ROBIN HOOD POLITICS RISKS MAKING AUSTRALIA'S HOUSING CRISIS WORSE

For months, I have been one of the few commentators openly stating what the data was already showing: property prices had begun to fall.

The latest figures confirm it. Cotality’s June 1 Home Value Index showed Sydney values down 0.9 per cent in May and Melbourne down 0.8 per cent. ANZ has cut its national capital city forecast to 2.8 per cent growth this year, down from 4.8 per cent in April. CBA has also downgraded its outlook.

So the Federal Budget arrived at the worst possible time, with the wrong prescription, to treat a problem it fundamentally misunderstands.

Treasurer Jim Chalmers has suggested that making it easier for first-home buyers to get a fair crack at auctions is a good thing. The reality is more complicated.

Driving property prices down does not simply hand a discount to first-home buyers. It affects the 1.4 million Australians employed by the property sector, the 67 per cent of household wealth tied to housing, and the state government revenues that fund schools, hospitals and roads.

The government had a choice: tackle supply constraints, link migration growth to housing completions and reduce spending, or increase taxes on property investors. It chose the latter.

Property is an economic pillar

Property is not simply another investment class. It contributes about 10.6 per cent of GDP directly, up to 15 per cent when flow-on effects are included, and employs more than 1.4 million Australians. It also generates more tax revenue than mining and underpins consumer confidence through the wealth effect.

Against that backdrop, the Budget removed negative gearing from established residential properties purchased after Budget night and replaced the 50 per cent capital gains tax discount with cost-base indexation and a 30 per cent minimum tax from July 1, 2027.

The government calls this fairness. I call it a misdiagnosis.

The grandfathering trap

The policy is also internally contradictory.

Properties purchased before Budget night are grandfathered, allowing existing investors to retain full negative gearing and capital gains tax benefits until they sell. The logical response is simple: hold.

That means fewer properties coming onto the market, fewer rental listings and reduced transaction volumes.

The result is likely to be higher rents, reduced stamp duty revenue and further inflationary pressure at a time when the Reserve Bank remains focused on bringing inflation under control.

The government is attempting to fight inflation with one hand while fuelling it with the other.

Who really owns investment properties?

What is often lost in this debate is who Australia’s property investors actually are.

According to ATO data, 71 per cent of investors own just one investment property. They are not wealthy property moguls.

They are teachers, nurses, police officers and small business owners who have purchased an investment property as part of their retirement strategy.

For many Australians, property remains the most tangible and trusted pathway to building long-term wealth.

Removing the incentives that supported that investment does not hurt a billionaire developer. It hurts ordinary Australians trying to secure their financial future.

Investors aren’t the affordability problem

It is true that housing affordability has deteriorated significantly over the past two decades. However, negative gearing is not the primary cause.

Research by economists Ross Kendall and Peter Tulip found planning and zoning restrictions significantly increase housing costs.

Their work showed zoning lifted detached house prices well above marginal construction costs in Sydney, Melbourne, Brisbane and Perth.

Low interest rates, strong population growth, chronic under-supply and restricted access to development-ready land have all played a much larger role in pushing prices higher.

Punishing private investors does nothing to address these structural issues.

The Build-to-Rent advantage

At the same time the government is reducing incentives for Australian investors, it has created a more attractive tax environment for foreign institutional capital through Build-to-Rent projects.

Under current arrangements, foreign institutional investors can access a 15 per cent withholding tax rate through Managed Investment Trusts, accelerated depreciation benefits and exemptions from the new negative gearing restrictions.

State governments have added further concessions, including land tax reductions and exemptions from foreign investor surcharges.

Australian mum-and-dad investors receive none of these advantages.

The cumulative effect is striking. Foreign institutions can access a range of tax benefits unavailable to Australian private investors, while local investors lose concessions they have relied upon for decades.

This is not solving the housing crisis. It risks transferring ownership of Australia’s rental housing stock from local investors to offshore institutions.

Why state governments should worry

There are already signs these changes are affecting the credit cycle.

Major banks are removing negative gearing benefits from serviceability calculations for investment loans.

As market conditions soften, lenders become more cautious and investors find it harder to secure finance.

That matters because property transactions are a major source of state government revenue.

In NSW alone, transfer duty generates more than $12 billion annually. If transaction volumes fall significantly, the impact on state budgets will be substantial.

The consequences extend beyond stamp duty to GST collections, payroll tax receipts and land tax revenue.

The 95 per cent loan trap

There is another aspect of the Budget that concerns me.

The government has expanded first-home buyer deposit guarantee schemes, allowing eligible purchasers to buy with a five per cent deposit backed by the Commonwealth.

The intention is admirable. The timing may not be.

If prices in Sydney and Melbourne fall further, buyers entering the market with 95 per cent loan-to-value mortgages could quickly find themselves in negative equity.

They become trapped. They cannot sell without crystallising a loss, while the taxpayer guarantees the loan and the bank remains protected.

That is not wealth creation. It is a debt obligation.

After three decades working with debt and investment, I would never encourage my own children to borrow at a 95 per cent loan-to-value ratio.

A policy built on politics

The government had an opportunity to address the housing crisis by encouraging supply, reforming planning systems and reducing development costs.

Instead, it chose Robin Hood politics.

The optics may be appealing, but the economics are not.

Australians may ultimately pay the price through higher rents, weaker investment and a future in which an increasing share of the nation’s housing stock is owned by offshore institutions rather than local investors.

Paul Miron is the Co-Founder & Fund Manager of Msquared Capital.

Most property investors spend considerably more time watching interest rates than bond markets.

