What’s going on guys It's Jordan de Jong here and today I want to talk about why the government will do everything they can to prevent the housing market crash and how much they actually make from the housing sector. The Australian economy is hugely reliant on the housing sector, according to CoreLogic at the end of November 2019, residential real estate is a $6.8 Trillion dollar industry, compared to the Australian Superannuation industry at $2.9 Trillion or Australian Listed Stocks at $2 Trillion. 51.5% of Household wealth is held in housing, so when the market takes a hit we suddenly feel less wealthy, we stop spending or “Stimulating the economy”, consumer confidence goes out the window and we almost cease transacting our largest financial assets. Not only does this affect the overall economy, but with 386,498 total sales per annum and a gross value of $248.5 billion in sales, when residential sales start to slow down the government also takes a big hit in revenue from the $6.8 Trillion-dollar industry. Which means they have less financial stability to inject back into the economy to get it wheels rolling again, hence why the RBA halved the cash rate and APRA eased lending restrictions to counter the halt from investors caused by the proposed negative gearing and capital gains tax discount policy changes in 2019 – We’ll maybe there was a few other un-important causes but this is a property channel so let’s blame those. This is only really the tip of the iceberg of what could be done, phase 2 could lead to quantitative easing or even negative interest rates, which we all want to avoid, but drastic times causes drastic measures, anyway, that’s a topic for another blog so let’s get into today’s topic. You maybe be aware of stamp duty and capital gains tax which is a huge chunk of the revenue that gets paid on every transaction, however, there are so many other goods, services, profits and salaries that all hit along the way too. In this blog specifically, I’ll be taking Australian averages and more specifically metropolitan Melbourne averages where possible to demonstrate as examples, using those numbers to calculate the financial figures. I’ll be as fair as possible using averages for my calculations moving forward, however, let’s just presume all parties involved including companies, sole traders and individual incomes, are all paying 30% tax on the remaining income after GST without any tax deductions on top. Therefore tax and state revenue figures in this blog will not be an exact indication, but more of a reference point without having to go down the rabbit hole of the tax system. I won’t be including any construction GST or tax’s on the trades and suppliers involved in the construction process, I may do a separate blog on this but let’s start calculating from the point a developer sells a brand new property. According to the Real Estate Institute of Victoria, at the bottom of the market in 2019 the median house price for metropolitan Melbourne was $793,000, so we’ll base our sales model on this figure, and if we reverse engineer it 5 years back taking the average Australian growth of the 6.8% PA let’s say then this brand new property sold for $570,000 5 years ago. Using this as our example, let’s presume an investor bought this brand-new property, so it is purchased as an investment property and all associated taxes are applicable including capital gains tax. When it comes to the actual sale of the property a ton of people also take a clip throughout the process, there are agents fees at 2.5% so $14,250, marketing costs of $3,000, conveyancer or solicitor fees at $1,400, a lenders discharge fee of $350, home staging at $4,000 and auction fees of $600, totaling $23,600. According to the ATO “Generally, selling or renting existing residential premises are input-taxed sales and do not include GST, However, if the residential premise is considered ‘new’, it is a taxable sale and GST is applicable.” So, on that $570,000 initial sale the ATO gets a minor GST revenue of $51,818, plus with $23,600 of expenses that includes $2,145 of GST and 30% tax on the remaining $21,455 is $6,437, totaling in $60,400 revenue for the ATO. Now the buyers turn to pay, their biggest costs are stamp duty, which goes to the state revenue office and for the $570,000 price tag, it comes to a total of $29,270. On top of this, the buyer also has to pay a transfer fee of $1,433 and a mortgage fee of $120, as well as solicitor or conveyance fees of $1,400, building and pest inspection at $450, mortgage registration fee of $200, loan-application fee of $500, potential 90% mortgage insurance of $12,722 and their portion of council and strata rates, say $500 and let’s throw in a buyers agents since it’s for an investor, at 2% commission that’s $11,400, totaling at $28,725. Breaking this down, that’s $2,611 of GST and 30% tax on the remaining $26,144 is $7,834, in total this is $39,715 of tax and stamp duty out of the buyer’s pocket. For the initial sale, this is a total of $100,115 of revenue for the ATO and State Revenue Office, let alone all of the jobs it has provided the construction workers, lawyers, office staff, and sales teams who now have an income to inject back into the economy. 