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Feb 22, 2024

Who’s to Blame?

Housing affordability is one of the most significant challenges of the modern era. Both house prices and rents are at record highs in Perth and across much of the nation with Perth’s median house and rent prices at around $600,000 and $600 per week respectively and growing faster than any other major Australian capital. We understand that the reason for these rises is down to simple economics, higher demand and short supply means prices and rents rise. Governments have done a spectacular job at shifting blame away from their own housing policy failures to investors, banks, real estate agents, local councils and developers. Yet, each of these sectors play a pivotal role in delivering the existing housing stock. Governments, on the other hand, through their taxation and other policies actively undermine housing supply. Property investors, mostly families that own a single investment property, provide 90 percent of all residential rental homes across Australia, housing millions of tenants. They obtain a moderate benefit by claiming some of the expenses stemming from that investment against their taxable income via negative gearing. However, once positively geared, investors pay tax on the property’s income and pay Capital Gains Tax if they make a profit upon selling. Banks, whilst not the most popular corporate citizens, provide the funding for property through mortgages. Banks also provide the funding for developers. Us real estate agents provide the services that help investors navigate residential tenancy laws, help people into home ownership and enable property transactions. Local councils often stymie property developments, especially increased density but they also adapt their planning laws over time, enhancing our urban environments. Developers provide housing on mass, adding density to areas where people aspire to live, work and recreate. Part of the reason property values are rising is the cost of construction, both labour and materials, has risen by around 40 percent in 3 years with end property values for finished product not at levels sufficient to support the viability of the project. Developers work to a margin and if the project fails the feasibility test, it doesn’t get built. That’s why new emerging density areas such as those around the new Metronet hubs will take several years to be developed; the cost of delivering the project is higher than the combined value of the housing produced. These cost constraints are not limited to construction costs. Land tax, holding costs, public art levies, developer levies, rates, headworks fees and stamp duty are additional cost burdens representing around 25 percent of the total development costs. This is where government ought to step in. If they were serious about housing supply, government would support the groups that provide the housing. Instead, state and federal governments either fail to provide the housing themselves (public housing waiting lists are at record highs) or set policies (stamp duty, tenancy law changes and land tax for example) that actively discourage additional housing supply. If it isn’t government, who is to blame for the housing crisis?

Feb 15, 2024

10 Ways to Fix Rental Crisis

It is widely recognised that insufficient supply of housing is the main cause of rising rents. It’s a simple supply and demand equation; low supply plus high demand equals higher rents. Astonishingly, the main supplier of the rental homes - family investors – are mostly ignored by governments and are actively vilified by the Greens. Policies that disincentivise the suppliers of rental homes, such as rent caps or rent freezes, end up diminishing the supply and rents continue to rise. With changes to Stage 3 tax cuts heading through parliament, debate around negative gearing and capital gains tax policy settings has been re-kindled with speculation that Labor will go back on another election policy promise and dust off policies they took to the 2016 & 2019 elections. This would be a very bad idea.  In the absence of an alternate plan to deliver affordable rental homes, private unsophisticated investors remain the answer to supply and policy changes that turn them away would make rental affordability far worse. Here’s a practical ten-point plan to help tenants: Coordinate State and Territory bond agencies to track data on tenancy numbers and tenures. Monitor rental pain points, particularly tenancies not professionally managed. Develop a cohesive national industry-government program of awareness materials for renters. Develop incentives for vacant properties and short stay rentals to bring them back to long-term rentals. Commit to long term stamp duty reform; and offer immediate stamp duty waivers for purchases of rental properties in areas of high need. Commission an immediate occupancy audit across Government owned and funded housing. Develop a feasibility study for re-purposing non-residential real estate into residential housing. Examine options for non-conventional rapid build homes in high areas of economic growth and housing need. Implement the National Cabinet target to build 1.2 million homes by 2030 and have performance mechanisms that hold governments and industry accountable to achieve this. Keep current tax settings for negative gearing and capital gains tax.

