In terms of broadband Australia doesn’t fair too well, ranking somewhere around 58th in terms of speed whilst being among some of the most expensive, both in real dollar terms as well as in dollars per advertised megabit. The original FTTN NBN would’ve elevated us out of the Internet doldrums however the switch to the MTM solution has severely dampened any hopes we had of achieving that goal. However if you were to ask our current communications minister, the esteemed Malcolm Turnbull, what he thought about the current situation he’d refer you to a report that states we need to keep broadband costs high in order for the NBN to be feasible. Just like with most things that he and his department have said about the NBN this is completely incorrect and is nothing more than pandering to current incumbent telcos.
The argument in the submission centers around the idea that if current broadband prices are too cheap then customers won’t be compelled to switch over to the new, obviously vastly more expensive, NBN. The submission makes note that even a 10% reduction in current broadband prices would cause this to happen, something which could occur if Telstra was forced to drop their wholesale prices. A quick look over the history of the NBN and broadband prices in Australia doesn’t seem to support the narrative they’re putting forward however, owing mostly to the problems they claim would come from a price drop already happening within Australia.
You see if you take into consideration current NBN plan pricing the discrepancies are already there, even when you go for the same download speeds. A quick look at iiNet’s pricing shows that your bog standard ADSL2+ connection with a decent amount of downloads will cost you about $50/month whereas the equivalent NBN plan runs about $75/month. Decreasing the ADSL2+ plan by 10%, a whopping $5, isn’t going to change much when there’s already a $25/month price differential between the two. Indeed if people only choose the cheaper option then we should’ve seen that in the adoption rates of the original NBN, correct?
However as the adoption rates have shown Australians are ready, willing and able to pay a premium for better Internet services and have been doing so for years with the original FTTP NBN. The fact of the matter is that whilst ADSL2+ may advertise NBN level speeds it almost always delivers far less than that with most customers only getting a fraction of the speeds they are promised. The FTTP NBN on the other hand delivers exactly the kind of speeds it advertises and thus the value proposition is much greater than its ADSL2+ equivalent. The MTM NBN won’t have this capability unfortunately due to its mixed use of FTTN technologies which simply can’t make the same promises about speed.
It’s things like this that do nothing to endear the Liberal party to the technical vote as it’s so easy to see through the thin veil of political posturing and rhetoric. The facts on this matter are clear, Australians want better broadband and they’re willing to pay for it. Having cheaper options aren’t going to affect this, instead they will provide the opportunity for those who are currently locked out of the broadband market to get into it. Then for those of us who have a need for faster Internet connections we’ll happily pay the premium knowing full well that we’ll get the speeds that are advertised rather than a fraction of them. The sooner the Liberal party wakes up and realises things like this the better, but I’m not holding out any hopes that they will.
Before I dig my hooks into the reasons why negative gearing isn’t to blame for high house prices (a seemingly controversial view these days) I will tell you, in the interests of full disclosure, that I’ve been negatively gearing property for the past 5 years or so. Back when we first bought our property I lamented the dearth of good properties that were available in our price range, focusing much of my anger of the property boom that took place mere years before we went into buy. However we found something that we could just afford if we played our cards right, even though it was out in the sticks of Canberra. During that time though I never once blamed the negative gearers for this predicament but the more I talk about it the more it seems my generation blames investors for it when they should really be looking elsewhere.
Depending on what figures you’ve read though I’d find it hard to blame you like the table above (from this ATO document) that has been doing the rounds lately. On the surface it seems pretty hefty with some $7.8 billion in total losses being claimed by investors with negatively geared property. Realistically though the total cost to the government is far less than that as even if everyone was on the top marginal rate (which they aren’t, most are on $80,000 per year or less) the total tax revenue loss is closer to $3.5 billion. Out of context that sounds like a lot of dosh, especially when this year’s budget came in at a deficit of $18 billion, but it’s like 0.9% of total tax revenue which is significantly dwarfed by other incentives and exemptions. If your first argument is that it costs the government too much then you’re unfortunately in the wrong there, but that’s not the reason I’m writing this article.
The typical narrative against negative gearing usually tells a story of investors competing against homebuyers (usually first timers), driving up the price because they are more able to afford the property thanks to negative gearing and the higher amount of capital that they have. Whilst I won’t argue that this never happens it fails to take into account the primary driver for upward trending house prices: owner occupiers. Initially this idea sounds ludicrous, since homeowners aren’t taking advantage of negative gearing gains nor are they in the market for new property, but the thing is that the vast majority of capital gains in Australia are held by just such people, to the tune of 84% of the total property market.
In Australia the primary mechanism which drove house prices up, with most of the increase occurring between 1994~2004, was current home owners upgrading their houses. For a current homeowner especially ones that own their property outright, the cost of upgrading to a larger property is a fraction of what it would cost to buy it outright. However anyone looking to upgrade will also try to extract the maximum amount of value out of their house in order to reduce the resulting loan and thus the cheaper priced houses get pushed up as well. Couple that with the fact that the majority of Australian owner/occupiers move at least once every 15 years and that selling your primary place of residence is exempt from capital gains tax and you have a recipe for house prices going up that’s not predicated on negative gearing’s influence.