5 years on the value of the property has now grown to $793,000 and the investor wants to sell the property to lock in the $223,000 of growth, this is when capital gains tax comes into play. The 12-month ownership rule applies here, so we get a 50% discount on Capital gains tax, so we are only taxed on $111,500, the average Victorian income is $83,616 so we'll use this for the current taxable income, which means the Capital Gains Tax payable is $44,407. On top of this, the investor now being the seller has to pay all the selling costs incurred previously, we’ll use the same numbers here, the only cost that changes would be the agent selling fees, remaining at 2.5% for a $793,000 sale they would get a $19,825 commission. All up the total re-sale costs come in at $29,175, $2,652 of which is GST, and of the remaining $26,522 taxed at 30% that’s $7,957, in total including capital gains tax, that’s $55,016 of revenue for the ATO. The new buyer is hit with another round of stamp duty, for the new price of $793,000 this is now $42,650, and again all other purchasing costs are incurred and remain the same apart from additional stamp duty costs, buyers agents fees, and Lenders Mortgage Insurance. At 2% of the purchase price its $15,860 of commission for the buyers agent, and the new 90% Lenders Mortgage Insurance is $17,700 totaling in $38,685 of outgoings for the purchaser, which includes $3,517 of GST, and 30% tax on the remaining $35,168 is $10,550, in total this $56,717 of tax or state revenue paid by the new homeowner. This comes in an at a whopping total of $111,733 of taxes and state revenue, that’s 14% of the transaction price of $793,000, and for the initial sale 5 years prior, the $97,834 is 17.2% of the $570,000 transaction price. This cycle then repeats itself every time a property is traded and why the Australian economy is so reliant on the housing sector, not only does it bring in huge revenue to the ATO and state revenue offices, but also provides profits for business and income for individuals. As stated at the start of this blog, the housing sector has a gross value of $248.5 billion in sales per annum, if we take our 14% example and applied it to the $248.5 billion that’s just shy of $35 billion in potential taxes and state revenue, again all figures calculated in this blog are not an exact indication but more of a reference point. When the market goes through a slow period it has a flow-through effect to many other industries including construction, material manufactures, retailers that sell things such as appliances, furniture and so much more. The giants in these industry’s with considerable market share have to accommodate this flow-through, ensuring they can still operate on lower turnover and in some cases have to de-scale their business, and this isn’t good for anyone. On the plus side the smaller players have a small window of opportunity to be more competitive with pricing, produce better alternatives, or increase efficiency faster then the giants that are now awkwardly trying to become nimble again, however, without any advantages it could result in a blood bath for small businesses. There’s a fine line between affordability and a complete market crash, I think the RBA, APRA and the government realize that if housing prices crash and the market comes to a halt, it has serious implications on the economy. On the flip side if housing prices grow out of proportion to wages, becoming completely unaffordable, it would have a similar effect, only the super-wealthy would own property, it wouldn’t exchange hands as regularly and hinder their financial injection from the sector. I do think there will always be an affordable alternative, it might just impact our standard of living, instead of the white picket fence and big back yard our homes would become a base and somewhere to sleep at night, we are already seeing this as townhouses are now quickly becoming the new entry point for first home buyers closer to our cities. This all comes down to supply and demand, we have plenty of land to accommodate supply, but it all depends on the locations that have the most demand if it’s our CBD’s we could continue to go up if remote work increasingly becomes the new norm we could continue to go out. Finding a balance is essential to the health of the economy and our living standards, I think it’s in everyone’s best interest to not let the market surcharge freely without restraint, or implement too many restrictions that toil with borrowing capacities and investor confidence leading to a major crash. As always, seek your own professional financial, legal, taxation & property investment advice for your current situation, these blogs are just my opinion and general in nature and should never be considered personal advice. Until next time, happy house hunting.

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