Chapter 1: What is the main topic discussed in this episode?
Hello, and welcome to the Australian's Money Puzzle podcast. I'm James Kirby. Welcome aboard, everybody. If you're a property investor, there is a lot happening right now, okay? We are in a rising interest rate environment. We've got serious changes flagged. for the budget. And I know a lot of you have been writing in asking me to cover this and I am covering it as it unfolds.
But just keep in mind that we don't know for sure the final detail until budget week. And we will do that budget special podcast, of course, on the 14th of May with Will Hamilton. But either way, it's getting serious. That's for sure. So I'm going to cover some budget issues today. And my guest is perfectly placed to talk about anything
within the budget that pertains to property because it's Nerida Conisby, the chief economist at Ray White, who's been on the show before. Hi, Nerida.
Chapter 2: What is the impact of rising interest rates on property investors?
How are you?
I'm well. Thanks for having me.
Great to have you on. It's interesting, folks, we were just talking before the show. And, you know, in many ways, what looks like unfurling on Budget Day is Bill Shorten's 2016 agenda minus the franking credits changes. You do wonder if he had left out the franking credit changes, would things have been different? But I don't think so. It's 10 years later, Nerida.
It's a different environment, I think, in housing. Do you think?
Yeah, look, absolutely. Housing is obviously a lot more expensive. People are feeling very angry, young people in particular are feeling really angry. And also it's not just a difference in terms of prices, it's also rents.
I mean, we had a very prolonged period where rental growth pretty much didn't occur and we've had the fastest rate of increase that's ever been recorded over the past six years. So it is a radically different environment that we're in.
And we have also this consistent enduring vacancy rate that's just like zilch. It's at 1% to 2% in residential property, which means the queues for rentals are longer than the queues for house sales. And that's been the case for a long time. We're going to look at this, obviously, from the investor point of view.
But the more you know, obviously, folks, then the stronger you are as an investor and the more informed you are. So talking about being informed... Our senior reporters in Canberra are very well informed because, you know, the government is leaking like a sieve, leaking at a pace I haven't seen for quite some time.
I'll just try and synopsise what's been leaked, what I take seriously, and then I'll put it in there and see how it matters to you folks. So the key changes would seem to be that the CGT arrangements are going to change for sure.
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Chapter 3: How are older Australians affected by interest rate hikes?
This sort of smoothing effect. That's number one. Number two is negative gearing and it would seem, believe it or not, that they're going to make changes to trim negative gearing, perhaps to two properties per person, but new properties will be exempt from those changes. Narada, tell me, what do you think that will make to the property investment market?
What impact do you think those highly likely changes would make?
Well, it does make investing in property less attractive. So, I mean, I say, okay, so maybe if we talk through both of them, I guess the first one, the CGT change to an inflation indexed option, it actually could mean if we go, just say, you know, you're selling in two years. It could be that you pay less tax under that option than the 50% because it does rely on two things.
It relies on both what inflation is and it also relies on what capital growth is. We are entering an environment where capital growth is likely to be lower, primarily because interest rates have risen, but there's also a lot happening with the budget. And we're also in a high inflation environment. So when you...
put back through the methodology that we expect Treasury to use, then people might come out. It might be beneficial for some people.
In the immediate term, because of our relatively high rates just now of inflation, that is, folks. So just keep that one in mind. And also the speculation is that in terms of how this will be applied in terms of grandfathering and all that, they are talking about this thing called time-based approach, where rather than picking a valuation, it will be applied yearly, these new changes.
And we won't get into that today. But interestingly, as I say, I'm reluctant to talk too deeply on it, folks, before we know for sure what the facts are. It's only a week. Hang on. Okay, that was CGT. And separately on the negative gearing then, new houses only. Quick question. How many investors, as a portion of all investors in Australia, negatively gear new houses? Roughly.
Any idea? I don't know off the top of my head, actually.
Would it be less than 10%?
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Chapter 4: What changes to capital gains tax (CGT) are being proposed?
The ultimate article on all these issues is the Australian Housing and Urban Research Institute, AHURI. They forecast home ownership in Australia will fall from the current level of about 67%, used to be much higher, used to be in the high 70s, to around 63%. I mean, is it the case that pool of mortgage payers, as you say, one side of the story is they are so indebted that a mortgage...
rate rise hurts more, but there's less of them, isn't there, sort of carrying the load?
