personal circumstances. Now let's get cracking.

Veronica: I think you all know by now that while this is a property podcast, that's not all we're interested in. Property per se isn't necessarily that interesting. It's the human element, what it does for us, the way we aspire to it, rent it, by it, live in it, live off it. These are all part of a bigger picture and that's why we love to expand these conversations to find out about what else is important to us, what drives our behavior, and the implications of that behavior, both on a micro and macro level. So we're very excited about today's guest because he works in a think tank with a bunch of clever people with access to all manner of research that allows them to tackle the big questions and problems facing us as a nation. In this episode, we pick the brains of Brendan Coats, Household Finances, Program director at the Grattan Institute. Now Brendan's research focuses on tax reform, economic and budget policy, retirement incomes, superannuation, housing, transport, infrastructure and cities. All things that we've been talking about in many of our episodes. He's got a background in macro economics. He's actually worked for the Australian treasury. He understands the political machinations and public policy and we're really excited that he's joined us today. Thank you, Brendan.

Brendan: It's a pleasure to be with you.

Chris: Thank you, Brendan. Um, I've read lots of the Grattin, um, reports and research, um, and they're very well put together and got lots of big ideas and big reform. What do you think is some of the, can't do it all at once, but what would be some of the most pressing issues if you had to make them be reformed today, you would focus on first?

Brendan: Well, the big one is that, uh, Australians living standards are pretty much stagnant. And so, you know, we haven't had a lot of economic reform over the last 20 years. Um, so the pace has slowed a lot. That means if you don't have productivity growth in people's living standards started rise, that means your budget positions are being a lot worse than otherwise would be because you've got an aging population and we need to deal with that. And so the kinds of things that I think really sit at the top of the list would be, you know, getting some decent tax reform would really help. So maybe we will talk about tax. Um, housing is a really big issue. So I think housing is sort of growing as a real social policy issue in Australia, both for the average Australian who you know, is struggling to get into the property market if they're younger.

Brendan: And then particularly at the bottom, there's a lot of people who are really struggling cause if you don't have a high income and there's a lot of people in housing stress and homelessness is rising and then beyond that, I think there's a real intergeneration inequality issue happening in it. So, you know, we've had older generations have done really well. They've done pretty well out of the tax system in particular. So the whole debate about franking credits during the election was really about trying to unwind some of that. Now that's not going to happen anytime soon. Um, and then you've kind of got these long term budgetary problems that I think are still looming on the horizon. So older Australians are, you know, Australia's aging. So you've got more older Australians for every younger person who is still in the workforce, that's gonna start to really hit us. So we've been talking about these intergenerational reports for about 20 years and during that entire time we've been doubling down on the, exactly the kinds of policies that are going to make that problem worse and now was going to start to have that reckoning where older Australians are retiring and that's going to put more pressure on the budget. There'll be fewer people in work. And so the longterm position of the budget does look pretty messy.

Chris: So on the, um, up, yeah, it is true actually. I mean the, um, uh, you know, it was very scripted actually as I had done it before. But yeah, in terms of, um, you know, the aging population, cause every country on the world's kind of got this problem right. Where, you know, people aren't dying at 80, they're dying at 90, you know, they're not dying. Um, so the life expectancy is much higher. Um, and we're not having babies like we used to. And so are you having, you know, one a 1.6 children each or something like that rather than 2.6 and so we've got this problem, let's try Australia's counter um, to counter that he's got very high migration. Is that going to be enough though if we have very high migration of the next say 20-30 years so at least make it much more even?

Brendan: it means our population problem, our aging column is a lot less bad than other countries. So you know the pension is not going to grow as fast as a share of GDP and partly as a result of the fact that we've got, you've got, you're bringing in younger largely skilled, although a lot of growing share of the migrant intake is actually unskilled people into Australia who are going to be here for a long time. They are going to pay tax for 30 40 years before they themselves retire and sort of they go on their way and start drawing more benefits from government. The challenge in Australia is that in the last 15 years, and particularly under the Howard Government, but I'm a bit on either side of that, we've sort of doubled down on, um, age-based entitlements. So, you know, we raised the pension under, under Rudd.

Speaker 5: Um, that obviously costs a bunch of money, but the biggest things have been making the superannuation tax system much more generous. Ah, so you know, now superannuation earnings are tax free for anyone earning with a balance of less than $1.6 million. You know, you can put a lot of money into super now and it's taxed very concessionally this higher, um, tax free thresholds for older Australians. Um, and then, you know, making franking credits refundable I think was in 2000 as sort of part of the issue as well. So we've gone from a world where about one in 4 older Australians paid any tax. So a world where only about 10 to 15% pay any tax today. And so in a world where you retire at 65 and you don't pass away until your early nineties on average, that's a long time to opt out of the tax system. And it means that someone can earn basically $100,000 income as an older Australian be tax free in their retirement, whereas a minimum wage earner, he's got to pay some tax. So that's gonna be a big challenge and I think we're going to have to face that reckoning over the course of the next 10 years. It's not politically popular, particularly when older Australians make up a growing share of the voting population.

Chris: That's the problem though, right? You know, like if you've got to win parliament and you got win, you know the election you gotta have the older cohort on board and if you tell me out with policies that are going to piss them off, you're not going to get elected. So you know, I think that isn't that the real challenge?

Brendan: that look, that is the challenge. But some work we did out of the election was really interesting. It showed that all those seats that were older and wealthier swung to labor and all those seats that younger and poorer swung to the coalition.

Veronica: Wow.

Brendan: So the conventional wisdom that it was now franking credits that costs labor, the election, I don't know if that holds, um, I suspect it hadn't affected the margin. Certainly when you got an unpopular while, fairly unpopular later on, the polls suggested in Bill Shorten and you're trying to do it from opposition pretty hard. Like Paul Keating and Bob Hawk, when they made these big performs, they didn't do them from opposition. They got in, did a year in government and now it's something hard implemented before the next election and took it to the election. And that's, I suspect where we'll go if we're going to deal with these things.

Chris: I was also at the election, I get a lot of stick about this. Um, I was actually for the removal of franking credits. I thought that the real reason why is because a lot of people over the age of 60, um, do have a lot of money in super in tax free environment where it's tax free income tax free growth. It's like a tax Haven and there were lots of money in there. And then they've also got a nice house that's growing tax free as well. And so that, yeah, they're not really contributing much. Um, yes, they've got paid tax along their life, but they're getting a lot of tax free income and the governments are getting tax. So is that the real issue is that problem is getting bigger and bigger every year? Is that the real problem?

Brendan: Yeah, that's right. So you're basically earning your income tax base as the population ages at the time when we know we need to spend more on older Australians for their pensions, for their healthcare. So health is the big one. So you know, we're spending for the average household that say in their seventies the government spends something like $15,000 a year on them know that's mainly health. And so individuals don't normally put into their own pockets to pay for healthcare. So you know, Medicare's free pharmaceutical benefits scheme for all your drugs is, you know, heavily discounted. That's way the real cost is. And you're right. So we've, we've basically taken out retirement income system as super system and we've turned it into a way of generating essentially a tax side. We've made it far too easy to put money in and never pay tax to the point where people are, you know, will pass away because the average person in retirement does not spend down their retirement savings. Yeah. The average person is pretty much a net saver, which, which basically means that in the long run, what are we doing? You kind of subsidizing inheritances and that's not really what the system is supposed to be about.

Speaker 5: Oh God,

Veronica: I was about to ask actually, is that what the architect of the system had intended? You know, because often I guess when it comes to any tax reform there's clever people that work out how to get around it. You know, clever accountants are clever people hire clever accountants to give them advice. And often it's that unintended or the are unanticipated, uh, behaviors that come about. So I guess with the franking credits, that was a bit of a bit of an oversight really wasn't it in terms of people not paying tax use me, uh, with the franking credits for instance, that was, we have an oversight wasn't it? So it was never intended that people who didn't pay tax would get the franking credits.

