Mexican Wave

Gold Coast developers prepare for Mexican wave
By Lisa Pryor, Property Reporter
April 10, 2004

Gold Coast property developers will be shining their white shoes in preparation for the expected influx of investors escaping new property taxes in NSW.

With south-east Queensland still in the grip of a property boom, consumer advocates warn that the influx will exacerbate the problem of real estate marketeers charging one price for locals and another inflated price to out-of-towners.

Real estate critic Neil Jenman said he was already receiving calls and emails from consumers indicating that marketeers had stepped up their activity since the new laws were announced.

“They’ll be the Pied Pipers leading people to the promised land of Queensland,” he said.

“They’re all booking seminars in the southern states.”

Anthony Field, principal of Elders Real Estate at Nambucca Heads, says investors are already heading north.

“I’ve had four sales fall over this morning directly attributed to the Carr Government budget,” he said on Thursday.

Unlike in Queensland, NSW investors will soon face an additional 2.25 per cent exit levy when they sell.

In NSW, all investors will be lumped with a land tax bill, while in Queensland properties on land worth less than $275,997 are exempt.

Queensland was already looking good to NSW investors before these changes. Brisbane and the Gold Coast have experienced massive price growth while the Sydney market has faltered.

The median price of a house in Brisbane leapt 40.5 per cent in 2003. Sydney prices increased by 7.2 per cent in the same period, Home Price Guide figures show.

However, the longer Brisbane growth rates are maintained the greater the risk of prices overshooting and then correcting, CommSec analysts concluded in the Property Quarterly report, which was released in March.

Then again, the strong capital growth has been underpinned by high levels of interstate migration, with 39,200 people moving to Queensland last financial year, up 8000 on the year before.

Every week, the Donald Property Group in Edgecliff has been flying prospective buyers to Queensland on a private jet to inspect Coral Cove, a resort-style development with golf course near Bundaberg.

Katie Gold, sales associate at Donald Property Group, said she had noticed more interest from Sydney buyers since the new taxes were announced.

“Since Tuesday the callers were calling up saying ‘we’re not going anywhere in NSW any more, we’re not interested. We’re going to Queensland, that’s where the growth is’.”

The company was now looking further afield, seeking hot spots in Adelaide and Perth.

Investors venturing beyond their geographical comfort zone could take action to make sure they would not be ripped off, Mr Jenman said.

“They get an independent lawyer, an independent valuer and they check what happened to the clients that bought from this company before,” he said.

“I’ve never seen anybody caught if they do those three things.”

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Asset rich off the tax hook
By Lisa Pryor and Sunanda Creagh
April 10, 2004

For Barney Remond, this week’s property tax overhaul means no longer having to pay more than $70,000 a year for the privilege of living in his own home.

He has held on fiercely to the Vaucluse home which has been in his family since 1939, even though the asset-rich, income-poor home owner has accumulated a land tax debt “in the order of a quarter of a million dollars”.

“I couldn’t afford to pay my bill but I was not prepared to give up and move out of my home.”

The abolition of the premium property tax was only one change in the state’s property tax overhaul, but if anyone needed convincing about how far-reaching it was, Mr Redmond’s case should do the trick.

His yearly land tax was more than the average wage. And yet he has neighbours who were even worse off. “The chap down the street, at Coolong Road, had a $110,000-a-year bill even though his income was only $10,000.”

The premium property tax – 1.7 per cent a year for every dollar a property’s land value exceeds

$1.97 million – was introduced in 1997 and last year applied to only about 1300 properties in NSW, the top 0.2 per cent.

These millionaire home owners are the big winners from the changes. The new one-off stamp duty hit on the purchase of homes worth more than $3 million will be piddling in comparison.

But the State Government is expected to reap more money from the revised tax on luxury properties because it will apply to a larger number of owners.

“We expect to receive $40 million in premium property tax compared with $14 million under the previous premium property tax system,” a spokesman for the Treasurer, Michael Egan, said.

The old tax applied to just 0.2 per cent of properties, where the land alone was valued at more than $1.97 million. Last year about 1300 properties were billed.

That tax is replaced by an increased stamp duty rate that applies when buying a property worth $3 million or more. An extra 1.5 per cent on top of the existing 5.5 per cent is paid on every dollar over $3 million, amounting to an extra $7500 for a home worth $3.5 million.

