Tax man increases high-end property squeeze

By Leith van Onselen

Over the weekend, the Sydney Morning Herald (SMH) published an article on an important legislative change that has the potential to squeeze both capital city rents as well as home prices, particularly at the higher-end of the market.

On 1 October 2012, temporary foreign residents will be unable to receive Living Away From Home Allowance (LAFHA) concessions, which could both increase the cost of rental accommodation in Australia and reduce rental demand, particularly for higher-end properties. From the SMH article:

THE bottom is falling out of the executive rentals market because of changes to the Living Away From Home Allowance taking effect from October 1.

From that date, most overseas executives or their companies will no longer be eligible for lucrative tax breaks that encourage them to spend up big on Sydney accommodation.

Thousands of foreign workers who have been living lavish lifestyles by the beach or harbour subsidised by the federal government are having to dramatically downsize, with disastrous consequences for landlords.

Sean Urquhart, a partner in the accountancy firm Nexia Australia, believes the upper end of rental housing markets in Sydney, Melbourne and to a lesser extent Brisbane are set to take a bath.

“A lot of the premium properties were absorbed on concessional taxes and allowances,” he said. ”There won’t be those people renting those places”…

Australian Property Monitors data shows Point Piper apartment rents have fallen 20 per cent and in Dawes Point 25 per cent in six months.

There have also been substantial drops in median house rents in some exclusive suburbs. In Dover Heights they have dropped 15 per cent and in Darling Point they’ve dropped more than 30 per cent in six months. In Vaucluse they have fallen close to 30 per cent over a year…

…without the tax breaks, which effectively meant the government was often paying half the rent, companies will not be offering accommodation as part of salary packages…

…some [foreign workers] were abandoning plans to come here, citing the case of an American in financial services. ”When he was headhunted he thought he would be getting the benefit,” Ms Nunn said.

”But he’s done his calculations and even though he and the family loved Sydney … the financial incentive just wasn’t enough because the tax benefits wouldn’t be there”…

Mr Patrick was expecting the changes to have repercussions on the already weak top-end of the sales market.

”When people were under a bit of pressure and couldn’t sell, they actually leased it,” he said.

”If their rents are going to drop substantially, they will be under a bit of pressure to sell.

”But if rents are decimated, that option won’t be so attractive, so they’ll be thinking ‘well, we’ll just have to sell it.”

Twitter: Leith van Onselen. Leith is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.

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Comments

  1. But aren’t all the oldies soon going to abandon resource stocks for property? (according to BIS Shrapnel).

    How likely is that?

  2. reusachtigeMEMBER

    Do we need anymore evidence that government tax breaks/subsidies like this, including negative gearing and FHOG, just push up prices?

    But overall, this is great! Just another nail …

  3. Rumplestatskin

    I covered the changes to LAFHA when they were proposed last year. HERE

    My conclusion was –

    “In terms of rental markets nationally, this will take tiny slice off demand at the margins, as this foreign workforce, occupying around 3% of rental homes, will be less enthusiastically spending tax-free income on accommodation. The top end of the city markets will see much of this change.”

    Nice to see that my conclusions were correct.

  4. this is great news. Now for neg gearing, rental subsidies etc. And dont forget child care rebates –> most mums of pre school kids do not actually want to go back to work immediately after birth, its generally a necessity to pay off a house. The rebates no doubt just get slapped on mortgage payments.

    • reusachtigeMEMBER

      See, that’s the thing. If all the damn subsidies and tax breaks were removed all around we wouldn’t need anymore subsidies and tax breaks to pay for the higher prices caused by the subsidies and tax breaks. Maybe as the government coffers shrink they will be forced to remove all this middle and upper-class welfare that was introduced during the good times. Fingers crossed.

      • They’ll just take the extra tax and give it to bogans to have more kids, or buy a negatively-geared rental property, or prop up the Bogan McMansion lifestyle dream…

        Australian Government: It’s all too depressing for words.

        • It is depressing. I find it mind boggling that some Australians criticize the Europeans for their profligate Socialist tendencies and our government even has the temerity to comment upon it. Don’t get me wrong, in no way would any sane person condone what has gone on there but consider our situation.

          We have had what is likely a once in a generation mining and property boom… what did State and Federal governments do with the proceeds ? Created bureaucracies that don’t actually do anything, handed out free money to people in order to increase their cost of living, spent next to nothing on infrastructure, raised the cost of living further through a carbon dioxide tax, inncreased regulation to restrict the supply of housing and granted senior bureaucrats substantial pay increases. At least when Europe and China implode they will have some nice railways and bridges to look at. What will we have to show for it all ?

          • drsmithyMEMBER

            […] raised the cost of living further through a carbon dioxide tax, […]

            Wow, seriously ? It’s been in place all of a month and will have bugger all impact even after it has actually had a chance to influence prices, but gets equal billing with all the other decade-long problems you complain about ?

            Try to keep your partisanship under control, you could take someone’s eye out.

