Hooked on property

In January this year, I published the below HIA chart and accused Australia’s governments of being ponzi merchants for attempting to keep the Great Australian Housing Bubble alive by pumping demand and restricting supply in order to preserve government finances.

Now RP Data has confirmed my suspicions with a fantastic piece of research entitled Property taxes at record levels. Here is an extract from RP Data’s Property Pulse report [my emphasis].

Property taxes at record levels

Property related taxes are, by far, the largest source of tax revenue for the state and local governments. With buoyant housing market conditions over the 2009/10 financial year, property related tax income for the state and local government sector rose to new highs, however Governments should be budgeting from much lower property related taxes over the current financial year.

During the 2009-10 financial year, state and local governments raked in almost $32 billion in taxes from property – the highest amount on record. Over the financial year, total property related tax revenue increased by 14.3% following a -10.5% fall in property tax revenue during the softer housing market conditions of 2008-09. Last year’s increase was the largest of any financial year since 2000-01…

Property related taxes are the biggest cash cow for state and local governments, accounting for more than 48% of total tax revenue during 2009-10… This result highlights just how important property taxes are to state and local governments and why they are so reluctant to remove taxes such as stamp duty.

The data broadly breaks property taxes into two types: taxes on immovable property which includes rates and land tax and taxes on financial and capital transactions which include stamp duties. Taxes on immovable property accounted for 58.5% of property tax revenue and taxes on financial and capital transactions accounted for the remaining 41.5%. Stamp duties on conveyances were the largest single contributor to revenue ($12.294m) followed by municipal rates ($11.645m).

During the financial year, the total tax revenue on stamp duties on conveyances increased by 29.1% and municipal rates increased by 6.5%. Interestingly, this growth in stamp duty was greater than the 20.3% increase in the total value of residential property transactions…

The improvement in taxation revenue from property transactions is reflective of the improved market conditions during last financial year where we saw improvements in dwelling values and an increase in sales volumes. When the residential property market is performing well with values growing and a large volume of transactions it is certainly also beneficial for state and local governments as the amount of tax revenue grows in periods of a strong market.

In what is sure to be unwelcome news for state and local governments, the 2010-11 financial year looks set to see a drop in property related taxation revenues. Between May 2010 and February 2011 capital city dwelling values have fallen by -1.6% and sales volumes during 2010 were their lowest on an annual basis since 1996. For the remainder of the financial year sales volumes are unlikely to record a significant rebound and value growth looks unlikely to return.

As a result of these current soft conditions we expect that state and local governments will experience a budgetary hole at the end of this financial year due to fewer transactions within the sector which accounts for their greatest source of taxation revenue.

Over the past decade, Australia’s state and local governments have rode on the back of skyrocketing property prices. The revenues received have funded all kinds of expenditure – from public servants’ salaries to health care, schools and infrastructure.

The story is similar at the federal level, where tax collections have surged on the back of growing property values and rising debt levels, which have boosted consumer spending, employment and the economy more generally.

Should Australia’s housing market encounter a significant correction, rather than the price stagnation and falling volumes experienced currently, then government finances will likely take a hammering as consumer spending dries-up, unemployment rises, tax collections haemorrhage, and welfare payments rise. And the impact will be a whole lot worse should Australia’s other economic pillar – mining – experience a sharp contraction of demand and falling commodity prices.

Think about these motives the next time a government representative announces a new measure under the guise of improving housing affordability, which is really aimed at underpinning housing values.

“I’m from the government. I’m here to help.”

Cheers Leith

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Leith van Onselen

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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Comments

    • 6% in a single Q? Thats got to be a blip/anomaly.

      Thats 11.19 Qs to a halving. 2 years and 10 months to a halving? We are talking October 2013.

      That makes the economic train wrecks such as Dublin, Detroit, Las Vegas et al look like a kind of benign easing.

      Gotta be a blip.

    • I saw this too. It’s funny, because two days ago I had a co-worker get openly angry with me for even suggesting that property could drop in price (he’s an ex real estate agent).

      So much for that idea.

      • You get falls of 2% a Q consistently – throw in 3% pa (0.74% a Q) wages growth and it may be manageable. Then we are talking 6 years and 3 months to an effective halving.

        4% (QLD, Tas, Perth) to 6% falls per Q and its poo and fan stuff.

        Govts borrowing to bail out banks, nationalisation(?), deficits over the 10% of GDP line, 10-15% unemployment etc.

        You want to hope its a blip.

      • This happened to me as well! Funny thing is every person who owns a property think he or she is knows better than anyone else…they just dont wanna see the fact.

  1. Haha, great work rp data. We have another confirmed MB reader. It’s years like this one they find out that a broad based flat land tax, is the much preferable type of property taxation, compared to a boom, bust in SD revenue.