That makes sense. The Reserve Bank cash rate has an obvious relationship with mortgage repayments, borrowing capacity and investor sentiment, while government bonds can seem far removed from what someone will pay for an apartment in Sydney or an office building in Melbourne.

But the bond market can provide one of the earliest indications that the price investors are willing to pay for property is changing.

That became evident last Thursday, when Australian shares suffered their worst trading session in months. The S&P/ASX 200 fell almost two per cent, with property among the rate-sensitive sectors caught in the sell-off as government bond yields moved sharply higher.

Australia’s 10-year government bond yield pushed to around 5.4 per cent, close to its highest level in 15 years, against a backdrop of rising global yields and renewed concern about inflation and the direction of interest rates.

For property investors, that matters because the government bond yield is effectively one of the reference prices for money.

An investor buying an Australian government bond is receiving a return while taking comparatively little credit risk. Property comes with tenants, vacancies, maintenance, leasing costs, illiquidity and the possibility that the underlying asset falls in value, so investors generally expect to be compensated for accepting those additional risks.

A property yielding five per cent therefore looks considerably more attractive when a 10-year government bond yields three per cent than when that same bond is yielding more than five per cent.

That does not mean property values automatically fall every time bond yields increase. Rental growth, scarcity, lease structures and the quality of an asset can all outweigh movements in rates, but it changes the return investors require and therefore what they may be prepared to pay.

SG Hiscock & Company made that point in an ASX Investor Update, arguing that real, or inflation-adjusted, bond yields can be particularly relevant to property because real estate is fundamentally a long-duration investment whose value is derived from future income.

The first place investors can often see that repricing is the sharemarket.

A house or commercial building does not have a price that changes every few seconds. An Australian real estate investment trust does.

A-REITs can own billions of dollars of shopping centres, offices, warehouses and other property, but their securities trade continuously on the ASX. When expectations around interest rates and bond yields change, investors can immediately alter what they are willing to pay for those property earnings.

That can create a situation where the value attributed to a portfolio on the sharemarket falls even though the underlying buildings have not changed hands and their independent valuations remain unchanged.

The two markets simply move at different speeds.

Mark Ferguson, Head of Charter Hall Maxim Property Securities, has previously described direct property valuations as lagging the listed market. Writing for Charter Hall during an earlier period of rising interest rates and bond yields, Ferguson noted that listed property was already pricing increases in capitalisation rates and falls in underlying property values before those adjustments had fully emerged in direct-market valuations.

The effect can be substantial.

Consider a commercial property producing $1 million a year in net operating income. At a five per cent capitalisation rate, that income implies a value of $20 million.

If investors subsequently require a 5.5 per cent return while the property’s income remains unchanged, the implied value falls to around $18.18 million. At six per cent, it falls again to roughly $16.67 million.

Nothing necessarily happened to the building. It could have the same tenant paying the same rent under the same lease. What changed was the return required by the person buying it.

That is also why income growth becomes so important.

A well-located property with constrained supply and strong rental growth can increase its earnings quickly enough to absorb some of the pressure from higher required returns. An ageing office building facing vacancies, refurbishment costs and an approaching debt refinancing could instead be hit from several directions at once.

Debt adds another dimension because property is one of the economy’s most capital-intensive asset classes.

Higher market rates can increase the cost of financing an acquisition or refinancing existing debt while simultaneously increasing the return investors expect from the property itself. For developers, the consequences can be even more pronounced because higher construction finance costs can coincide with lower anticipated end values.

If that happens, a project can be squeezed from both directions: it becomes more expensive to deliver at precisely the time investors become less willing to pay yesterday’s price for the finished asset.

The direct property market generally takes longer to reveal that adjustment.

An A-REIT can lose five per cent of its market value in a trading session. An office building may not transact for another year. Owners can reject lower offers, transactions can be withdrawn and valuers must wait for comparable sales to establish new evidence.

That lag is one reason listed property can be useful even for investors who have no intention of buying a REIT.

The same principle eventually extends to residential property, although houses and apartments are generally valued using comparable sales rather than capitalisation rates.

Residential property is particularly sensitive to credit. Higher bond and swap rates can influence bank funding and fixed mortgage pricing, while higher borrowing costs reduce the amount households can service.

If prospective buyers can borrow less, the number of people capable of paying yesterday’s price can shrink. Vendors may initially resist that adjustment, resulting in fewer transactions rather than immediate price falls, before motivated sales eventually establish new comparable values.

For investors, rental growth can provide an important buffer. Rising rents can help offset higher financing costs, just as increasing commercial rents can compensate for some expansion in capitalisation rates. Investors relying primarily on capital growth while accepting a low rental yield have considerably less protection when the cost of money rises.

That is why movements in listed property and bond markets deserve attention beyond the trading floor.

They provide a constantly updating view of how investors are pricing interest rates, debt, future income and property risk, often months before those changes become obvious in direct transactions.

For an A-REIT investor, that means looking at gearing, debt maturity, hedging, interest cover and the discount or premium to net tangible assets rather than simply chasing the highest distribution yield.

For a commercial property investor, it means testing what happens to valuations if capitalisation rates move 25, 50 or 100 basis points higher.

For residential investors, it means understanding mortgage costs, borrowing capacity, realistic rental income and how much of the investment case relies on future capital growth.

The cash rate will continue to attract most of the attention in Australian property. But investors looking for an earlier indication of how the market is repricing risk should also be watching the bond market.

Property prices might take months to respond to a changing financial environment. The price of money moves considerably faster.

ROBIN HOOD POLITICS RISKS MAKING AUSTRALIA’S HOUSING CRISIS WORSE

The Federal Budget has created a supply freeze that could push rents higher, reduce investment and hand more of Australia’s housing stock to offshore institutions.