This one-off cost from June 1 is less than what some owners of prestige homes have been paying each year in land tax.

Yet there is speculation that some wealthy buyers will seek to evade this extra stamp duty by dividing the sale price into two components – a $3 million contract for the sale of the home, which is subject to stamp duty, and a separate contract for furniture and other chattels.

David Singer, a lawyer and land tax activist, said the premium property tax had been an embarrassment to the Government and had raised only a very small amount of money. “It should have gone a long time ago.”

A buyers’ agent, Gina Machado of Finders Keepers, has been fielding calls from prestige property buyers concerned about the new tax. She said the new tax would be an additional impost on people trying to sell in a soft market.

“Our clients, both investors and owner-occupiers, see it as an opportunity to further capitalise on the current soft market, particularly if investors are looking to sell in a hurry before July to avoid the new tax,” Ms Machado said.

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The house rules
April 10, 2004

Related:
A pocket guide to the new taxes

Property prices are expected to fall as new taxes clip the wings of investors, writes Annette Sampson.

Experts are predicting falls of up to 40 per cent in the value of some Sydney properties as a result of this week’s state mini-budget. At particular risk are areas where investors dominate, such as inner-city apartment buildings.

“Just as the technology stock bubble back in 2000 burst following news of an anti-trust case against Microsoft, these tax changes tip the balance,” says Dr Shane Oliver, the chief economist with AMP Capital Investors. “They are not a major event in themselves, but they are the event that will burst the bubble.”

The sweeping reforms to property taxes, introduced by the Treasurer, Michael Egan, had the baby boomers who have rushed to buy investment properties firmly in sight. “An overheated property market is no good for the economy, it’s not good for the community, and it’s certainly no good for young people and families who are battling to buy their first home and are priced out of the market,” he said.

In recent years, investors have been a major driver of the housing market, with 45 per cent of new housing loans going to them. At the same time, loans to first home buyers have dropped and housing affordability has fallen sharply.

To put a curb on investors, Egan announced that all property investors will now be subject to land tax and a new 2.25 per cent vendor transfer tax (VTT) will be charged on the sale price of investment properties. At the same time, he made home ownership cheaper by abolishing stamp duty for first home buyers on properties worth up to $500,000.

But sorting the winners from the losers is not as simple as it seems.

Existing land-tax payers: Larger property investors and businesses will benefit from a drop in the land tax rate from 1.7 per cent to a maximum 1.4 per cent. But there’s a catch. At present, land tax is only charged on the amount by which the land value of your properties exceeds $317,000. From January 1, tax will apply on the total value. The new rates are 0.4 per cent on the first $400,0000, 0.6 per cent on the next $100,000, and 1.4 per cent on the amount over $500,000.

The break-even point to be better off under the new rules occurs when you own property with a land value of about $410,000. An investor with property worth $350,000 will see the tax on it more than double from $661 a year to $1400. But the owner of a $600,000 property will see the tax bill fall from $4911 to $3600.

The Government says the new land tax scales will benefit businesses that own premises worth $500,000 to $1 million, which will pay 20 to 30 per cent less tax. But the trade-off is that all investors will be subject to the 2.25 per cent VTT on the sale of properties that are not your home or a farm.

Small investors: The Government estimates up to 250,000 new investors will pay land tax from January 1. Small investors at present don’t pay land tax as long as the land value of their holdings is less than $317,000. All investment properties owned at midnight on December 31 will be taxed at a minimum rate of 0.4 per cent. For a small investor with a property valued at $250,000, land tax will be $1000. Investors will also be hit by the 2.25 per cent VTT when they sell.

The good news, says tax expert Gordon Cooper of Cooper and Co, is that the Federal Government will help pay both taxes. For investors, land tax is a cost of earning rental income from the property and is tax deductible. The VTT will be treated as an incidental cost in selling your property and will reduce your capital gains tax.

Macquarie Bank’s chief economist, Richard Gibbs, says we may see a surge of selling by investors to beat the VTT. He says that when these sorts of taxes have been introduced overseas they have sometimes generated a vicious cycle where prices have spiralled downward. What is unknown here is how much support will be given to prices by first home buyers.

Oliver predicts that some inner-city units could fall by as much as 30 to 40 per cent, though he says such falls are unlikely in other areas. Longer term, investors may be more inclined to hold on to their properties, which may squeeze supply and possibly push prices up. While many investors will want to lift rents to help fund the new taxes, he says this may not be possible due to historically high vacancy rates.