Brendan: I think the better example is the super system because I think there's this idea, um, created by a us academic code club theocracy, which basically says in the yet in the attempt to try to get fair outcomes, you add complexity and once you add complexity, as you say, someone will find their way around the walls and that's someone does tend to be wealthier Australians or was the people that have access to financial advice. So you've got a whole industry of people whose job it is largely is to find their way through the system. And, the stakes are high enough that, you know, higher income Australians will pay them to do site. So when it comes to super, we used to have a system that was a bit of a mess. So, and this is actually Paul Keating's fault. So Paul Keating, we used to have a system, the perfect system in the eyes of many.

Brendan: It's all something I fully agree with, but it's sort of flight. It tends to be, you know, uh, what's in fashion is that you put your money in tax free, um, the earnings on the money when it's in that, so you dividends and shares when it's being saved to tax free and then you're taxed it full marginal rights on the way out. That was the system Australia used to have. And then Keating, uh, basically brought forward the taxes, issues, taxes on the contributions in the earnings to get some money and made it really messy. Cause then now we tax the earnings concessionally the contributions concessionally and then at the time we were taxing withdrawals. Costello came along and he said, look, uh, that's pretty messy. Let's get rid of the Tax on withdrawals, actually pretty good policy, but for, for those that are over the age of 60, that earnings is still tax free. And so you can put money in just before you retire, pay 15% tax, and then not pay tax again for the rest of your life on that money. Yeah. So that's an example where made it really hard. Um,

Chris: and over the last 20 years, the rules have like, they're a bit too broad and now they're gone. Oh God, this is going to be a big problem. We've got so much money growing up, getting in super now 2 trillion, two point 2 trillion, 2.7 trillion and like, it's getting a lot of money and that a lot of that money is growing tax free. And so then they started said, look, we've got to start and limit how much people can put into super. So now that has stopped it and then they say, let's start taxing people with big balances. So that's what they're kind of doing. I know that Grattan haven't, uh, that's on the retirees though. But one of the things that protects young Australians, um, and gives and de risks their future the most is forcing them to save for their own retirement. Um, because humans are humans and they'll spend their money. And then from my understanding, Gratton don't believe that we should be increasing the super, from 9.5% Up to 12%. Yeah. So what, you know, I think it really protects someone. Why do you think that you should not do that or why the government shouldn't do it?

Brendan: well we should do it. And so compulsory super is a good idea and it's been actually quite successful. It's been so successful that we don't need to increase it anymore. So that's really the argument.

Veronica: It was funny cause Keating was a, I saw him on the ABC on your recently saying that 12% wasn't enough because we were all living to a hundred now. And when he did, he's, he's budget. He'd see a forecast that, uh, we had a shorter life expectancy. So tell us more. Why do you believe that it, it's done its job or it's, it's enough but not unhappy.

Speaker 5: Hey, look, it's a fascinating debate because I think most people would say, hang on. Yeah, you know, more self-sufficiency is not a bad thing and therefore it's, it's pretty good. So what we did in a report called money and retirement earlier that was published late last year, uh, looked at, okay, well what's happening to, um, how well off are retirees today, how they're doing and what's the retirement look like in future and retirees today, actually you're doing really well now. They're not all living roll gold lifestyles on the sunshine coast, but the real test is, are you doing as well in retirement? Is what you're doing beforehand because that's really what the system is trying to achieve. So the compulsory super contributions are about overcoming this behavioral bias that you just not going to save your retirement or you might just sort of like blow your cash and now to the age pension. Yeah, yeah,

Chris: it is. So it's going to come out of there. I, I'm an employee, I pay for it.

Brendan: Well, yeah, so you start off by it. So that was a shake of the head. So you start off by paying for it. But in reality in most cases actually comes from workers wages. And that is what the evidence does show.

Veronica: In the senses you don't put the wages up.

Brendan: Exactly. So you know, in a world where, you know one of the arguments is, you know we've got low wages growth, this is the only way you're going to get more money in your pocket. And I think it's a bit like rearranging the deck chairs on the Titanic. Cause for most employers you've got to bucket the, you put the wage into in a bucket you put super into. And for most employers, if you put half a foot more into the super bucket, you know, nominal wages still growing 2.3% a year. And the super guarantee is going up in 0.5% a year increments, you know, means your wage growth will be 1.8 rather than 2.3.

Chris: yeah. So the real issue is, is that we're going to enact an economy where we've already gotten low wage growth. We're gonna S potentially let go of that, which could be better for our economy. People get that money, they could spend it and that could be better for the economy. You know, the reality is people aren't going to save that money because the vast majority of Australians spend every single dollar that comes in. So if you don't take that money that's going to, they're going to spend that money. You know? And I guess that's the reality here is that you've got to be pretty confident that 9.5% have's enough money.

Brendan: That's right. And so, you know, our work shows that the average person is going to retire with a retirement income of about 90% of what they had while they were working. The number that tends to be thrown around internationally, 70%. You look at, uh, the modeling that's been done by others that says that it's not enough, and they were predicting retirement income crisis today and now people have gotten to retirement. Retirees are more financially comfortable than any other group in society.

Veronica: It's interesting because I did read an article about that report and one of the things that you pointed out was that there is a lower socioeconomic group, however, who haven't got their own home, who are not better off,

Brendan: and that's where the real crisis is going to be. So the government's got this retirement income review that I've said they're going to set up. And I think everyone in media in me industry's waiting, waiting to see what they're going to do. Um, and the big problem is home ownerships crashing amongst the young and the poor. So 30 years ago when you looked at say 25 to 34 year olds, the poorest sort of quarter to a fifth of that group, most people own their own homes. It was North of 60% now it's 20% way of saying that growing forward or transitioning forward into older age groups. So home ownership has been falling in Australia amongst younger cohorts for quite a while and some of those cohorts now in their 50s ahh particularly with lower income. And so we're going to see the share of Australians that are in their own home in retirement full for about 75% are today until less than 60% in a couple of decades time.

Brendan: And if you don't own your own home and retirement, all the numbers that we see is that you really struggle say pension is that on their own home are very unlikely to say they are being financial stress and not be able to pay a bill on time or they're skipping meals. Yeah. If you don't own your own home and you're a pensioner, you are in deep trouble and if you don't own your own home and you're working age Australian, particularly on new start, you're in deep, deep trouble. So that's the crisis. And I think a really interesting part of the super debate is the presumption is super helps the budget and racing compulsory super would help the budget because it reduces the pension spending. But that unfortunately isn't the whole story because the tax system is so generous. Increasing compulsory super costs the budget about $3 billion a year today

Veronica: because you basically reallocation of wages into super,

Brendan: where is tax concessionally compared to main tax? That marginal rights and even in the long run, it still hurts the budget. So super high super will exacerbate the problems of an aging population, not solve them.

Chris: In turn though just up the taxes on super as the whole balance to get people to put more money in, but then just tax the super more at a higher rate.

Brendan: So you could certainly do that, but the, you'd have to be taking $5 billion a year plus out of the super funds. So, uh, franking credits would have done something like that. It was about $5 billion. The Turnbull government changes that happened in 2016 2017 they were worth $1 billion. So you've got a lot to do. And why would you do that first? And our argument would be that it's not needed anyway. Nine and a half, look, maybe 10, maybe we're getting close to the point where you accept, it's going to get a 10 because it is legislated to increase crates. So maybe, maybe you say leave it at 10 and then we're done. It's not a big round number. I think we'd be pretty comfortable with that. Um, and then, and then you move on and you focus on the real problems in the system, which is renters.

Chris: Yeah, let's go, let's go there then on property because affordability, um, is a big issue and it's, it's a big social issue because there are other people on the, um, who haven't got work who are never going to potentially go in a home because it's just so unsafe, um, just out of their reach. Right. And then your homelessness, because there's not enough properties and not rental accommodation, but then there's also the, the, you know, the middle kind of income bracket that also struggle because of the prices. But what do you think what some of the big reforms that we need to do as a country to kind of start to reverse the home ownership rates that not marginalizing people.