Indeed the ABS Household Wealth and Wealth Distribution supports this theory as the average value of an owner occupied property is $531,000 which is drastically higher than the Australian average (which includes all investor properties) at $365,000. Considering that the bulk of the Australian property market is dominated by owner-occupiers (since investors only make up 16% of it) then its hard to see how they could be solely responsible for the dramatic increases that many seem to blame them for. Most will retort that investors are snapping up all the properties that would be first home owners would get which is something I can’t find any evidence for (believe me, I’ve been looking) and the best I could come up with was the distribution of investment property among the 5 sections shown here which would lead you to believe that the investors are normally distributed and not heavily weighted towards the lower end.
The final salvo shot across the negative gearing bow usually comes in the form of it providing no benefit to Australia and only helps to line the pockets of wealthy investors. The counter argument is that negative gearing helps keeps rent costs down as otherwise investors would be forced to pass on the majority of the cost of the mortgage onto renters, something we did see when negative gearing was temporarily removed. Indeed the government actually comes off quite well for this investment as using that revenue to instead build houses would result in a net loss of rentable dwellings which would put an upward pressure on rents.
I completely understand the frustration that aspiring home buyers go through, I went through it myself not too long ago when I was in a position that wasn’t too different from average Australian. But levelling the blame at investors and those who negatively gear their property for the current state of the Australian property market is at best misguided and at worse could lead to policy decisions that will leave Australia, as a whole, worse off. You may believe to the contrary, and if you do I encourage you to express that view in the comments, as the current Australian property market is a product of the Great Australian Dream, not negative gearing.
I’ve gone on record in the past about how the median house price is unaffordable for the median income earner in Australia. In the same breath I also explained how rare that this kind of situation was due to the number of assumptions made when you just equate median income with median house price. Still it seems to be a sticking point for many people of my generation that housing prices are just too damn high for them to be able to afford something, even if their incomes are above the median. While I’ll admit that it is harder in some areas rather than others (like Canberra for instance, which I explain below) the generalization the property is straight up unaffordable for our generation just simply doesn’t hold water and the reasons are far more likely to be ones of desire than affordability.
The Canberra Times ran an article yesterday that showed Canberra’s cheapest house prices were $100,000 more than the cheapest places in other capital cities. The cheapest suburb Charnwood (where I just so happen to live) had a median price of $382,000. In comparison to the other 2 suburbs listed in the article this seems kind of ludicrous but there are some pretty good reasons for this discrepancy. Firstly the suburbs that Canberra was compared to aren’t exactly identical with Charnwood being only 20 minutes to the CBD of Canberra and the other suburbs being around double or triple that distance. In that respect it’s more apt to compare property in Queanbeyan and the surrounding region which has several areas with a substantially lower median. There’s also the fact that Canberra is disproportionately affluent thanks to the high concentration of public service jobs and low population which skews the median further. That doesn’t change the fact that property in Canberra is more expensive than it would be elsewhere but it does show that straight up comparisons like the one in the Canberra Times aren’t exactly apples to apples.
Whilst the zeitgeist around the property market for my generation might be “it’s too expensive” a recent survey showed that a large majority of my generation are considering buying property within two years. Unfortunately only 30% think of it as a good investment (although what investment vehicles they consider good doesn’t seem to be included) which makes me then wonder why so many are intending to buy. The biggest challenge according to the survey is saving the required deposit for the house, not financing the loan as you’d expect. The article then references the high median price in Sydney as a source of this barrier which, in my mind, isn’t a barrier at all.
The first folly here is to assume that a first time home buyer should be buying at the median. For starters a good 50% of the housing market will be below that price range, especially if you consider some of those cheap suburbs that the Canberra Times article alluded to. This reduces the “required” (more on that in a sec) deposit from $110,000 to something more like $60,000~75,000 still an non-insignificant amount but a lot less than what the article insinuates. There’s also the assumption here that you need to get a 20% before considering buying which I can tell you is misnomer.
For starters the 20% threshold is usually just to avoid paying Lender’s Mortgage Insurance (LMI). Now this isn’t insurance for you, it’s for the bank in case you default on the loan. What a lot of people seem to think is that this is either some astronomical one off cost or a recurring charge that’s tacked onto the loan. For both of the home loans we currently have we had little more than a 5% deposit and the LMI charge was a couple thousand dollars, much less than the amount of cash required to get the 20% deposit. Of course your choice of loans might shrink a little as well but we never struggled in finding a suitable loan at a decent rate, even when we had such a small deposit. Put this all together and cracking into the property market doesn’t seem as bad for my Generation Y cohorts but you wouldn’t read that in the papers.
Realistically it all comes down to a lack of information and understanding which is unfortunately fuelled by articles like the ones I’ve linked to. Whilst I know that many won’t do the research and then continue to lament their position I’m hoping that at least a few will see articles like mine and start doing some investigation for themselves. Knowledge, as they say, is power and the Australian property market is no exception to this.