The property boom is over leaving frustrated first home buyers, governments over-dependant on property taxes and some people worrying how they will pay rates and land tax.
But of all the states and territories, the ACT is perhaps in the best position to cope, through good luck as much as good management. But it is not all beer and skittles in the ACT.
The AMP-Real Estate Institute of Australia Housing Loan Affordability Index for the June quarter was published this week. So were the Australian Bureau of Statistic June quarter figures for housing prices in the eight capitals.
Canberra fared badly in both of them. They show the property boom is well and truly over in Canberra and Sydney and most likely over elsewhere.
You would expect that as prices level or fall, affordability will improve. But right now it is not good. Affordability is now at its worst in the ACT since the index began in March 1995.
The index came out a few days after the brave words of Urban Services Minister Bill Wood that “the Stanhope Government is making considerable progress in addressing housing affordability in the ACT”.
Repayments are now taking a higher share of income in the ACT than ever before – at 21.7 per cent. The average loan in the ACT is $246,000 – higher than the national average of $213,000. But Canberrans have higher incomes to finance a loan, so our affordability is still better than everywhere but the Northern Territory.
On the prices front, the index showed the median price falling from $370,800 to $361,500 – a 2.5 per cent drop. It is confirmed by the bureau which says the price of established houses fell 3.3 per cent in the June quarter.
Maybe that will help first home-buyers who now form just 14.5 per cent of the market against an historic level of more than 20 per cent.
It may be that despite Bill Wood’s evidence-defying statement, that affordability and property prices will not have much political impact in the short term. But that is not so on the rates and land tax front (and I must declare I pay both).
People got their rates and land tax notices recently. They are based on a three-year rolling average. So people see that in future years, as the lower values of 2002-03 and 2003-04 drop off the base, their rates and land tax will continue to rise even if property values level out or fall a little. That’s a worry. On the rates side it is constrained by the promise that the total rates grab will not go up by more than inflation plus an allowance for new land and redevelopment. So the rate in the dollar falls to compensate for rising property values.
This does not help people in areas where property values have gone up by much greater amounts than inflation. Oddly enough this has happened in some of Canberra’s less affluent suburbs. But it has also happened in areas close to shopping centres – Planning Minister Simon Corbell’s “core areas”.
While Corbell has been busy drawing polygons around shopping centres calling them core areas for more intense development, Treasurer Ted Quinlan’s valuer has been following. The valuer has been giving these places higher values because of their redevelopment potential. But much of it will not be redeveloped. Many people living in these core areas would be content to continue living in their houses and gardens, but they will struggle with the rates. They will be paying for redevelopment rights they do not want. That might cause some flak.
It will slowly have an effect on rental affordability. It might see the demise of the old shared house, so fond of university students in the inner areas. Land tax, and to a lesser extent rates, are taking so much of the rent income from single houses that surrendering them for development becomes the only option. Rates and land tax are taking a third of the rent in the core areas of inner suburbs. The overall return on capital is a mug’s game – lower than 2 per cent. And no one is expecting much capital gain in the next few years.
Corbell’s encouragement of development in core areas will be accelerated by the effect of the valuer.
Over reliance on property taxes will give state and territory governments some difficulty.
In the ACT, property taxes are 56 per cent of tax revenue. If you take out rates (which are a local-government matter elsewhere) it is 40 per cent. Five years ago it was less than 20 per cent.
Land tax, as a share of tax revenue, has gone up 60 per cent.
True, the states and territories get a lot of non-tax revenue – mostly grants from the Commonwealth. Sixty per cent of ACT Government funding comes from Commonwealth grants.
But property is the lion’s share of its discretionary revenue. With the boom over, governments will have to find revenue elsewhere or cut spending.
Last Budget, the ACT forecast a drop of 11 per cent in stamp duty revenue this financial year. That is $20 million it must find elsewhere to fund hospitals, schools and police. The government naively hopes that the following year stamp duty will return to 2003-04 levels. It’s dreaming.
Governments hopelessly under-estimated the increase in revenue on the upswing of the boom, but still spent the proceeds. My guess is that they will under-estimate the decrease in revenue on the downswing.
The falling market contains a double whammy. Prices fall so there is less revenue on each transaction. But there are also fewer transactions. Many people refuse to sell unless they can fulfill the foolish expectations they had at the top of the market.
The trouble is that governments spent most of the money in the boom instead of squirrelling it away. At least the three-year rolling system in the ACT slowed the revenue increases for rates and land tax in past years and will allow a gentler easing as prices fall.
NSW is in a dreadful mess. It has been profligate in the boom. It even capitalised on the boom by introducing a new property tax – on sellers, and it widened the land tax net. Moreover, it is not a very popular Government so it is bribing its way out of trouble so its Budget is in worse shape than the ACT’s. Also its hospital, mental health and child care crises are even worse than those in the ACT.
The Stanhope Labor Government is lucky that it goes to the polls this year. In the next couple of years it is going to have to replace the revenues of a property boom with new revenue elsewhere, or cut spending – either is unpopular.
Stanhope will inevitably be re-elected, but I doubt if he will have seven Labor colleagues with him around the Council of Australian Government table in, say 2006.