Brendan: So I think you got to break it up into two parts. You've got to break it up for your everyday Australian and then you got to look at the bottom 20th percent differently is that there are certain things you can do for everyone that will help the bottom 20% but it won't be enough. Yeah. So forever, the biggest problem is that housing has become more expensive. So price income ratios are gone up a lot. I'm sure you've talked about this before on the shine rates of reason, although they've only really reasoned in line with wages, so they haven't gone up that much. Yeah. Um, but the big issue is that uh, housing has become less affordable because those processes are so high. The deposit hurdle is gone from six to 10 years to buy the average house on the average income. And as I said before, home ownership's crashing. So we've, and that's not because they don't want to home is it because it's not as if it's just younger Australians that are low income that are deciding now I don't want a home and everyone else's still really keen or the surveys show they really still care. So it's, it's clearly related to affordability. It's not a question of just saying smashed avocado instead of saving for a home.

Veronica: Or perception all that. How long is it, it's moving target. You know, there's, there's all these perceptions around that as well and then they give up and make different decisions. So I mean affordable is part of that, but it's still behavioral reaction to that as well.

Brendan: Well some of the work that progressed and put out recently report called generation gap says that younger Australian just spending less on discretionary items than they did 10 20 years ago.

Chris: Oh really? There you go. But the house, the avocado argument then yeah, the house and the rent, et cetera. Such a big portion of their spending. Is that what you mean though?

Brendan: Absolutely. The, the spending on essential has gone up and so, and housings, you know, obviously the biggest part of that, because I think older generations look at, Oh look, younger generations are going out and getting takeaway food all the time and doing all these thing or going and traveling and the things that these things have become cheaper in some sense relative to your income. So, you know, it's pretty cheap now to go fly to Bali. You know, 30 years ago it was really expensive to get on the air in an airplane. And so I think people look at that consumption and they say, Hey, that's where they're spending all their money. But no, they're not actually spending more of their money than in the past. It's just that some of those things got cheaper process relative process change.

Veronica: It's a good, ah, it's a good point. That perception. It's like it as so many things to do with an election. It's all about your lens and how you look at it and what data you're actually relying on and how you're interpreting that. So I do, I do like the fact that um, you know, you are trust your data better than my opinion on that.

Brendan: I have, I haven't listened to enough of the podcast too to have formed a view of your opinion but like we do trust our data. Um, but to answer your question before about what you'd do, look, the answer is pretty simple. Um, housing's become more expensive because of interest rates have fallen, you know, debts risen and all of that sort of stuff. But in terms of the things that we can really deal with or, uh, would work, you know, the big problem is we haven't built enough housing for a growing population. That's a problem that grows over time cause we only add less than 2% of the housing stock each year. Population has been booming in Australia for about a decade and a bit. And we've only at the peak of the housing construction boom, got close to meeting that demand and up before, before and after that point we're adding more people than we are houses and particularly housing in Melbourne and Sydney way people really want to live.

Veronica: Have you done any work though, because I mean there is, there's an apartment over supply problem in Melbourne and maybe it's not so critical now, but certainly over the last, you know, decade it's at point's been an issue. I mean you've got developers that turned them into service departments rather than sell them.

Brendan: So define over supply cause anytime prices fall we say we've got over supply.

Veronica: Okay. So my view of over supplies where you've got far too much crap stock built in a location where there's just not the enough demand for people to live in that location, in that type of stock. So Docklands for arguements sake, no, I'm not an expert in Melbourne so I can completely get into trouble with this one. But if you've got, and Docklands has been mentioned many, many times, Southbank mentioned many, many times over the past decade. So I'm not giving them a specific examples, but if you have a lot of new buildings in a concentrated area where a lot of the stock is homogenous, you got ones and two bedrooms, um, it's all been sold to investors on a, on a bit of a dream property, prices aren't going up because you know, there, there is a lot of data around about the resale val. Those property prices on resale being a less in like 60% of cases over a 10 year period. Um, so, so those sorts of things to me say over supply, when you got prices falling, there's over supply. And so it's what is being built, the type of apartment, that type of housing and the locational concentration of that housing. So I've always wondered and, and I'm not asking this cause I know the answer, I don't know the answer, but I've always wondered how can you have a situation where you don't have enough housing for the population and yet you've got a situation where you've got prices falling.

Brendan: I think so you do obviously get um, particular parts of the market which do different things and Docklands I think is an example of something that didn't work particularly well in practice. That process falling on the Holies is a good thing. You know, I don't think you'd hear that very much. People on this podcast would want to say that very much. We listen as think with would sort of think of it that way, but is falling is how housing becomes more affordable.

Veronica: Yeah. Except, okay. All right. I get you here. Except you've got a situation in isolation. You've got, you've got a situation where you've got a tip, it a bit type of stock in which prices fall over a period of time where the rest of the market in the same city prices are rising. So, so why would anyone with half a brain take advantage of that affordability piece and go, Oh goodie, I'm going to buy in an area where prices have all in whilst everything else is rising. That is not a good investment decision whether I'm buying it to live it or not. You know what I mean? So I'm just saying I'm, that's where I come to with that. You say it's good. I say don't buy there people, you know, different, different approaches I guess.

Brendan: Well I suppose so part of what's happening is a lot of that stock in Melbourne, so Docklands is an example, but we bought a lot of stock elsewhere at rent have been flat. So rent in Sydney for example, are falling now that is making housing more affordable for the people that choose to live in it. I don't doubt that there are some people that are taking a loss or a hit on, on, on that, um, on their investment. Now. I don't think that's what probably policy should try to sort of achieve. Like, if we, if we have a, one of the big challenges, I don't know if this is quite actually your question, but it'd be challenged we have with affordability is, uh, particularly the politics. You know, we saw this with Scott Morrison during the election. We're going to help you afford a house, but prices aren't gonna fall. Like those two things unfortunately are contradictory at the end of the day.

Chris: Oh, he's nice. Labour said the same thing though? I mean they were saying that uh, the negative gearing policy isn't going to reduce prices.

Brendan: and I would agree with that. I don't think negative gearing would reduce process very much at all. Um, you know, we've, I, I know there are others that disagree. Yeah.

Veronica: All I can tell you all those apartments in Docklands that already lost value, there's going to be nobody wanting to buy them if they weren't negative gearing available.

Brendan: So we've got some work that, you know, has looked at what's happened since the election. So the election happened and what happened to the process in Melbourne on the series, they went up by 0.1%. Now, interest rates moved, move, interest rates moved again, nothing happened. The responsible lending laws changed and house prices have exploded in Melbourne and Sydney in the last three weeks.

Veronica: You actually pinpointed, cause I know, you know, we've been saying with all of these things have lined up to create the perfect storm for, for a bit of reversal. So what you're saying is that you've actually done the research that the pinpoints that it's specifically,

Brendan: I think that might've been a build up of pressure and then the damn wall has fallen because the catalyst, yeah, because you know, interest rates mean people are more likely to spend more money. You know, um, when we bought a couple of years ago, we thought interest rates were gonna go up to three, four, 5%, uh, while the cash rate was going to go up. And therefore interest rates would be back at say 6% by now. Um, that clearly has not happened, um, at the same time. And so that obviously means that prices, uh, that's for wanting support for prices. The responsible lending laws though I think are a really interesting one because they basically tighten the screws on people's ability to borrow. And in a way that was pretty onerous. So you asked the average person, what do you spend each month? They have no idea. So I look way going through the whole like Barefoot Investor thing now trying to look at buying another house.

