Elite AgentOpinion

The federal election, the property market, and the elephant in the room

As Scott Morrison and Bill Shorten campaign throughout the nation, the state of the national property market continues to be a key matter of contention. But according to Marshall White Projects Director Leonard Teplin there is an elephant in the room that neither party is addressing.

The Labor Party has pledged to make sweeping changes to negative gearing and capital gains tax, while the Liberals have suggested they will be relying on the Reserve Bank of Australia to cut interest rates in a bid to regenerate market activity.

But what both parties have yet to fundamentally address is just how much the property industry serves the economy, or the policies required to ensure the market can continue to be an important driver for the economy as it once was – as well as funding the major infrastructure projects that both parties have pledged to deliver should they be elected come May.

Take for example Labor’s planned changes to negative gearing, which on the surface look to be a win for first home buyers – albeit at the expense of investors, who play a vital role in providing rental stock and who are critical to the economy.

According to ALP calculations, the changes would save $2.9bn in tax concessions over four years but alternative projections paint a different picture.

Labor’s proposed changes will be grandfathered, so current investment properties will not be affected by the changes – no savings to the country’s purse pocket to be had there.

Meanwhile, both the state and federal governments’ ‘anti-investment’ sentiment has all but eradicated investors from the market altogether since sweeping regulatory changes took effect in 2017.

Tighter lending restrictions coupled with declining construction rates mean first home buyers are unlikely to produce the same momentum that investors once did, so it’s doubtful this activity will generate the economic impact that is required over the long term.

In fact, if you believe former Liberal treasurer Joe Hockey, a similar play in the early 1980s under the Hawke Government led to rent increases that impacted household earnings. This affected a buyer’s ability to enter the market altogether, which ultimately led to negative gearing being reinstated in 1985.

Why should this worry the voters?

Without the significant cashflow generated from the property market, infrastructure projects become difficult to fund, carrying a heightened risk of a budget deficit blowout or new taxes to cover the costs.

Layer that on top of already declining consumer confidence and a languishing property market, and we will see sentiment plummet even further and quickly – carrying with it all the markers of a major recession.

Instead of focusing on handouts and short-term strategies in an effort to lure voters, what we need is a long-term outlook and a set of bold policies to encourage cash inflow into Australia at an international level.

A plan to support first home buyers while cutting off investors or vice versa, all the while turning our backs to capital injections from international markets, will no longer cut it.

Without addressing the bigger picture, the mounting bill for major infrastructure projects, both planned and underway, will soon become too big to ignore.

The elephant in the room

Ever since the property boom peaked in 2017 and sweeping federal regulatory changes were introduced, ‘international investment’ has become a dirty phrase.

So much so that both major parties have completely backed away from any policies that would relax these restrictions and once again entice foreign capital, for fear of incurring the wrath of voters.

It’s the elephant in the room that neither party has addressed.

But what many fail to realise is that this same foreign capital led to sustained development activity, providing much-needed cashflow into the country.

It has subsequently helped to fund many of the projects that are currently underway, as well as generating countless construction jobs and economic prosperity, all of which are now steeply on the decline.

Without a robust policy to encourage local sales and open the doors to international capital, what our major political parties will gain in the short term the everyday Australian will lose out in the long term.

When Canada enforced similar restrictions to overseas cashflow in 2018, after a sustained property boom where prices rose over 300 per cent in 15 years, the effects on their housing market were swift and caused a significant chain of reactions that are still painfully at play.

House prices in Vancouver have decreased close to 8 per cent on the previous year, while sales volumes have slowed to the lowest rates in 30 years.

Housing analysts first speculated that this would encourage an uptake of first home buyers finally getting their foot in the door; however, the stringent lending restrictions at a local level means these buyers are still unable to get into the market despite the price correction.

Sound familiar?

In fact, property prices in Vancouver are on the decline so quickly, analysts are forecasting that soon home owners in high risk pockets could owe more on their mortgages than there is value in their homes.

This would create a catastrophic negative equity environment, the likes of which we last experienced in the lead-up to the Global Financial Crisis in 2008.

That’s where things start to get very scary.

A controlled reintroduction of foreign capital in Australia is not to say there should not be stringent prudential regulations in place to safeguard the way in which this investment flows and where it is directed.

The days of large-scale high rise developments selling overwhelmingly to foreign investors are behind us and so
they should remain.

If managed correctly, there are a myriad of ways offshore capital can be encouraged into the economy.

This would avoid placing such upward pressure on residential property prices, thus allowing our local home buyers the opportunity to gain a foothold into the market – all the while protecting our economic outlook into the future.

What we need is a policy that relaxes restrictions enough for local buyers to access the market and allows Australia to once again court overseas investment while supporting the economy as we spend up big funding infrastructure upgrades across the country.

We need strong leadership in this space where decisions should be made to drive our economy forward, rather than what appeals to a small contingent of voters in the short term.

Without a robust policy to encourage local sales and open the doors to international capital, what our major political parties will gain in the short term the everyday Australian will lose out in the long term.

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