Retirees: The president of the Real Estate Institute, Rowan Kelly, says retirees with investment properties will be among the big losers. Retirees tend to own their investment properties outright and are looking for income rather than capital gains. Kelly says income will now be eroded at a time when they can least afford it.

Gibbs says one unknown is how this group, who have been encouraged by the Government to save for their retirement, will respond to the new taxes. “It may be that some are prepared to sit there because they’ve taken a longer-term view and the property is part of their investment portfolio for retirement,” he says.

However, Peter Nicholas, the savings and retirement director for AMP Financial Services, says those planning for retirement would do better to consider more tax-effective investments.

First home buyers: The State Government has reduced the costs of getting into the home market by up to $18,000 by abolishing stamp duty on first home purchases up to $500,000. There will be a phasing out of the benefit on purchases of $500,000 to $600,000 with a first home buyer of a $550,000 home saving about $9000 in stamp duty.

Buyers of vacant blocks will pay no stamp duty on purchases of up to $300,000 with a phase-out benefit on purchases up to $450,000. While this will make first homes more affordable, some commentators are concerned that the concession will bolster the prices of sub-$500,000 properties. If rents rise, tenants may find it harder to save for their first home.

Owner-occupiers: By clipping the wings of property investors, the State Government has reinforced the outlook for slower increases in house prices. BIS Shrapnel recently predicted zero price growth after inflation for the three years to June 2006. Fortunately, most home buyers should be shielded from the predicted falls to some investment properties.

Losers from the mini-budget include luxury home buyers who will now pay a marginal stamp duty rate of 7 per cent on home purchases over $3 million. But the annual premium property tax on homes with a land value of $1.97 million or more will be abolished. The main beneficiaries will be asset-rich, cash-poor retirees living in long-held family homes.

While most owner-occupiers will not have to worry about the 2.25 per cent VTT, those using their home as a combined place of business will have to pay the VTT on a pro rata basis when they sell. To avoid the VTT, a property must be continuously occupied as your principal place of residence for the two years before you sell, although there will be exemptions for owners who are absent for up to six years who keep the property as their nominated residence.

Second home owners: The VTT will apply to holiday homes and other non-income-earning second properties as well as investments. One concession is that low-income owners of non-income-earning land valued at less than $300,000 may be able to defer paying land tax. If they have an income low enough to qualify for a part age pension they can defer payment until they sell the land. The outstanding tax will be adjusted each year for inflation.

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Taxes mean smart money is anywhere but Sydney property
By Annette Sampson, Personal Finance Editor
April 10, 2004

Once, it was obvious. The smart investment was Sydney residential property.

Not any more.

The Carr Government’s new property taxes are just the latest in a series of disincentives for Sydney property investors, though they may prove to be the last straw.

Shane Oliver, chief economist with AMP Capital Investors, said: “The problem is that the fundamentals were already very poor and these tax changes have just tipped the balance.”

Property transactions incur a lot of dead money and will now incur more.

Property adviser Peter Kelaher estimated investors paid around 4 per cent on a $500,000 purchase. Selling costs, including the new 2.25 per cent vendor transfer tax, can add another 5 per cent.

With shares there is no stamp duty, no legal expenses and minimal brokerage. Managed investments – often considered expensive – charge up to 5 per cent upfront but cost much less through a discount broker. Even interstate property investments are cheaper.

You need a big return on Sydney property to justify the costs, but rents have lagged behind house prices. Rental yields have fallen to around 3 per cent before expenses. After expenses, many properties are yielding about 1 per cent.

For those not paying land tax, Macquarie Bank chief economist Richard Gibbs estimated the new land tax would knock another half a per cent off yields.

With Sydney’s residential property vacancy rate at around 3.7 per cent, there is little hope for strong rental growth. While vacancies have come down, Dr Oliver said they were still historically high and likely to stay that way as new developments come onto the market.

Optimists say it is not property income that matters, but growth. But higher interest rates have taken much of the steam out of house prices, with auction clearances at a 13-year low in March.

There are those who will still make money in Sydney property. But the smart investors will look elsewhere.

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If you have a chance go to http://www.smh.com.au and click on the Pocket guide to the new taxs, its not a bad read.

“Dont be looking in your back yard for a four leaf clover when the opportunity of a lifetime could be knocking on your front door….”