Brendan: Um, we did the numbers and I had no idea. But what I do know is how much money I have left over at the end of the month. And so with those responsible lending laws, particularly combined with the fact that we were using APRA we're using a serviceability buffer of 7%. So you know, assessing people's ability to repay on the basis of a Simpson interest rate is, it basically said you're being assessed in your ability to repay the loan based on your current income, less your expenses at that level. When the whole point of interest rate changes is that you cut back your spending. So I think the law change there has actually been pretty good while at least I think the logic of the, of the, of the judge where, you know, I know he talked about Wagyu and Shiraz and cutting back spending. It was very colorful. It's not the language I would have used, but the logic is actually pretty sound. And I think that's the thing. Once you've taken everything else out, those other, um, those are the supports have sort of come in. Um,

Chris: but if you like think that we're going to have is growing problem with affordability, um, the last thing that you want to do is increase how much people can borrow. Because the last thing, the first thing people are going to do is when they go and see a broker or they go to a bank, they ask how much can I borrow? And they say $1 million and they go out and spend $1 million. And if that was $800,000, that would have spent 800. And so the, the worst thing we could do for the property market now is increase borrowing capacities. And so the, and so what the whole purpose of ASIC's, you know, battle and they are appealing that the court case is there saying look, we can't be just constantly increasing borrowing capacity because if the property market is basically priced on borrowing capacity, we're just going to keep increasing prices. And the best way to make it fair is to force people to use actual living expenses because then borrowing capacities will reduce and you'll start lending money kind of more responsibly because unfortunately, you know, if a bank is, goes through on customer declared living expenses and someone's spending a lot more money, they can borrow a lot more money. They can just kind of navigate their way through the system. So if you think about if you want to create more affordability, you've got to reduce borrowing capacities.

Brendan: I think it's a really tricky one cause someone loses in that process. So I think process of being falling, you know that for some people has made housing more affordable for other people though it's made it harder to get a loan. So I don't, and first time buyers are the ones who are sort of often hit the most by that

Chris: it was only made harder for people to get alone who were spending extravagantly or spending more than the ham if they weren't. So that people was made harder to get a loan with people who were potentially needed to cut back their spending. Hmm. And they were doing things like after pay and gambling and you know, and also things on their, the credit file. But the majority though, fate, the bank still wanting to lend in that process, it's just people who were overspending weren't getting through the system. And I don't think that's a bad thing if they can't get a loan as a good thing because it's so, it slowed down the property market without a doubt hit the market because it made people be more accountable. And so, but if you still had, if you still were spending reasonably, you could get a loan. So it, you know, I think, you know, moving that direction is actually a good thing because what it's saying is if, if you are, you know, in control of your finances we will go and put you in a lot of debt. But at the moment no one cares about whether you're in control, they just care you've got a job.

Brendan: Well the hem measure I think is actually a pretty appropriate measure. Sorry. I think if you're saying to someone, as long as it's a hem based on income. So there was a period without using the hem that was based to the poverty line and that's a bad thing to do because like I might be in a position where I can cut that by spending, but that is a situation where I might be hanging onto my finger nails to the line, but I'm experiencing real harm from that. Yeah. The situation I think you've got to worry about is the process where you're forcing people to actually verify expenses. I don't think they're verify expenses is actually the right way to do it. So I think something like the serviceability buffet where you say, okay, should it be, we've now cut rates. So that serviceability one problem is that serviceability buffer is now two and a half percent above the prevailing interest rate.

Brendan: We're in a world where feel like doesn't want to cut rights because he's worried about house process. You know, I'm sure you guys have seen the comments he made at the Jackson hole and the differences between what he said in the actual speech that was, um, per recorded versus what he said on the website. And there was a difference in saying,

Veronica: Hey, no can you point that out?

Brendan: I can't give you the exact quote unfortunately. Um, but, uh, jasonMurphy@news.com started great job of sort of separating out, but basically the one on the website is pretty anodyne like with house prices. And then the one on the, where he said in is like really worried, right? So you're in a world where if you're cutting, you're cutting rates, you probably want to tighten those macro credential rules. Yeah, I think so. This is a subtlety. It's about how you do it. I don't think the responsible lending laws were the way to do it. I think that's a particularly onerous and not very accurate way of doing cause people's expenses are not a good predictor of how much they can adjust their spending down in nature. Whereas,

Chris: but if you are going to put someone in a lot of debt, shouldn't it be okay to force them to live the way that they should live to actually make sure they can afford it.

Brendan: Oh at the prevailing interest rate shore. This was a combination that made they had to do it based on the interest rate. That's too and hops

Veronica: protect them if if rates rise

Brendan: well I don't think anyone's expecting rights to anytime soon. Yeah, but you know what you're talking about here is these kinds of measures. Macro approves a really hard one, so I don't think anyone's done the guru. Really good study about what are the longterm welfare impacts of, of doing this cause you're obviously hurting some people and the people who end up hurting tend to be first time buyers.

Veronica: Well. Okay, so the latest figures are out that first home buyers are all almost matching investor or on the property for the first time probably ever. Really. It's always a gap, right? So, you know, I think and looking are more for investing in property, but I'm also all for giving first time buyers an opportunity and having a more stable property market. Certainly too much investment property has not been a good thing.

Brendan: But a lot of that's to do with the investor lending restrictions. So I think that's a different thing. I'm talking that the responsible lending laws, I'm not sure they were a great idea one, but the rest of it, you know, I think we're pretty open to saying that that is, although that's season two.

Chris: Now we're going to have a bit of a short term sugar hit and it's already happened. You know, we've already um, you know, borrowing capacities are already up dramatically than they were two or three months ago. And so what are you doing? Is you gonna get a lot. A lot of people are going to get through the system now, all the first time buyers you want to buy and you're gonna come in and they're going to go, instead of spending 600 now I can get seven 50 they're going to go on bid at auction and instead of buying that house at 600 they're going to be competing with someone else who's got seven 50 and they gotta pay six 50 the next couple of months. Someone else is going to go in and they're going to pay 700 because they can borrow seven 50 but what we're going to do is we're going to reprice property based on higher borrowing capacity. Now, two, three years' time, the young 28 year old now who hasn't got the savings to buy into the property market now has to go in and buy the property for seven 50 it would have been able to buy for six 50 a couple of years ago.

Chris: So it, it might help people who want to buy today in three years time it's going to really affect them because they're gonna have to buy property a lot more expensive cause it's going to get factored into prices. And so I think you've gotta be, we've gotta be careful playing with borrowing capacity because the of property properties based on how much people have gone and how much people can borrow and if you increase how much people can borrow, you're going to increase prices. So I find it that it's not really going to help affordability. It's actually going to, go the opposite. I just know that. I think that's, if we're trying to make help affordability, what we should be doing is limiting borrowing capacity.

Brendan: I think. So I think we've, we've kind of gone down a down a path that's kind of not the focus of a lot of Grattin's research on housing, which is about sort of the efficacy of macroprudential rules. I think I'm pretty conflicted at all honestly as to where I stand on some of these stuff because there are these prevailing impact, these offsetting impacts in general though. The idea that you can, you know, in the long run you can't, I don't think you can use Macro-Pro to make housing more affordable for everyone because ultimately you are restricting lending to someone. So who know, whoever that might be your, ultimately our research says in the long run what you got to do is get with supply. That's the way in which you get housing to be more affordable over time. Um, and that certainly I suspect you know where we're going to need to go. Now in the short term, interest rates have fallen, you know, we that every from reserve bank where it research every 1% increase of cut in interest rates about an 8% increase in property values.

Chris: But that is exactly is that we're going to get the bigger end cap ain't borrowing capacities more people come in cause a low of rates and then we're going to get processed to rise. And so you know, what they should potentially should have done, I believe is APRA shouldn't have removed it to 5.5%. They should have kept it at 7.5 7.25 because, and just cut rates cause I would've got, you know, and just made it more affordable for people if they actually get the mortgage. But don't let them borrow more money because the last thing you're going to do is just, it's going to get factored into prices. But um, I mean we can probably debate that one all day in terms of the affordability, um, policies you had around the election and negative gearing and things like that. I'd love to kind of unpack that a bit more because it was such a big issue and you know, I know that you guys were very passionate around it. I'd love to kind of understand CLI passionate around just how the, how are you supporting labor's policy 100% or did you think that the ideal or the idealism of restricting investors and financialization of property, but did you believe that you know, you should just buy a new property, which was what labor believed, what was a good idea?

Brendan: We said in our research that the main thing you need to do is half to capital gains tax discount. That's the key piece of work. And that's actually the thing that will have much more impact on property markets and the budget in the long run.

