Australia is in prime position for a speedy economic recovery. Led by our admirable handling of the COVID-19 crisis and further bolstered by the turmoil unfolding in the USA, we’re seen as a safe place to live and invest.
The government has thrown us a life raft, buoyed by a $259 billion economic support package. Some may say, we truly are the lucky country, prepped to float out of this crisis with the wind in our sails.
The above, however, is not enough to turn a U-shaped turnaround into a V-shaped recovery; good management is required, too, and unfortunately, this is currently lacking. Let’s take the analogy that Australia is like a cafe. Domestic business is the equivalent of friends and families dining to help you out, but long term, this is not viable for any cafe.
What we really rely heavily on is the business of the rest of the world to survive and to thrive – international tourism, migration, education, investment. But for international business, we’re charging a 12.5 per cent premium on market value and expecting the world to dine at our cafe. On top of that, we’re picking a fight with our biggest patron, China.
This sort of management doesn’t come without consequences. And without a thriving business, money stops coming in and jobs will be lost. This is an analogy that many small businesses can relate to, and currently, this is what is happening to the Australian property industry due to mismanagement of the government.
With our strongest investment sectors likely to see a more drawn-out recovery as a result of restrictions on international travel, the property investment and development sector is waiting in the wings, primed to get Australia back on its feet. The only issue is it’s fraught with headwinds. So, what does the government need to do?
Replace stamp duty with land tax alternatives
Remove exuberant fees that discourage buyers, such as stamp duty, and replace this with land tax alternatives. Stamp duty is an inefficient tax that reduces the liquidity of property, whereas a land tax makes much more sense as it is an ownership tax that helps fund the state from people who own land in the state.
This reformed land tax would apply to new transactions and continue for all future transactions, ultimately phasing out stamp duty altogether. It should also be collected over a long period of time, given property is a long-term asset. Existing land tax rates have not been adjusted for years, while the value of land has increased substantially.
Additionally, a focus on taxing land value makes higher-density properties such as apartments more affordable to own. This encourages greater purchaser demand for this type of product, which, in turn, will result in greater density development around hubs, putting less burden on infrastructure development and budgets – which means taxpayer money can be distributed more efficiently. This also encourages further investment in off-the-plan medium- and high-density development as ongoing land taxes will remain low. Greater demand in this will drive development activity, meaning more jobs.
GST rebates to encourage buyers
Strong purchaser demand goes hand in hand with developments being able to reach necessary sales hurdles in order to secure finance to either commence or complete projects, but without this demand, many projects will be put on hold or cancelled.
So, how do you ensure this demand remains? Lower and more affordable prices, opening a wider pool of buyers. Rather than pocketing the GST collected from developers, the government could instead use this to incentivise buyers via a rebate system. Yes, they forfeit the GST but theoretically speaking, they wouldn’t receive this GST if there is no buyer demand and therefore no supply. The rebate system would allow more projects to get off the ground and in turn, achieve economic stimulus.
Open up the HomeBuilders initiative
Some may think the recently announced HomeBuilder package is the government’s way of encouraging buyers, but the reality is the eligibility criteria is very narrow. The maximum $750,000 value of end property is lower than the median house price in Victoria. This is encouraging those on lower incomes to undertake builds and renovations and, consequently, accumulate more debt when the government should instead be casting a wider net by encouraging the wealthy to spend. If something goes wrong, they’re more likely to have a contingency plan, as they can afford it.
Encourage foreign investment
All government-imposed property taxes on foreign investors are simply a means of raising money, yet it’s dressed up as helping affordability because that’s what the Australian public wants to hear. If we go back to the analogy of the cafe, foreign property investors are being charged an absolute premium. The foreign investor is characterised as a common threat to citizens alike when in reality, they are important and significant contributors to the market. Without their contribution, it’s renters that are needing to make up the shortfall.
Increased taxes will discourage foreign buyers, meaning there is less supply for developers and, ultimately, fewer taxes collected. Economics 101 will teach us the relationship between supply and demand determines price, so naturally, the price will go up with higher demand (increased population) and less supply, bringing us full circle to our affordability issues.
And lastly, if the feud with China continues, it will be hugely detrimental to our five most important sectors – property, education, tourism, mining and agriculture. In each of these sectors, China is our biggest customer. We need them, but they don’t necessarily need us, and this is a fine line we are treading.
Matthew Khoo is the managing director for ICD Property.