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Wednesday, 19 October 2016

Asking rents have been soaring in Canberra, but why?

Grattan op-ed

A bit of early disclosure: I'll admit here straight away that I had a few gripes with the Grattan Institute during the recent election campaign when I felt they were twisting 'facts' to suit their arguments. For example:

Over years of experience in housing markets, I've literally never heard of anyone paying a huge lump of stamp duty only to sell their investment property because the rents had become too high (before buying another loss-making investment property, and incurring yet more stamp duty).

Would never happen in a month of Sundays.

Anyway, I generally don't bear grudges, so we can let bygones be just that!

Let's move on from that to today's op-ed from Grattan, which recommended that other states follow the Australian Capital Territory (ACT) lead in phasing out stamp duties for a broad based property tax.

Land tax in the ACT

In theory, phasing out stamp duty - a pro-cyclical levy which discourages labour force mobility (if, for some unknown reason, not landlord churn!) - in favour of higher recurrent property taxes is a sound economic principle.

Of course, one always fears that new and additional taxes raised will be frittered away on infrastructure white elephants, while those of us that have already paid their stamp duties are naturally inclined to be grouchy (in the same way that I'm bound to think that Chartered Accountants shouldn't have open book exams, because we didn't 'back in my day'). 

Overall, I tend to agree with most of Grattan's points, with stamp duties being an inefficient if extraordinarily lucrative levy. 

In fact, I wrote a piece myself for Property Observer back in 2013 which discussed precisely the potential benefits of introducing a progressive and recurrent property tax (i.e. not necessarily a straight land tax). 

Canberra housing

That said, five years in to the experiment, there was no analysis provided by Grattan of the impact of the tax reforms to date on the housing market in the nation's capital itself. 

As always, of course, it's impossible to isolate the impact of shifts in property taxes.

We can't after all run a parallel universe wherein another version of Canberra sticks with the old regime as a control experiment (Lord knows, just the one Canberra existing in our own Universe is plenty!).

In any event, here's a quick look at what's been going down.

The ABS Residential Property Price Indexes to 30 June 2016 showed established house prices rising by +8.0 per cent, and a +6.0 per cent increase for all dwellings - rates of price growth which in a healthy market should be resulting in a strong supply response.

Anecdotal evidence suggests that house prices have been going a bit silly in parts of Canberra, though I do worry about the outlook for the new apartment market in the city.

Investor loans have understandably declined due to the inevitable uncertainty of change. This may in part be due to tighter lending restrictions introduced by APRA in 2015, and in any case many would argue that lower investor loan activity is on balance a good thing.  

Less thrillingly, detached house approvals have tanked.

The trend in monthly new house commencements has basically crashed in the ACT, down by more than 50 per cent since the beginning of 2011.

Attached dwelling commencements, on the other hand, have held up much better, perhaps reflective of record low interest rates, a structural shift towards attached dwellings, as well as strong pre-sales to offshore investors.

Long lead times

Whatever the causes, with the long lead times for apartments there are presently more than 5,000 dwellings under construction in the ACT, of which only 600 or so are detached houses. 

As a result of the above dynamics, vacancy rates in the capital have nosedived from 2.5 per cent in 2014 to just 1.1 per cent, even though population growth in the entire territory is tracking at just 5,000 per annum.

According to SQM Research, after a lag asking rents have soared lately, up by +12.3 per cent over the past year for houses, while even apartment asking rents have ripped +9.3 per cent higher. And this through a period when nationally rental growth is tracking at two decade lows.

Granted this vast increase in asking rents is yet to be reflected in the ABS consumer price indexes, which lag significantly. The figures for Q3 2016 will be released next week.

But in any case, when the 5,000 dwellings under construction eventually hit the market, rents for apartments at least should eventually return to flat or falling in real terms.

The wrap

No strong conclusion either way here.

As noted, we can't readily know the counter-factual, while some of the prevailing housing market dynamics in Canberra may be related to restricted land release, in particular the lack of responsive detached housing supply. 

On taxes, my view is that homeowners shouldn't have to pay twice, and that will no doubt be the view of most other homeowners too.

Therefore in the real world the most populous states would find it extremely difficult to phase in such a tax with the required long exemption period for existing homeowners, due to the initial revenue shortfall (look at the unprecedented stamp duty windfalls being delivered in New South Wales, for example).

I'd also be very wary of declaring the ACT experiment an unqualified success while even in a low density market such as Canberra with moderate population growth asking rents for houses are rising at more than twelve times the rate of inflation!

Nevertheless, it looks to me as though the rental market will probably correct itself in time with a flood of new apartment stock in the supply pipeline.