Veronica: It's so interesting isn't it? Because everyone called it the negative gearing tax policy and it was like even on their website it was, it was the negative gearing tax policy. It was like a, that's the sort of the Trojan horse really isn't it? Cause any reality to be quite frank, even though I'm benefiting will benefit one day from this very generous, you know, 50% tax concession on investment property. Um, I can see a case that it should be halved or should be addressed, reduced and you'll absolutely see that.

Brendan: And in terms of salience as well. So we, we also suggest that you should, you should roll back negative hearing by it so that the less important part of the package, the salience though I think is so negative gearing, you see it every year on your tax return. This is what I got back as a result of putting in my rental losses and all the rest of it, the capital gains tax discount, you don't see that every year. You only see that at the end. Even though that is the thing in terms of what's the longterm bloodstream pack that matters far more for the budget and I should be clear that our case or the argument for why I needed a gearing and CGT should change was actually not that much to do with the housing market. So I think a lot of people said in 2016 labor went to the election saying let's do negative gearing and CGT and house prices were rising and a lot of people said, great, you should do that because it's going to cut process. And that was an argument that kind of worked for them at the election. One problem with having a an a a policy then you, you tied to an election is if you lose, you keep the policy and then the circumstances vastly different between your team. Our argument on negative gearing is that, look, in terms of tax policy, that 25% capital gains, well 50% capital gains tax discount is too generous relative to what tax policy is supposed to be really achieved.

Veronica: Was said at it in different economic time, wasn't it? I mean we had different levels of inflation and it was, it was actually set to simplify things, wasn't it? Because it was indexed before then. It was all very, very complicated. Yeah.

Brendan: So you're supposed to be taxing real gains. Right? And so it was set to generous relative to that.

Chris: And it is because on a top tax rate, if you only gave you, I think you're getting a 50% discount and you're paying 50% tax, the maximum tax you're probably going to pay is 25% which means that as an economy, you shift your, does, you shift your assets to asset growth assets rather than income assets because you know you're gonna pay more tax that way. And secondly, capital gains tax, you only pay when you sell. Yeah. So you don't actually sell. So what you do is you avoid paying tax by wishing it to capital gains growing assets and then never selling. So that's why I think that's where the problem is, right? We, we don't get any money on the income cause it's negatively geared and we don't make much money on the capital gains because they never sell. Even if they do, we only get 24% of it.

Veronica: But there was very little debate about the CGT. The debate was all about negative gearing and in fact even a lot of your own, not maybe not penned by you, but certainly from the Grattan Institute. A lot of the articles were all about negative gearing. So why was that?

Brendan: Well, so our articles I suppose for more about negative gearing because that's what's in the public debate and that's what we're trying to defend sort of policy position. Also if you say capital gains tax discount, people will be like, what? What are you talking about? So negative gearing was the policy that mattered a lot more. You know, I think it's a reform that's going to eventually come back. So you know, if your ride and prices rise partly because of what policies that have changed since the election, then I could say that easily coming back onto the, into the public debate because I think there'll be, there's a lot of anxiety in Australia about prices rising. Again, there's a lot of anxiety. There was a lot of anxiety when process started before quite quickly before the election. Our, before they used various policies were on round. But the budget's going to be the thing that makes them happy. Sorry I government of either side have to go there. So the longterm challenges I think we talked about before is we're gonna have to spend a bit more and at the moment we're writing the tax space. And so a lot of Grattan's work is said, well look, you can cut some spending and we say ways you can do that, but you're probably gonna have to raise some revenue. And these are the least economically costly ways of doing that. Native gearing, super Sprite

Chris: And the anxiety is going to kick off within 12 to 18 months again, because we are going to start seeing it again. We can already see it. You can already see it in, in Melbourne and Sydney, the things that suit families and young couples in Sydney and Melbourne are already the things that are arising and it's not the apartments, but the two bedrooms, the one bedrooms, the studios, um, the house and land packages right out in the suburbs. It's the things that are quite scarce and there's not many on the market and all families are gravitating towards them because they're low rates and they can borrow money.

Veronica: You are a little bit skewed on that because that's sort of your demographic at the moment that Oh, I can say my area definitely the first time buyer segments is very competitive. Very competitive.

Chris: Yeah. So then move. But yeah, you know, if today's your one and two bedroom apartments,

Veronica: well no, my first time buyers, I mean generally they're going to have a family. They know that they're not going.

Veronica: They are not worrying about that. They're not often, they're not thinking that far ahead. They just want to get on the property ladder and there's an opportunity and so they see that as it being an affordable entry point,

Chris: but then they're not thinking about, oh, newer style apartments are,

Veronica: they've hopefully not, but with all building quality issues so then know one. is changing a bit yet,

Chris: So the elephant in the room is 100% for you.

Veronica: The reason that Chris and I do this podcast is because we passionately believe that property buyers can do it better. We really want to help all of you understand all the risks, but also the ways in which you can avoid your elephant making the decisions.

Chris: But what we would love for you to do is just to share this episode and share other episodes with people around you that are going through the property process.

Veronica: Give us a review on iTunes. Five-star, please will be very appreciated because this is about making sure that we all benefit from the wonderful information that our guests have been sharing with us.

Veronica: So let's get back to tax rates for them. Because the reality is that, that, you know, a lot of people are commenting that, well, we need to do more than bandaids, you know, and no sort of government has the appetite appetite. There's say Hawke and Keating deed back in the 80s to do something really systemic, systemically changing. Um, so first of all, I, other than the obvious what we want to, they want to win elections. Other than that, uh, the obvious reason is why that that's not tackled, you know, what are some of the things that you think really need to be dealt with and the tough things that governments or politicians want to avoid and why?

Brendan: Well, I think cause I want to get elected. It's most things, right? So mostly it's, it's no surprise that a lot of grand reports, uh, we go and brief ministers and shadow ministers and they're like, great story. Yep. Yep. Yep. That's the problem. That's the problem. Oh really? That's, that's what we have to do. Or I don't know about that. Thanks for coming in. Well, it's just the reality of political life, you know? So that's part of, it's part of what we spend our time doing is to try to change the public data debate about reforms by focusing the public's attention on problems.

Chris: So like things like bringing the home into the pension test.

Brendan: I think that's a great example. So this is a problem that's really gonna apply out on the next couple of decades. So the, the, the backstory is, uh, um, if you own a home only in effect, really the first $200,000 is included in that, in the pension assets test. It's, the rest of it is excluded. So you could own a 200,000, $250,000 home in Bendigo or a $2 million home Toorak, and they'll both be counted the same in the assets test and everything else equal. We get the same amount of patients. Now, that didn't matter as much in a world when home ownership was at 80 plus percent amongst older Australians. And when housing wasn't that valuable, that it matters a lot more now. And it matters before questions of fairness. So it matters that you know, I might have my assets in housing, so I own a big house, it's maybe worth a mil and I've got $200 grand outside in super and therefore I get quite a lot of pension.

Brendan: You might have not own a house and have, you know, less money over all, say $800,000 and you get no pension whatsoever. And we're seeing people notice that. Now the other reason it's going to matter is what we talked about for home ownerships falling, a lot. And so you're gonna get to the point where half of Australians in retirement don't enter in homes. And then that's going to look really unfair between those. As an aside note, it's also a question and we've historically assume you don't draw down on your house and retirement. You pay off your house by the time you retire, it stays that way until you're either going into aged care or you pass away and it goes to kids. In a world where housing is worth 10 times your income and you're spending 10 times your, I knew you'd say you worked for 40 years to get 40 what's your income? You spend 10 of it on housing. I used to spend two system mortgage interest. The fact that you then get to retighten the never draw on that asset ever again is not going to be possible. At some point someone's going to have to deal with it. Cause at the moment what's happening is you're just giving it an asset that's worth 10 times your annual income as inheritance for your kids. So in intergenerational inc income inequality or wealth inequality problem is going to become a within generation. Like a classic inequality problem.

Chris: Yeah, because mom and dad has got their big expensive houses paid off and they use all their other assets. They re they die and they've got a big house. It's all growing texts.

Brendan: Well they don't even use their other assets. So there's that too.