Feb 13, 2024

Blockchain in Real Estate

Like a startled rabbit staring into headlights, this Gen Xer listened intently to the REIWA Trainer awaiting the lightbulb moment for clarity and understanding of what Blockchain is. Unremarkably, blockchain was simply described as a “chain of blocks”. Not that helpful to my understanding. For the benefit of others, here’s how I was able to better grasp the blockchain concept. REIA CEO, Anna Neelagama assisted by pointing out that unless you’re a coder, trying to understand the blockchain from a technical point of view is probably quite pointless. One way to gain understanding is to describe blockchain as a new layer of the internet building on Web1 and Web2. Web 1 was simply information being put out to be consumed in a one-way manner. Web 2 began to enable users to interact with content and “talk back” - remember the first online payment you made online and how revolutionary that was. Web3 will have a new level of the internet called a blockchain. This facilitates legal and financial transactions to occur in a secure way representing a true economic exchange. This is due to the blocks (which are pieces of programming that cannot be altered) enabling a complex transaction environment with many parties simultaneously involved. The blockchain therefore removes the need for a third party - such as a bank – to be involved in the transaction. Bitcoin is a well known example of a blockchain. As blockchains are unchangeable, malicious actors are unable to tamper with the transactions or contracts within it mitigating against fraudulent activity. The “smart” contracts (digitally created agreements) within the blockchain are immutable and record a complete history of transactions within the particular network which can be either private or public. PEXA, the digital settlement system now widely used for property transactions is an example of a private blockchain. Real Estate transactions are, of course, more complex than a simple bitcoin trade, with multiple participants and processes involved in a typical transaction. However, the principles of value exchange remain the same and that’s where blockchain technology can begin to play more of a role. Blockchain technology is able to verify, inform and enable transfer of property ownership. This is where things get complicated with the introduction of Smart Contracts, the Metaverse, Non Fungible Tokens (NFT’s), Decentralised Finance (DeFi) and Decentralised Autonomous Organisations (DAO’s). There is insufficient room to attempt to explain these terms. These are, in short, aspects of blockchain technology that can apply to real estate transactions in both the real and virtual world that are already with us. No doubt, the aspects of blockchain technology will be more easily understood as certain applications of it are applied to real world situations. However, the idea that people are actually buying (spending real money) advertising space in a virtual metaverse is, for this Gen Xer at least, a bridge too far divorced from reality.

Feb 1, 2024

Property Taxes Back on Agenda

The federal government’s revision of the Stage 3 Tax cuts has re-enlivened debate for a comprehensive tax review, with negative gearing and capital gains tax settings once again part of that discussion. The ability for investors to claim property-related expenses against other income (normally their taxed wages) has been a key part of Australia’s housing spectrum for generations, underpinning the supply of affordable rental homes for millions of tenants. Governments, unable to supply enough taxpayer funded rental homes has relied on property investors to supply property to the market at a ratio of 9:1. Calls from teal independents and others to remove negative gearing in order to address housing affordability fails to consider the impact this would have on supply, rents and the budget. With 27 percent of all homes in Australia rented, the estimated value of this asset class is $2.835 trillion; nearly three times annual GDP. The burden on taxpayers in Australia is already substantial (as a measure of overall tax take, only Denmark collects more tax than we do from wages), so without investors supplying the market (which would surely diminish if negative gearing was disallowed) how can government afford to supply the rental homes? The 2019 election campaign featured proposed changes to negative gearing with then would-be Treasurer, Chris Bowen saying, “Don’t worry if your property value falls.” I cannot imagine how the community could possibly think such a comment is okay given household consumption makes up about 45 per cent of the economy and if housing values fall, so does their spending and so does, therefore, the economy. Bowen’s comment back then is telling because it paints property investors as being aspirational and therefore on the wrong side of certain political agendas. If he’d said, “Don’t worry if your rent goes up,” he’d have been in trouble, but the brutal truth is that both comments are the same. Abolish negative gearing on established homes and prices will fall and rents will rise. Any plan to mess with the current negative gearing provisions is fraught because it is so deeply entrenched (it’s been part of our tax system for more than 100 years) and therefore interlinked with our vast and complex tax system. We know about 80 percent of investment properties are owned by mum and dad types who only have one investment property. Proposals to remove negative gearing is hardly taxing the wealthy and ignores the fact that not all investors choose to buy property to avoid tax otherwise payable. A loss is a loss and pressure on families to meet their daily expenses means investors are often attracted to property investments that either break even or are positively geared in order to maintain cash flow. The last time a government tried to abolish negative gearing it was back in several months later as the voter backlash from soaring rents and plunging property values frightened them into a retreat. If Labor once again wades into the negative gearing morass, the Opposition will be one step closer to winning government.