I would say, I mean, it's usually been, it's always been a third. A third of people rent, a third of people own property and then own outright, and then a third of people have a mortgage. I guess what better data is showing is that fewer people will own property outright. In the future. In the future. And then on the other hand, more people are going to be renting.
as well and then the mortgage you know more people with mortgages so I think you know that's it is a clear trend I think the idea that you get to retirement and paid off your mortgage I think for a lot of household is quite foreign now whereas in previous generations it was a very normal thing to do is to have paid off your mortgage by your 50s perhaps.
That idea of one third in each group, that has to change, obviously, with what they're saying, if the level of home ownership starts to drop. In the fullness of time, there will be less mortgage payers.
Again, it's hard to... I mean, if they remain renters... Yes. Will then more people have paid off their homes? I think probably not. I think that's probably not the way that it's expected to move because people have much higher levels of debt now and are increasingly finding them much more difficult. I mean, also banks are really extending loan terms. I mean, if you have a look at CBT,
They've moved from what used to be a pretty standard to get a 25-year loan. It's now 30. And every time they move it out, it increases people's borrowing capacity, but it also then increases the time period of which they're paying off a mortgage.
So it's this sort of pain bubble, what they used to call the mortgage belt in our minds. We used to picture young families, basically, with small children. Has that actually changed? Is there much more regularly?
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Chapter 5: How will negative gearing be affected by new property investment rules?
Are there older people in that cohort now?
Oh, absolutely. Yeah, absolutely. There would be, again, coming back to people hitting retirement with a mortgage. You know, I think a lot of people would, you know, ideally, I think for most people would be downsized, pay off the mortgage and, you know, take the extra money. But then we also know the difficulties of downsizing that,
Often housing, there's not much housing that's suitable for people to move into. There's not much incentive to downsize from a tax perspective. So there's a lot of challenges in trying to get people to do that.
Right. So once upon a time when you had a mortgage rate rise, you were really hitting younger families in the suburbs. You're now hitting... Possibly a group that hasn't expanded much at all, possibly in the fullness of time may get smaller, but it will definitely get older. And that group is actually people may more likely be in their mid 40s, mid 50s with mortgages. Yeah.
Is that how it's sort of?
Yeah, absolutely. Absolutely. I think the ideas of having paid off a mortgage in your 50s, you know, would have been very common a generation ago. I don't think it is as common at this point.
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Chapter 6: What are the potential implications of limiting negative gearing to new properties?
Right, right. And to your point that they don't have to move them much for the pain to hit, if you like, because this cohort is so indebted. Then one last question is, there are some senior economists out there who you know, I'm sure, who are talking that there's still two more rate rises to come, even if, you know, from the rest of the year. Do you think that's the case?
But the thing is that this outlook can change very quickly. And, you know, we know that a lower than expected inflation rate, for example, which seems unlikely at this point, but the other one would be what happens with unemployment. And, you know, unemployment seems stable.
But when you look underneath, you know, when you look a bit more closely at the data, youth unemployment is rising very rapidly. Victoria has a much higher level of unemployment than other states. And then you look at things like high frequency data around job ads and SEEK are now publishing the number of job ads and that's been reducing quite rapidly.
So I think there's, you know, there's a lot going on. I think, you know, when you look at headline inflation, obviously things are very alarming that we've got 4.6% inflation even taking out fuel and all the other factors. highly bearable elements are still sitting at 3.3. But then I think the economy is a lot weaker than what people, some other economists feel.
And I think that's going to be the factor that does start to balance things out over the rest of the year.
Less rather than more interest rate rises.
Yeah, absolutely. You know, again, we don't know. And I think this is the thing too, like you even look at market expectations of rates and that's what the market's expecting at this point. But that, you know, again, overnight, you know, a new piece of data comes in and that drops dramatically.
And it can turn on a dime. Yeah. As you say, it's really just where the betting is at in terms of those money markets. Yeah. All right. Now, Nerida has done some really interesting work on one of our pet subjects, which is why is Melbourne so bad as a market compared to other markets?
When we say so bad, what we mean is from an investment point of view, as an investor, why the returns are so low there compared to other markets, such as Queensland and West Australia in particular. The answer will be revealed after the break. Hello, welcome back to the Australian's Money Puzzle podcast. James Kirby here with Nerida Conisbee.
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