Chris: Yeah. Okay. So then I pass by pass them onto the kids, which is all tax free. The tightest to an interesting point. If we are going to, you know, it's the research is all there that we are getting, um, more inequality. Um, you know, the faster incomes are growing faster in the top segment of incomes rather than the bottom, assets are growing faster with people who have got money that they, we haven't got money. We are going to create these world where the top 20% have got more wealth every year. Do you think Australia should look at introducing any inheritance tax?

Brendan: I think it's something that we're going to have to talk about. So the, the, the way that gratin is attack that issue is to say, well, for a start we should sort of subsidizing inheritance, which is what Frankie credits stupid title. Right? So, and everything else that, and they are things, you know, inheritance taxes are politically very important. Well, we had them in Australia until the 60s. Um, and then, um, they, it was the States that ran them and then the occupation in Queensland got rid of theirs and slowly the other state, well actually I think quite quickly the other States got rid of them. And so they used to raise quite a lot of money. Like we used to raise, I think the equivalent of something like $10 billion in today's dollars out of those inheritance taxes. So big tax back at the third or fourth biggest tax in Australia sort of does force the selling of assets back into the system. Really doesn't it? Because if you've got to pay tax and you've got to free up some cash somehow and um, will you spend it?

Chris: Well you give it away.

Brendan: Hm. Well that's, so that's the way we got around and, and people got around in the past. Now the issue that killed them in the past was family farms because you'd have three or four kids and families, not just like an asset. It's actually your business. And so what do you do every generation if you've got to transfer that to kids and yeah, exactly. And ended up point, they sell a few paddocks and there's not much of a farm left. There are questions around gifts and all the rest of it. So our approach where basically where you give your money away before you retire and then you don't get touched. And so it som inheritance, sex regimes do account for gifts, ah, that you give out before you, before you go. But no one raises an enormous amount of money from inheritance tax around the world. No. So there tends to be ways that people do get around them. So designing them really well because we do have, particularly the wealthy, they can access pretty good advice and find their way through.

Veronica: Yeah, that's exactly it, isn't it?

Chris: Even the U S though.

Brendan: Oh the US they use gifts. So USD their certainly doesn't raise, I think the most inheritance taxes raised in some countries might be one % of GDP in places like Finland, us is less,

Veronica: I'll tell, I'll tell you, it's like an an unintended consequence, which may not bother most people, but of the inheritance tax is a number of old houses that I've sort of been involved in either looking at to sell or buy my various Dick for decades in real estate. And you will see every now and then you come across some big old pile somewhere that I saw one and Hunters Hill recently one in Putney. I can think of a number of them where at some point before the inheritance tax was taken away, they've had to sell off bit of the land to pay the tax and depending on how smart or otherwise the beneficiaries where, um, the worst case was basically a waterfront home where they sold off a parcel at the waterfront. They kicked themselves and a little sliver of land that went down to the waterfront.

Veronica: So they could still say it was a waterfront sliver, wasn't wide enough to build anything on, not even a boat shed. So that was a bit dumb. But they also didn't put a caveat on what could be built in front of them. So that is raised or a wants to raw city built I think in the 70s. Um, which basically obliterated all they view. Ah, well I couldn't move the house cause the house was so oriented to the street. But, so in how to seal, for instance, you see quite a lot of these grand old homes and you know, I know there's not gonna be a lot of sympathy for the owners of these grand old homes, but it's sort of sad to see this, you know, carved up and really unsympathetic, you know, other, the dwellings plunked in really awkward spots. And it's quite interesting how that's been the impact of the inheritance texts in terms of some properties over the years.

Brendan: Well, taxes drive behavior, so all the, all the terraces, right? We're based on the fact that the all the old Victorian terraces were partly based on the fact that you, your tax was about your front road frontage. And so you'd deal just a little while. So if you,

Veronica: so the window texts was there. Yeah. Window texting Australia.

Brendan: Oh, that's a good question. Um, I'm not actually sure whether we do have one.

Veronica: Did you, you got texts on it, man. A window. So if you had a terrorist and on all the windows and a terrorist, couple of winners in the front, in the back that's it.

Brendan: if you've ever been to Vietnam, like you, that the tax system there works as bat your street frontage. And so even in the middle of rice patties, you have these two story narrow soup, right?

Veronica: Ah that's why.

Chris: It's that's interesting. You site is around homes. I think it's another good tax that I believe the greatest tax write off, um, his home ownership because, you know, if you buy a house, walk around numbers, but you buy a house for $1 million, you live in it and then you sell it one day for $2 million. And a lot of people have done that in Sydney and Melbourne. Um, they've made $1 million, you know, give or take, um, tax free. And you know, if you earned $1 million, you'd have to give 500 grand of that to the government or you, you know, et cetera. That, to me, I think, and you might not own $1 million over your whole lifetime, you know, so the biggest way to actually save on tax is actually home ownership. Do you think we need to look at that as an a country too potentially change that tax, um, and look at other ways of, you know, because it, is this the biggest tax write off?

Brendan: Ah, it's, it's the, the preferential treatment or the privileged position of own occupied housing in Australia is the you're right? It's the biggest cost of revenue. Uh, it's a big impact on inequality, particularly if fewer people in their own homes. So look, we've looked at that before, so you could potentially raise quite a lot of money, but you've, this is the tricky part. It's not just, there's two parts to income from house. It's the capital gains and what economists call the imputed rent. The fact that you, it's giving you a return cause you'd have to pay rent. Right now if you just taxed the capital gain, you'd probably face little calls to say, why should be on offset? I should be able to , deduct my interest payments against my income tax bill. And if you just did those two things, you might know rice name, any money you have to also then tax the imputed rent. Now the fact that probably most of your listeners may not even know what I'm talking about and then we're going to say to people, we're going to tax you this thing that's worth 4% percent of your property valuation. It's complicated and it's hard to understand. And so if you think of franking credits exactly. So I'm with you. I, I think that is way we, it would be great to go. It's just that's, that's the one we've sort of said there are the fights first, right? We might come back to you.

Veronica: Are you saying it would be good to go there or are you just saying that it's a great opportunity?

Chris: I'm just talking tax policy and tax flaws. I mean, what about though if, you know, cause there's what you basically would do as a helping pay for the government to advise on tax policy. And there are lots of loopholes within the system that are marginalizing people. And if you know what to do, you, you've structured your assets because what you said about tax, um, tax policy drives behavior and if you, um, and so if you do want to encourage more behavior like home ownership, but yeah, builders, people know that you can buy a house for a million, spend 300 on it and make 700 grand tax free if you sell it, if you live in it. So it's your home.

Veronica: However, if you start texting the house, if he taxed the gain, um, I think that's going to make home ownership less attractive because you think about it, like people do often trade up in their lives, right? And so you do buy a little house when you start with everyone, but a lot of people buy a little house and then they might have three kids, maybe then they need to get a bigger house. Um, their ability to upgrade if they gotta pay tax on the gains is severely diminished.

Chris: and that means you'll slow down house prices exactly why and you're gonna make it less attractive for people to actually buy. Then they may not be as excited about why.

Chris: people still buy because they still want somewhere to live. They still want security. What you will stop though is people taking their gain really leverage going back to the bank and they go and borrow another $2 million and then they said that's the problem with housing is people make profits and then they go to the bank and then they re leverage it. But they don't just stay in the house, pay off the debt. So that's why you get prices rising because people are just constantly reinvesting their profits and not paying any tax.

Brendan: Do you think that's because they're paying stamp duty? Because that's a question I actually have for you guys is do you see that people are still trading up your stamp duty? Makes it very expensive.

Veronica: it does. And in fact it in pretty much in sort of the area in which I buy my business. Oh, we're the 10 K radius of the CBD of Sydney says the most expensive area in, in Australia basically. Um, you know, pretty much everybody accepts as basically a quarter of a million dollar trends, transaction costs, you know, and that that's just in all the bits and pieces of stamp duty, the selling fees at buying fees, all that stuff rolled in, they pretty much say, yeah, quarter of million dollars. Okay. So therefore that's a hurdle you got to get over the starters, you know. So if you can't actually get access to significant amount of money over that, then you're not going to get enough of an upgrade by doing, going through the whole exercise even bother, you know, so there's that hurdle. Um, and that is something that does stop people and that's that level.

