From Credit Suisse:
Thought of the week: A major overhaul of the Australian tax system has been talked about for some time. Recently, Prime Minister Malcolm Turnbull confirmed a Goods and Services Tax (GST) increase is “on the table,” with amendments possibly being announced in conjunction with the May 2016 budget. Raising the GST when the housing cycle is slowing could have a material adverse impact on new home construction and severely distort the timing of activity, as occurred in 2000-01 when the GST was first introduced.
■ Housing demand shock: The GST was first introduced on 1 July 2000. In anticipation of the 10% cost increase for a new home, a significant pullforward of activity occurred in the 12-months prior. FY00 dwelling commencements increased by 15% to 172k, before falling to a record low of 115k in FY01 (post-GST). In FY02, commencements rebounded back up to 165k. Despite volatility in each of the years, the commencement average over FY00-02 equated to 150k, in line with the long-term average. This implies that the absolute number of new homes built did not change over that three-year period, but the timing of the activity was severely distorted.
■ The GST wildcard: Based on the average cost of a newly constructed detached home ($300k ex. land), a 5% increase in the GST (to 15%) would add $15k to construction costs. Lending requirements are tight and with housing affordability already stretched, a GST-led increase to house prices has the potential to amplify dwelling construction volatility and create a “shock” in one particular year.
It was this very shock that panicked the Howard Government into introducing the first first home buyer’s grant, which has since mushroomed into a gigantic bubble prop and macro economic stimulus mechanism.
Talk about unintended consequences!