Jan 23, 2024

Investors Not to Blame

Only a few weeks into the new year and rental affordability is once again making headlines. Core Logic’s latest numbers put national rents at $601 per week, up from $437 per week four years ago. Inevitably, calls to make rents more affordable will follow with campaigners Everybody’s Home calling on the government to scrap negative gearing and capital gains discounts to fund more social homes. This group, amongst countless others, fail to recognise the fundamental fact that across Australia, 9 out of 10 rented homes are provided by private investors. Removing negative gearing and CGT discounts and hundreds of thousands of investors would sell, decimating supply and setting rents soaring. Governments have very successfully shifted the blame for today’s housing affordability challenges away from their own housing policy failures and instead pointed the finger at property investors and the real estate agents that represent them. Politicians have very effectively shifted the narrative away from supporting private property investment to supply homes to the market whilst simultaneously blaming investors for spiralling rents and house prices. This is a remarkable achievement. Like it or not, unsophisticated private investors – ordinary Australians – supply 27 percent of all homes in the nation to tenants. Government supply about 3 percent as social housing. Yet, in this time of greatest need, with supply of rental homes at severe lows, there are few housing policies that seeks to encourage the investor cohort into supplying more homes. On the contrary; governments shun the idea of stamp duty reform, land taxes continue to rise and tenancy laws continue to swing in favour of tenants. Negative gearing and capital gains tax discounts are no longer sufficient incentives to encourage enough investors to buy. Appealing tax settings and returns in superannuation funds, commercial property and syndicated funds offer ‘mum and dad’ investors an alternative to direct residential property investment. Prior to 2014, the volume of investors buying residential homes to add to the rental pool, ran at a higher rate than those selling rented homes. Talk of changes to negative gearing tax laws from the then opposition, along with broader market factors, began to see this trend reverse. Nowadays, there are far more rental homes being sold than purchased. In Victoria, thanks to rising land taxes and changes to tenancy laws, for every three tenanted properties sold, only one remains in the rental market. In WA, there are now 18,000 fewer tenancy bonds being held today by the Bond Administrator than in 2019. When investors are inactive in the market, it falls to government to provide the housing; something they have failed to do. Put simply, governments – supported by the media and tenancy advocates – have been busily whacking investors, whilst simultaneously failing to provide enough rental housing for Australians as the only alternative to the private investor market. And, somehow, they’ve so far been able to get away with it.

Jan 18, 2024

Rent Bidding

Early this year, the West Australian parliament are likely to pass into law changes to the Residential Tenancies Act designed to further protect the interest of tenants. Some of the changes bring WA into line with other states where substantial tenant-friendly changes have altered tenant-landlord relationships and, in some cases, have deterred investment and pushed up rents. Many of the changes will be relatively benign, such as rent increases limited to no more than every twelve months (currently it is a minimum of six months). None of the laws encourage investors to further supply rental stock by improving protections for landlords from tenants that breach the lease agreement and / or wilfully damage the property. One of the changes will be to make it illegal for a landlord (or their property manager) to encourage a tenant to offer more rent to secure a lease. Known as ‘rent bidding’, in a tight rental market it is common for tenants to offer more than the advertised rent for a property. A ban will not prevent a tenant from offering more rent than advertised. In other states, rent bidding is already banned, but the outcome of the ban has failed to afford any additional benefit for tenants. In the current market, most properties receive multiple applications to rent with many tenants prepared to offer more than the asking rent to secure the property. Under the current arrangement, tenants will typically seek guidance from the leasing agent as to what constitutes market rental value and without specifying the details of competing applications, tenants are able to secure a lease by offering a modest amount above the asking rent. With a ban on rent bidding, tenants will be ‘flying blind’. The leasing agent will have to be silent on proffering any advice as to the level of competition, or where the market sees value. What has occurred in other states is tenants are offering substantially more than the asking rent because the leasing manager is unable to guide them where fair market rent might lie. I am told desperate tenants in NSW will offer 20% above asking rent where a 5% increase would have been sufficient. Already, property managers are advertising asking rents with a “From” in front. This makes it more difficult for tenants to determine fair market rent, especially once rental bidding is formally banned. Mostly, landlords are seeking quality tenants at a reasonable rent. Many will choose the best tenant over one offering the highest rent. Property managers have a duty to their landlord to secure the best possible lease outcome for their client and the rent achieved is but one component. Banning rent bidding will do nothing to further the plight of tenants already dealing with a highly competitive, stressful market of limited supply and rising rents. Governments should spend their time thinking about how they can get more rental supply into the market by actively encouraging property investors. Everything else treats the symptom not the cause and rents will continue to rise.