Chris: They do that. Finally, they'll only upgrade though if they know they're going to get a better asset and they're going to make that 250 grand back and gains.

Veronica: I honestly think for owner occupies don't often think exactly like that an investor might, but an owner occupies often thinking, Oh that's a cost. It's, they're not even thinking. I actually exhort my clients to think like investors when they're buying their home because often they're not thinking like investors. They're just thinking, I want to have this environment to live in for my family or whatever. That's what they're thinking. Um, you know, I want more space, I want these, I want better schools, I want whatever, whatever the drivers are that that's encouraging them to want to upgrade. They're not really thinking of it. That is an investment. Not many of them. Um, but there are other areas where people do buy for the long term. They buy and they sit, they buy and maybe send their money. I'm renovating for instance, and they're buying to sit there for 20, 30 years.

Brendan: Well the the average owner occupier is in their house for at least 20 years.

Veronica: Yeah. So, so these areas that we're talking about, the churn is unusual in terms of the broader since yeah. And then August that Everage bears that out. Yeah.

Brendan: So, so for a, just a reflection on sort of my, the, my cohort, so you know, I'm in my mid thirties, um, a lot of my cohort are trying to buy houses. Some, you know, have really high income, some don't. The ones that, what's interesting, the ones that don't, they tend to, that idea that's always been told to me is like you trade up when you're talking about trading up in sort of like any way, I mean the center Melbourne, so if you buy say a two bedroom apartment, it costs you or maybe buy a townhouse costs, you say 800 grand or something and then you want to trade up to a house that's worth a bit more. The stamp duty does become very high. And I think people just don't do that as much because those costs are so large. And I would, I would posit that a lot of the inner city renovation, market would disappear, stamp duty, um, was reformed or changed. I think a lot of it is people go, well, I've got to spend X thousand dollars on stamp GD. I can just do a renovation and stay here.

Veronica: Oh, I agree. Anecdotally I can, I can concur that a lot of people have that, just that conversation. And that's the decision. And if I just had a meeting with a client last week about that though, they were their options, you know, you're gonna lose quarter million dollars in the transaction and you're going to move out of it. The area in which you really, really like and you and you're familiar with, you know, I will consider the option of what can you do with your home. Now this home first is going to be a lot less painful.

Chris: So I guess the way you do ref if we're looking at yeah, creating a fairer system, um, you know, a way to do that is to start taxing the land that people hold.

Veronica: I'm laughing, not because I agree, but because of the sage nodding and the smile on Brendans face.

Veronica: I hate land tax, land tax.

Chris: The why that, you know, if you're an example, I've got a $4 million house, you paid your stamp duty 20 years ago. If you want someone to trade that access to create stock to better, you make it expensive than to hold that land. And so instead of having a system where you have one off tax with stamp duty, do you think we should consider taxing land rather than stamp duty?

Brendan: Absolutely. So stamp duty I think is of quite an unfair tax cause it tends to hit people that are younger and that people that move a lot to take new opportunities to their life rather than those that buy a house in a, in a, in an established suburb, wherever it might be. Um, and stay there for 30 years. And um, so why should those two households be treated differently? Cause one's had more get up and go to move and find things and sort of chase down opportunities, which is what you want to have happening. You know, an open, productive economy. So you know, if I, if I got a job in Sydney and was gonna move to Sydney, then you want to make it so I could do that. And then if I go to Brisbane or if I'm in Melbourne and I need to come and come and move in the Southeast and I need to be able to, do you want to encourage that cause otherwise, yeah. Less mobility. People move less often. This economies less dynamic.

Veronica: So what doesl tax look like for you, cause I hate the way it currently [inaudible] set up. Um, you know, I absolutely hate it. But what, you know, because it was broad based, land tax will be completely different to what's currently existing, I'm presuming. Or do you have a similar, do you think it should stay along the same line?

Brendan: Sure. So the council rates is a broad based land tax. So council rates applies to unoccupied, occupied housing. It applies to investment property, it applies to commercial that it applies to agricultural land or to farms. Although there are sometimes carve outs for that. That is the right tax base. So the answer is not to take the existing land tax system that only implies to investors and leverage that up. That's not going to work. One, because to raise the money you'd need to fund the abolition of stamp Judy, the tax rates would be enormously high and that's not going to happen. So a broad based land tax, we think in number, um, about half percent of the of the unimproved value, uh, about half a percent. So basically what is that 605, $600 for every $50 or $60 bucks for every thousand dollars of land, right? Or if you do it on the capital improve value.

Brendan: So the total value, including the buildings, maybe half that because land is only half the value of the dwelling on average across the, across Australia. It's different obviously in apartments versus houses. Yeah. Um, that would be enough to fund the abolition of stamp duty, which is what the ACT has done. So the ACT government actually has Australia's best state tax system. Uh, they uh, about a third close to a half of the way through a transition away from stamp duty towards land tax. I would gradually ratcheting down stamp duty here. Well that I haven't ratcheted it down as much as they increased land taxes. So total revenues have gone up. Um, which is often I think when people say, um, I'm sort of skeptical of land taxes. They worried about high tax take total and that's certainly something that can happen. The stamp, Judy's a popular, they don't know taxes really popular, but stamp duty is a more popular land. Taxes stamp duty is really, it's only once it's built into the property price. So you're already and borrowing $1 million for example, or 5,000. And what's, what's a bit more entry?

Veronica: It is certainly a barrier to entry.

Brendan: Yes and so you feel as a first time buyer, but it's not the same. You're only a first home buyer once and then you forget.

Veronica: Oh no, I don't think you do forget. I think it's not as painful maybe, but you don't, you definitely don't forget painful thing getting a land tax, a land tax bill. You get it every year.

Veronica: Oh, I to be thought to revolting that. Yeah. Great. I go, I pay the state government and then I get to claim 47% of that. But, well, I don't know. It actually, I don't think cause I in text in the current way that it's, it's some applied. It's, there's no productivity around that. It's just basically, it's not even based on what I earn from that land is actually just bang and re, uh, you know, while the prices were rising, and I'll have to say every year I was, Oh, and I'd look at it and I've, I re revalue my, my properties and I'd be like, yeah, cost. But, but it is, it is unfair because it's an inequitable, inequitable in the way that it can be applied. Right? So if you choose to buy houses, for instance, um, and yet you could also spend the same amount of money buying apartments in the same areas. And you say you buy those three bedroom apartments that are really in demand and really good assets. That whole idea, the land value, I mean I can go on about this for hours, but basically you could have the same property size property constructed differently. I could have a something in Melbourne or I could have something in a really good apartment would and, and well located. It absolutely will. I can show evidence that that some of them do. So if you were, or I had one in Brisbane or I had one in Melbourne or had one in Sydney, I'm paying less land tax, you know what I mean? So it's not, it is actually not fairly applied and it is another tax that other investment classes don't have. You know, I, sorry. So, Oh the way it currently is, I really, really, really discomfort, um, massive discomfort with that. But

Brendan: So the, just on the economic case, the I, the case is very simple. It's you want to tax things that don't move, land can't move. You want to tax things that aren't going to change people's behavior. Now you've given some examples where land tax is imperfect, so it does change people's behavior. But on the whole it's you're less likely to if the tax applies for the highest and best use, which is kind of how the land supposed to be valued. If that's imperfect but it's pretty close, then you know there's no, it doesn't matter the land value, the tax is the same regardless of whether if it's an empty plot of land or whether it's got a six story apartment building on it, the tax is the same. Yes. And that's, that's good tax design because you want to not change people's behavior. These example you're giving you about land, about the townhouses. Well the reason the townhouses even it's the same, property value has less land taxes cause the land component is less probably.

Veronica: Yeah, and I know it's meant to sort of tax the rich and all that sort of stuff.