    • Ha ha – I love the way that SMH story breathlessly reports that Anglicare found there is no affordable property in various western suburbs.

      APMnews Twitter feed is also very amusing. Thanks for the laughs!

  2. Take your pick:
    a) The RBA calling a housing market bottom (in 2009)

    http://www.news.com.au/business/money/story/0,28323,25086702-5013951,00.htmlexternal link

    ‘He (Glen Stevens) said he expected a recovery in the housing market to begin later this year.’

    b) Minack, Mellor and co calling a housing market top (2011)

    Housing downturn (one of the links should work)

    http://www.abc.net.au/rn/saturdayextra/

    http://www.abc.net.au/rn/saturdayextra/stories/2011/3192989.htm

    One of them must be wrong…

  3. Wealth out of thin air!

    A totally non productive sector rising on notion.

    A type of socialism afforded to ‘the lucky country’ courtesy of its dirt.

  4. At least with stamp duty the cost is borne by the vendor and buyer – otherwise it would just be a one-way street for the vendor.
    As a non- participant in the housing market boom/bubble I can at least thank those that have participated because they have helped keep my contribution to state taxes down.
    Well done everyone – keep up the good work

  5. “then government finances will likely take a hammering as consumer spending dries-up, unemployment rises, tax collections haemorrhage, and welfare payments rise”

    Sounds like European scenario!

    • Every mega bubble that explodes ends like that.

      It has to. When Unemployment doubles (housing, RE and construction industry) or triples and businesses go bust, Tax revenue plummets and social security out lays spiral thats govt finances. Then you must have plummeting consumer spending as less follars slosh around the burbs.

      I believe many of the great bubbles ended with a housing bust (eg South Sea-Housing, Tulips-Housing).

      • And Juilia has foreshadowed getting all the dole bludgers back to work as part of the forthcoming nasty budget!

        Me thinks the banks have been suggesting to Government that negative gearing has had its run, and now tax breaks need to go to those with savings! (there is only 1.3m property infestors soaking up all those tax dollars anyways)

        Even with the high aus assisting banks meet their os repayments, they are still desperate for local cash to feed their hangover.

  6. Home owners wants house prices to go up. As home owner outnumber renters 2:1 politicans who allow house prices to fall will not get re-elected. In thie sense, we get the government we deserve.

    • It’s important to distinguish between home owners and property speculators. I’m sure most home owners are mostly concerned about affordability, financial security for their families and a secure investment that will track inflation for the duration of the home loan. Even property investors who take a block of land and build homes deserve to make a reasonable profit for the effort and labour they put in. With that in mind, the ratio of people wanting housing to be affordable and stable again is probably not really 2:1 at all. In the long run most everyday Australians gain nothing from continual boom bust cycles.

      Speculators and anyone who has grown fat from housing unaffordability deserve the inevitable diet that they now have to go on. Biggest Loser eat your heart out!

    • Anthony Peterson

      I’m starting to think differently about this. Most Boomer’s I speak to are horrified at the current situation. A house is for living in, and Boomers are starting to wake up to the horrible legacy they are leaving their kids.

    • I’m a homeowner and do not want to see prices in a bubble. The outcomes are devastating.

      Prices rising with inflation is sustainable after 5 years of easing (-4% a year) to normal levels.

      • Ditto, but just honestly don’t think it is systematically possible.

        Once people get spooked, then deflationary mindset kicks in….people, for the most part, don’t want to knowingly buy into a dropping market….and that’s it: sharp drop… 🙁

  7. notice the first thing barry o farrell did when he got into government was ‘discover’ a big black hole in the budget.

    no doubt the dodgy budget was based on extrapolation of property taxes assuming growth continuing in line with the last couple of years.

    o farrell probably just toned down the extrapolation in line with the actual collections for the FYTD and voila – instant black hole.

  8. Leith I have been reading some great stuff by Murray N Rothbard entitled “What has the Government Done to our Money?”. Rothbard is an Austrian economist and explains the banking system in the above mentioned article.

    The Austrian economists in my view are the only ones that can truly understand the inflationary role of governments and central banks. Inflation is an insidious government tax that people do not know is happening to them. Governments have taken control of the monetary system which has resulted in the booms and busts whilst imposing poverty on its people.

    These economist were able to see through the b.s. of the mainstream press and government propaganda prior to the subprime meltdown.

    We need to get the message of how the banking system works to uncover it as a all centrally controlled taxing machine. If you understand Austrian economics you can see exactly what is happening before your eyes, whether it is a mining tax, green tax or bubble in the property market. it’s the politicians who have created the mess today – we need to change who’s in charge and we will live in a much happier place.

    • The Austria have a wonderful economic model. Unfortunately, I cannot find an example of an economy where the model applies. The condition where the model applies simply cannot exist in real life. It requires more idealism than Marxism.