    • Not directly to do with housing, but it’s the same syndrome…..
      I have employed retail staff for 17 years now and never had this ever happen before. This week a mum with 15 hrs has resigned because she won’t earn enough to pay her childcare, which consisted of before school for 2 primary aged kids one day a week ( so she could start work at 8am, and after school care for same 2 kids one day a week (so she could work to 5.30pm). She is hoping to get cleaning work during the day instead. I am not replacing her 15 hrs with another staff member.

      • A friend of mine found something else out recently. His wife is expecting, he earns just under $60,000 a year. Due to how FTB works and the cost of child care, if his wife were to go back to work after giving birth, if she were to go back to work part-time, she would essentially be working for something like $5 an hour.

        Gotta love high taxes and middle-class welfare.

        This country desperately needs to replace middle class welfare and subsidies with income splitting and limited tax deductions for costs of raising children.

        • drsmithyMEMBER

          Gotta love high taxes and middle-class welfare.
          Are you seriously equating the withdrawal of welfare payments with taxation ?

          What happened to “personal responsibility” and not having children unless you could afford them ?

          This country desperately needs to replace middle class welfare and subsidies with income splitting and limited tax deductions for costs of raising children.
          Why should tax deductions exist for rearing children ?

          Ah, wait, I understand: Because such a system would primarily benefit the rich.

    • I’m not sure what they were aiming for when they bought it in anyway – subsidised temporary banking/finance or management workers at the top end of the scale? Who knows.

      • It’d make sense if it was for truly temporary assignments – say your company sends you to work in the Pilbara for 6 months without giving you a per-diem or other bump in income to cover the costs of maintaining your actual “home” (say in Sydney) while you live away from it. It ended up being rorted entirely by people coming in from overseas or those living in Sydney while nominally maintaining a “home” in Melbourne.

        • I disagree. Why should the government have any role in the private contract between you and your employer? If they’re not giving you an allowance, that’s your problem, not mine as a taxpayer.

  5. It’s all good! If the rent on a place in Point Piper drops from $5000 per week to $3500 per week, then why rent a place that currently rents for $3,500 lower down the tree in,say, Paddington? So those ‘lower’ properties will have to drop their rents in sympathy…or stay untenanted…and so the trickle-down drop in rents – across the board – starts…..

      • But that just leaves more ‘upper’ levels empty….and reinforces the falls at all levels. Demand at the bottom has to be compared to vacancy at the top, before equilibrium sets in.

        • That depends though – I wouldn’t move to Point Piper because the transport connections are better in Paddington or Surrey Hills. Vaucluse is pretty but now that the rent isn’t subsidised (the hypothetical) I am going to act rationally and rent where it is convenient.

          • Fabian AlderseyMEMBER

            So if it’s subsidised, people are going to rent where it’s inconvenient?

          • If it’s subsidised, you can justify some inconvenience for other benefits, such as quality of location, quality of accommodation, etc. Why live in a small place in Paddington when you can get one twice as large for the same price (after subsidy) in Point Piper? But now that the subsidy is gone, you either move out to where you get the same quality, or you go for convenience. Either way, I think the trickle-down will have a floor/level of resistance.

      • Dunno, Peter! I haven’t been a landlord in Sydney since’96; but I was getting $1000 pw in Paddo, even back then…

  6. BadaBingMEMBER

    Mad policy to begin with, glad to see it go.
    Was chatting to a 26yr old lady from London over the weekend. She’s here for a few years to experience Aussie summers whilst working in a bar in Bondi. She was very upset that LAFHA was being removed, she won’t be able to afford her 1br pad with ocean glimpses anymore….

  7. That American fellow turning down a job is interesting. You could see it as an indication of how expensive (overpriced?) Sydney/Australia is. The pay in au dollars may be good, but if it’s all swallowed up by basic living expenses like rent or mortgage, it doesn’t translate into the high material living standard you would expect. Could also be seen how high prices/rents are inflationary, as local companies will now have to pay more to attract these people.

    Shame that I can’t see this helping rents for ordinary Australian workers.

    • I’d take issue with that – the guy doesn’t want to go through the effort of moving to Sydney for a job that won’t give him “enough incentive”, meaning he wouldn’t get sufficiently rich to make the move. If you’re relying on a tax break to give your potential hires financial incentive, you’re either lazy, or rorting the system through not paying enough for the talent. Here’s hoping that job goes to a deserving Aussie for just as much who doesn’t have to factor in moving costs.

      • Isn’t that the point though, without the subsidy suddenly the pay isn’t ‘good enough’ anymore, and now these firms will have to pony up the extra to attract these staff, or spend the time and money to train up locals for the role, or rents could fall as well.

        • hamish, you seem to think that these people are worth the money… they get paid way too much especially for what they DON’T do.

          Viva Macrobusiness!!!!!

          • Hey, I offered no opinion on whether or not I thought them worth it, which I think is a whole different topic… Ultimately I tend to think it’s for the business hiring them to make that determination, misguided or not. It’s the effect of the subsidy I find interesting.

    • What the article doesnt point out that is that Mr delicate from the states could just rent something at the price point produced by the subsidy after the subsidy runs out.