Brendan: Well we don't think of it in terms of taxing. The reach is taxing the people that own land and the main people,

Veronica: the ergo well actually

Brendan: really interesting so that you know, if you think about taxing land attack about LA Mo, wealthy people hold less of their total assets in land as a percentage, as a percentage. Well still a lot of data from a, that's where the survey of Income and Housing, you know, we published it before and grant and reports in the quarterly taxes cause they, they, they've got their, they've got stocks, they've got super, they've got everything. It's the middle that you actually attack a bit more.

Chris: And I mean land tax, it's, it's a tax you might be paying cause you own land. Um, end of the day it's, you're still a land owner and you've still got a portfolio and you still got things growing for you. When you, if you didn't own any investments, you wouldn't pay any land tax. So you're, you're paying a tax because you've got the ability to own and that's stopping other people owning that land. There's gotta be some type of ability of making, you know, limiting how much people land of got. Because I'll make it making it harder because you know, we do want to rather have rather than more and more investors. We do want to have people getting into homes. I guess the biggest problem with taxes, people say, Oh don't tax this more, don't tax us more, but we need to tax to a certain level. But what on the other side of the equation, what can the government do on the spending side where, what potentially being a bit too frivolous, we're wasting money in certain areas.

Veronica: Like they're not spending enough in areas maybe. Yeah.

Brendan: Well, so you know, Grattan is like any, any, anything tank will have examples of things where we probably should spend some more money. Um, so we've talked about, you know, the problem of low income owners struggling to pay for housing and the fact that more, why don't in future, particularly for retirees, you probably need to boost rent assistance, which is a payment. It's a tax to income support payments. So if you get the pension and you rent, you get some InterSystems. So we're saying that should go up.

Veronica: Look, I did read your article about in NRAS and I just thought that was really interesting. Just put one of the points that a lot of interesting points in that article. We'll put the link in the show notes by the way, but interesting note, um, about, um, the fact that the, it was the developers rebate or don't you get about $11,000 a year regardless if it is a one better or a three better? I mean, I just like really what sort of naive commercially, naive, um, you know, public and put that together.

Brendan: Look, I was in treasury at the time. No, it wasn't me. No, it wasn't me. I instantly, I worked on the stimulus, so I helped design the stimulus payments spot, um, and did pension of some parts of pension reform, but right. It's, it's economics one 0 one. So we looked at that after library announced their new policy and we thought, okay, we've got to have a look at this and just say it's [inaudible] it's the same. It's just like, and you know, it is, you know, it's those, the subsidy was way too high and then it was, it was the same for every road. It's, it's economics. What I wanted, policy files that you would not want to say replicated in Australia again.

Chris: I mean an risers and about finding portable housing to key workers and you know, you would encourage investors to by that housing too. Um, you know, cause they would get a subsidy so they could provide more rental.

Brendan: or to build that housing. And then, yes.

Chris: And so, you know, you create more stock on the market and we'll give a subsidy and then we'll create more rent, cheaper, affordable rent. What is your thoughts on, you know, Scott Morrison 5% deposit? Um, let's get everyone into the housing market. We'll back.

Veronica: Well, it's funny, isn't it? 10,000 people or something? It's not everyone.

Brendan: Well it is capped, isn't it? I haven't looked at it for a little while, but basically, um, it's the perfect, the epitome of a policy. That sounds good. It's not going to do a lot now. It's probably not going to do a lot because not many people were going to take it up. But even if they did take it up, it goes from being ineffective to counterproductive because if lots of people take it up then to your agonist before about that'll just turbocharge more borrowing and add to demand, then that'll push up prices.

Veronica: And why do you think that people won't take it up?

Brendan: Um, I think these kinds of schemes, we've had a few of them in the past, like the super Supersaver scheme. Um, you know, where you can, um, contribute money to super and then get it out the other. And not many people have taken that up in the past. Most people tend to want to have more than a 5% deposit themselves. It's part of feeling secure. So the average amount of the average leverage ratio for first time buyers has not changed in 15 years and it is 83%.

Chris: every week we hear incredible stories of the dumb things. Property buyers do, dumb things that end up costing a whole lot of money and, or a whole lot of stress, misstakes they can be avoided. Please, Brendan, can you give us an example of a property Dumbo? We can all learn what not to do from these stories.

Brendan: Ah, look I did, but I think the best example I've heard of was actually not something that property somebody, and I'm abided wrong, but uh, something to be wary of from site. I've, I made them on who works doing, I'm in development, not his development, but uh, if he get off the plan development and um, you look at your house and know the plans and if it's make, be careful if it's got furniture drawn on in the plans because it was this beautiful big round coffee table in the middle of the living room. It was a structural pillar.

Veronica: That's such a good Dumbo. Oh my God.

Brendan: Now they ended up hocking off the set, the department, the developer and clearly offering it for them for less, but they basically squeeze one more in and just they needed that extra bit of structure to support..

Chris: Oh, so it's like a pole, in the middle of the, in the lounge room.

Brendan: It's a feature. It's a feature wall.

Chris: Yeah. So something to dance around.

Chris: I guess that's the goal. Thank you very much.

Brendan: Thank you. Thank you very much.

Chris: We want to make you a better elephant rider. And this week's elephant rider training is.

Veronica: We talk quite a lot with Brendan around housing affordability. And one of the things that I just want to talk about in this bootcamp is the first home buyers to be very careful about really trying to get, um, government grants now. Yeah, a government grant for first time buyers icing on the cake as far as I'm concerned, but it should definitely not be a complete controlling factor. Now, let me give you an example. Quite often these government grants are really encouraging you to buy a brand new property. Now we've talked on and on and on about why that might not be a great idea. And so that in itself is a reason to avoid the grant if it is only paid on brand new, because fundamentally brand new property loses value very, very often straight away.

Veronica: So you might get a few thousand dollars from the government, but you're potentially losing hundreds of thousands of dollars or at least tens of thousands of dollars very, very quickly. So it's an absolute false economy. Another area in which relying on government grants is a problem is that it might limit your budget where you actually could afford more. Now let me give you two examples of where that might be a problem. One is where you'll, you're competing with every other first home buyer, also trying to keep under the threshold. And so therefore you're effectively paying a bit more than a property might be worth, um, at that point, right? And that whereas if you added say $50 grand to your budget, it takes you into a different price bracket, which is not as competitive with first home buyers. And you might find that proportionately you get a lot more value. So that is one example. The other flip side is it might limit what you buy.

Veronica: And when I say by that is that say you buy a one bedroom apartment because it you on under the threshold, whereas you could actually afford a two bedroom. Now in that one bedroom you might be a couple and decide to have a child or you might be single and you find a partner. All of a sudden that property that you bought it, you very, very quickly outgrow it. Now the transactional costs of selling that and upgrading to a larger apartment, well you can lose any savings that you made in terms of, you know, not having to pay stamp duty for instance, or, or getting a few thousand dollars from the government. You can easily lose those, those savings and the transaction costs, the cost of selling and then buying again and then ultimately having to pay stamp duty all over again. So that's our bootcamp for today is really just to caution yourself around using or limiting yourself around government grants. If you are a first home buyer,

Veronica: please join us for our next episode when we find out about what's happening in the Melbourne property market. Now you know that Chris and I are both Sydney based and so we can be forgiven I guess for talking more about Sydney than other places in the country, but we've planned a trip to Melbourne and we we're going to be interviewing a number of people, so we'll be meeting with buyer's agent David Eastebrook and finding out about how the recovery in the Melbourne property market is playing out and whether therte is still and apartment over supply problem in the city.

Chris: Don't forget, we're on all the social channels. We're on Facebook, we're on LinkedIn, we're on Twitter,

Veronica: or you can connect with us on www.theelephantintheroom.com.au, The links are all there for you. Please connect and send us a message we'd love to hear from you.

Veronica: Until next week. Don't be a dumbo.

Veronica: Now remember, everything we talked about on this podcast is general in nature and should never be considered to be personal financial advice. If you're looking to get advice, please seek the help of a licensed financial advisor or buyer's agent who will tailor and document their advice to your personal circumstances with a statement of advice.