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How the political parties’ policies are having a detrimental effect on most Australians and the economy

Owning a home has been the dream of most Australians for decades, and many have made great sacrifices to achieve that goal. As our population increased and the economy grew, so did the value of property, giving people greater equity in their homes.

Owners used this capital growth in various ways, for example:

To borrow against it to:

  • do extensions
  • supplement retirement income or superannuation
  • offer as assistance or security for their child/ren to purchase a home
  • start a business
  • buy a second property to negative gear (thereby providing rental accommodation for those who could not afford to buy at less than the holding costs for the tenant)

To sell to:

  • upgrade to a better home
  • downsize to use the balance for retirement income
  • start or invest in or expand a business
  • other reasons.

The owners are the ones who worked hard and took risks and should benefit from their investment. Some used their equity to leave to their children when they died.

Many changed houses about every seven years with changing economic circumstances. For a long time, the cost of changing houses was reasonable and didn’t reduce the equity much.

Many of the buyers did various things to enable their purchase:

  • Lived with their parents for a few years
  • Took two jobs
  • One party (the carer) took a part-time job
  • Made sacrifices in clothing and food
  • Plus, plus, plus.

Many started with very old, small houses not expecting a modern 4 x 2 with all the mod cons.

A distinction needs to be made between WA and the east coast. Interestingly, most commentators do not seem to realise that WA exists, or is part of Australia but with a very different economy and market.

WA experienced above-average increases in the early 2000s, which collapsed due to the:

  • GFC in late 2008
  • end of the mining construction boom in 2010.

Most falls were around 20% to 30% and turnover virtually halved. Since then, the market has been fairly stagnant – up a bit, down a bit.

Last year, we saw the first signs of possible increases due to:

  • The announcement of multi-billion-dollar mining construction contracts
  • Mining exploration going gangbusters
  • Record $ value of grain harvest
  • WA starting to get more GST (which shouldn’t be used to prop up states or territories that haven’t encouraged and built up their economies for years).

The increase in confidence in WA has been dampened by negative publicity by the eastern states’ media who just lump WA with the east coast, and for 10 years have experienced years of unsustainable above average price rises (like what happened in WA from 2000–2008).

This constant negativity in the eastern states is affecting the growth of confidence and recovery in WA.

How are government policies affecting real estate?

  1. The major problem is the exorbitant stamp duty for locals of 5.25% on every purchase. This reduces the equity for the owner and, when added to the agent’s commission of approximately 2% plus GST, it virtually reduces the capital to a point where it is not worth selling or changing residences for many years, if at all. The government takes the owner’s equity and prevents them from initiating the abovementioned actions that create more activity and employment.
  1. The well-meaning but misguided policies to make housing more affordable can push existing owners into negative equity if, after selling and paying costs, the owners owe more than they have borrowed. This wipes out all the hard work and sacrifices made by the owners to raise a deposit and reduce their mortgage. Often after selling, instead of having $1,000s, they find they still owe the bank money. This will affect thousands if not millions of people’s decisions on making the sacrifice to own their own home. Politicians would be better off exploring and implementing the technologies that enable housing to be built far more economically (even 50% of today’s costs) or building them at prices that are affordable for those who cannot afford traditional construction.
  1. Negative gearing is very misunderstood by politicians and self-interest groups. It provides housing at a much lower cost to those who cannot afford or do not want to buy a particular home. The owner/investor receives rent less the cost of:
  • Foregone interest on the deposit
  • Interest payments on the mortgage
  • Interest on stamp duty and settlement costs
  • Rates and taxes
  • Building maintenance
  • Garden maintenance.

Why would anyone do this and call it an investment? In the past, when capital growth was at a reasonable level, the investor’s return was:

  1. Some tax relief on their losses each year (this would be about half the amount that their costs exceeded their rental income).
  2. Capital growth on the sale of the property less the costs of selling. Of which, they would pay nearly half in tax.

With capital growth falling (even being negative) and turnover declining, most buyers and investors will decide to pull out of owning/investing in real estate, thus reducing prices and turnover even further. Government income from property transactions will fall dramatically.

Politicians would do well to:

  • Reduce stamp duty to 1 to 2%
  • Remove the capital gains tax.

This would give the control of capital back into the hands of the individual and remove billions from governments who waste most of it on big (and often wasteful) projects. It would be great if individual home owners (entrepreneurs) invested the capital gains into profitable business and created employment as they watch their profits closely.

This is opposed to governments who take money they haven’t earned and give billions to bureaucrats to run huge projects without any skills in getting the best contracts. Invariably they just tax us more to pay for their mistakes whereas private business go broke if they don’t watch the bottom line.

Copyright 2018 Gordon Davies Real Estate. All rights reserved.