      • The country (I’m not sure if Monaco is technically a country) is about as close as one can get to an Austrian-principled economy.

        I think you’re right when you say that it requires idealism…

        To become Austrian would firstly require less Govt, less taxes… less basically everything which is almost unachievable in our current form of democracy.

        Vote for me, and I’ll give you a bigger carrot only results in more theft from current income (e.g. carbon tax) or theft from future income (let’s borrow money and blow it on crap such as NBN, or killer-insulation or the school economic revolution–whatever that scam was called)… and lastly let’s just print money and they won’t even know we’re screwing them.

        The primary reason why Austrian economics isn’t applied is because the Govt has a very little role to play unlike Keynesian economics which puts the Govt as one of the major players within an economy.

        No politician would want to let go of the ability to buy votes.

        • “The primary reason why Austrian economics isn’t applied is because the Govt has a very little role to play unlike Keynesian economics which puts the Govt as one of the major players within an economy.

          No politician would want to let go of the ability to buy votes.”

          This is the ultimate truth.

          • You make some really great points re; government not wanting to give up the purse strings and it’s ability to confiscate wealth. Changing to a free money system backed by gold is 100% idealistic but we the people need to stand the f*#% up. We are all getting screwed by the fiat money system and governments.

            Now here’s a good one, “the wealth effect”. In other words, we will make you feel wealthy because your share investments are increasing, but we are secretly screwing you with the destruction of the dollar.

            Austrian economists say currency wars lead to physical wars. If you look at the tension between the US and China over the trade imbalances you can imagine this could get ugly very quickly. If the whole world used money backed by gold trade imbalances would be reduce significantly by everyone competing on a level playing field – no one country being able to destroy it’s currency faster than the other.

            We are in a crackup boom (including China and complements of the USA) where prices are spiralling up and obscene taxes above being levied by governments. If our economy tips over, our dollar will also be destroyed by our central bank – these muppets play the same game. Never trust a central bank when it talks about inflation – that’s its goal to tax by deceit.

          • We actually don’t even need a gold standard (that’s in the too hard category). The populace barely understood the ills of the stimulus packages… try explaining the gold standard.

            As a first step, RBA should be abolished (or more accurately its ability to determine the price of money, i.e setting of interest rates). Without the ability to monitise debt or print money the Govt’s hands are largely tied. The voters will pass judgment in due course. Borrow too much and the bond market will let you know… raise the tax rate too much and you’ll meet your maker real soon (in a political sense :)).

            Interest rate determined by the market is what we need.

            Interest rates become volatile… a bit like every other market.

            The effects are profound… borrowers borrow less – it’s too risky (and the bank will probably lend less as well as a result).

            Abolish the fractional banking system… there are no rules required anyway under a true market based system. But what is required is depositors insurance, either packaged as part of the service or purchased separately. This way there is never a need to bail out banks. The riskiness of the bank will be reflected in the interest rates offered by each bank.

            For a fully insured conservative bank, you might get 1-2% less interest than one that is not so conservative. Consumers have a choice which bank they want to give unsecured credit to.

            This is very similar to how the bond market works. You want high yield, buy junk bonds… you want low risk buy Aust Govt bonds etc…

            This way, the Govt is removed from the equation entirely… if your bank collapses, too bad… you should have bought insurance or had your deposits in a lower yielding bank.

            A true market based works if given a chance.

  9. The trend towards saving and paying down debt is good for Australia. The trend towards less taxation for governments that are addicted to property tax opens the door for bright minds with new policy

  10. Pollies have spent the money collected in taxes, borrowed against future taxes, are increasing future taxes (carbon) and now are noticing they have a problem? Boom!

  11. G-F-C ooi! ooi! ooi!
    G-F-C, its’ dynamite
    G-F-C, we could not fight
    G-F-C, debt overload
    G-F-C, Australia explode.

    Ah the 70’s, for those of us that were there… We could afford to live comfortably then on one modest salary per household.

  12. Wait till this news from our US cousins filters through to the collective psyche!

    BofA CEO: Owners shouldn’t look at home as an asset
    http://www.msnbc.msn.com/id/42556230/ns/business-real_estate/

    “”It’s sobering to think, but some people shouldn’t be thinking of (their home) as an asset,” Moynihan said at the 2011 National Association of Attorneys General conference. “They should be thinking of it as a great place to live.””

    • Now there’s a novel concept – a house is for living in, for providing a fundamental human need.

      But since everyone knows that a house is meant to be a vehicle for asset price speculation, I wonder if it’ll ever catch on?

  13. Sun-Herald Domain 17/4/11
    Yesterday’s Results Sold: 291 Value: $230.3m Clearance Rate: 544.8%