      I am sure he would cope with the horrors of lower cost rental stock.

      Truly tragic that finance types will struggle to live in harbourside mansions and may be forced into the slums of Paddington and god forbid Cammeray.

      • More likely, what we know about Mr Delicate is a quote from someone who possibly heard it second-hand, filtered through a reporter who wants a better story.

    • Why wouldn’t it help rents?

      A bunch will leave. A bunch will stay. Odds are the bunch that stay will seek rent reductions one way or another. Vacant property will result, driving a deflationary rent cycle.

      Change always happens at the margin.

      • In Sydney at least, the bulk of renters aren’t anywhere near this segment of the market, but instead are renting properties that gor for well under $1k per week, which is very competitive, and undersupplied. If there is any effect, I expect it to be very small.

        One thing I noticed when I had to move late last year was the more expensive the property, the better value it was to rent, so I fully agree with Persnickety’s comment lower down that an extra $50pw can bring a surprising lift in the quality of accommodation, problem is, most of us can’t really afford that extra $50pw and are stuck renting dogboxes.

  8. systems_and_limits

    This article explains why domain.com.au had so many “serviced apartments” for “visiting project teams” advertised for the North Carlton area a year ago – they were almost in plague proportions and were an irritating distraction from searching through the genuine long term rental ads. I seem to recall that Linden Property Management was a big offender.

    I checked Domain for North Carlton just now, and they all seem to have disappeared – it’s now back to 100% bread and jam rental ads from local real estate agencies. I presume those “serviced apartment” ads must have been driven by the tax break – so I was helping to fund these! Good riddance, is all I can say.

    Thanks for the enlightening article, Leith!

      • MsSolarFelineAU

        Thankyou The Patrician.

        Oh gawd, we’ve been infected alright! World Tower of Sydney, Mark II. *shakes head*

        If anyone reading this chooses to buy in this ____ (choose your own adjective), you’ve got yourselves to blame.

      • The Patrician

        The corruption of a keen young journalist implicit in this article reminds me of the memorable scene from “Scales of Justice” on NSW police corruption in the 80’s where the young constable is offered and takes the proceeds of a raid and is off on the slippery slope.

  9. Robert Sherlock

    Changes to the law could increase the sales of Caravans, as someone could buy a caravan in Perth and live in Darwin and return each year to their residence before returning to Darwin to work and get the allowance for another year?

  10. MsSolarFelineAU

    And, I’ll reference my original comment I posted it this thread yesterday http://www.macrobusiness.com.au/2012/07/links-23rd-july/

    http://www.macrobusiness.com.au/2012/07/links-23rd-july/#comment-164411

    MsSolarFelineAU
    July 23, 2012 at 12:14 pm

    http://smh.domain.com.au/real-estate-news/mansion-rents-to-plunge-after-tax-break-runs-out-20120720-22fdq.html

    >>A Mosman agent, Stephen Patrick, says his Richardson & Wrench agency no longer looks after rentals but he still advises people. ”I’m suggesting that people lock in tenants before the new laws come in,” he said. ”We’re figuring there will be quite a drop in rents.”

    He says that without the tax breaks, which effectively meant the government was often paying half the rent, companies will not be offering accommodation as part of salary packages.>>>

    Awww, you poor rich people being subsidised by us Aussie taxpayers…you’re going to have to pay high Sydney/Melbourne/Brisbane rents – just like us locals do…

    That means some high-end restaurants are going to close, and the ones that are well-managed etc will survive. And, then we’re going to have retail closures as less rich wives (and kids) are spending daddy’s money… (and no, I’m not being sexist, the majority of execs *are* men)

    Negative equity, mate! 😉

  11. So that’s how those international students could afford those luxury CBD apartments. I had expected that post the massive $ rises, that wouldn’t be the case, but they were still able to access that.

    On the flow on effects- I was really surprised at the quality differential an extra $50 a week brought in the rental market.
    If those places suddenly are available at the price less nice ones are, the less nice will start to suffer.

  12. Many of you have the wrong end if the stick there. These laws did not allow foreign workers as much to rent fabulously expensive homes. It allowed employers to get indentured workers they could pay under the market rates of workers with full rights.

    • MsSolarFelineAU

      That may be so SaCo, BUT, it’s one of the _many_ bureaucratic/political lobby group appeasement laws that has favoured one lobby-group over those of us who don’t need to pay high rent for crappy HOUSING.

  13. Houston Rocket

    The LAFHA was one of the biggest scams going around. A local with $1,000 pw to spend out of their after tax pay on rent is/was effectively up against a non resident with $1,000 pw of their own money and then another $1,000 pw from the subsidy. A $2,000 pw house is a HELL of a lot better than a $1,000 pw one. This distorted the rental market skywards and was another tax payer funded rort straight into property owners’ pockets. As soon as this is taken away there will be no way the non-resident is going to wear that hit to their net income. They will be seeking cheaper accommodation tout de suite. Landlords are going to get a shock to find that half of their rental income was only there due to the scheme.

    There is no question that there will be price adjustments from the top down as a myriad of people were taking adavantage across all income bands.