Jan 10, 2024

Missing Out

Licensed real estate agents are regulated by the Department of Mines, Industry Regulation and Safety (DMIRS) with consumers able to seek advice and lodge complaints about agents’ behaviour to that department. The Real Estate Institute of WA (REIWA) also has a community hotline where consumers can obtain real estate advice when dealing with a member agent. Current market conditions of savagely low supply and strong demand for both sales and rentals often leads to a spike in enquiry with REIWA and DMIRS, especially from tenants and buyers that have missed out on the opportunity to either buy or rent a home. Most are just wanting clarification of the process. When representing their vendors and landlords, agents have a role to play in ensuring their communication with interested buyers and tenants is clear and thorough, especially in circumstances where there is strong competition to either buy or rent the properties they represent. In the first instance, agents should make it clear to buyers and tenants that there is competition for the home. This can include asking prospective buyers to sign a document that acknowledges an awareness that their offer is one of many and that they’ve had sufficient opportunity to put forward their best offer. Similarly for tenants, the sheer volume of visitors to a home open should indicate that renting a home will be competitive. It is unlikely your application to rent will be the only one submitted. Local agents mostly manage competition amongst buyers and tenants in a professional, process-driven manner. However, it’s worth noting that agents are not obliged to inform you that there is competition for a property, albeit best practice to do so. Buyers and tenants ought to remember the agent is duty bound to act for their client and is not working in your interests. Agents are merely obliged to be honest, ethical and fair in their dealings with tenants and buyers. Despite this, buyers and tenants who miss out on a property are often quick to blame the agent. Some will lodge formal complaints against an agent even though the agent is simply discharging their responsibility to their client in seeking the best price or highest rent. A recent experience from a buyer who was repeatedly told a property would likely sell for above $900,000, was aware they were in competition and still insisted on submitting an offer for $875,000, was livid when told someone else had paid $975,000. Similarly, a tenant who offered $80 per week above the asking rent lodged a formal complaint against the agent when their landlord accepted an offer to lease $130 above the asking rent. Higher rents and selling outcomes are part of the natural market in action. Agents understand that buyers and tenants are trying to secure a property for the lowest possible price or rent, but it is not the agents’ role to achieve that outcome.

Dec 14, 2023

Christmas Markets

Around this time of the year, property markets normally begin to slow in anticipation of and planning for Christmas festivities and the summer holidays that follow. This year is shaping up to be different with buyer enquiry remaining strong and sellers committing to coming to market during the Christmas period. Property values across Australia continue to grow, spurred on from the demand side by higher migration levels and low stock levels. The federal government have already predicted a 115,000-property shortfall by mid-2024 and with dwelling commencements stubbornly stuck below the long-term average, there is little relief for buyers on the horizon. The Real Estate Institute of Australia released the comprehensive September quarter Market Facts report this week, revealing Australia’s median house prices rose 3.2 percent in the past twelve months to rest at $990,807. Perth’s median house price was at $595,000, the cheapest major capital by some margin. Sydney’s median house price as at September 30th was an extraordinary $1,578,000. The remaining capitals (aside from Darwin) returned a median house price of between $710,000 (Adelaide) and $934,000 (Melbourne). With such a yawning gap between our local market and eastern Australia, there is a sense of inevitability that prices here will continue their upward trajectory and the Christmas season will have little impact in quelling buyer and seller enthusiasm. Most agents I speak with expect a flurry of fresh listing activity in January, with new stock to be taken up from buyers bereft of choice. A recent property my agency sold received 20 offers. Another 15 offers. That’s 33 buyers that have committed to purchase, have missed out and will keep trying until they succeed. It is going to take some time for this buyer pool to deplete given stock levels remain below the five-year average, and new buyers keeping entering the pool. Meanwhile, rents continue to rise up to $581 per week nationally and $550 per week in Perth for 3 bedroom homes. Returns on investment for buyers in Perth are at 15.1 percent, leading the nation by some margin. Investors will take note of these numbers and continue to grow as a buyer cohort adding further pressure to our undersupplied market. This year, there will be no Christmas slowdown and buyers holding back waiting for the Santa Claus to deliver a market correction are likely to find their Christmas stocking empty.