"Home Truths" ...

ABC–Four Corners
Home Truths

2 May 2016


Has a generation been shut out of the Great Australian Dream?
It used to be that Australians would spend 3 or 4 times their annual income on a house. Now it's 10, 20, even 30 times, putting home ownership out of reach for many, and especially for young people. The tax breaks that have helped fuel the unprecedented housing boom will be a big issue in the coming election campaign. Taken together, Negative Gearing and Capital Gains tax breaks cost the public purse 11.7 Billion dollars each year. Labor has promised to wind-back the concessions. But despite criticism of Negative Gearing from some Liberal politicians, including former Treasurer Joe Hockey, PM Malcolm Turnbull has ruled out any changes to the system. In tonight's program, experts say that Australia's housing market is already cooling. Economists are divided over whether we're seeing the start of a soft-landing, a correction, or a crash. For many in the Millennial generation, a crash is what they're waiting and hoping for.
… watching house prices climb ever higher is practically a national sport.

[footage of house auction and overview of real estate sales in Sydney and Melbourne]

This is now the biggest housing boom in Australia's history and 'property' is the new gold rush.
On a Thursday night in an outer suburb of Melbourne, property salesman Ron Cross is selling the investment dream:
"So now is the time to make a move. Get in quickly when the door is open because the door will shut very, very quickly. … It doesn't matter if it doesn't go up in value. But it will because you've got this massive cash-flow. Why are people looking at negative gearing? Because it is generous. It's a wonderful opportunity for people to become involved in property investment. It's a gift. So the secret is to borrow money. So the young people in the audience tonight -- don't be fearful of borrowing money."

And his message has hit home:
"Get into property as soon as you can."
"Whether you should buy your home first or an investment property? Definitely investment property first." [Comments from members of the audience]
Following one prospective home buyer: "You can't live your life being depressed every weekend because you've missed out on another house."

The competition isn't other home buyers. It's investors.

"If we or a young couple don't purchase this house, I think in less that 2 years from now there'll be a house in the back yard."

Right! So you are thinking that this is who you're up against. You're up against an investor who just wants to sub-divide.
"100% - exactly right."
Have you lost-out at auctions to investors before?
"Oh! 100%. Yes!"
Cut to map of Melbourne areas where over half of the units are owned by investors.

"It appears that the opportunistic investor, buoyed by low interest rates, has dominated the market. So first-home buyers are unable to compete." John Alexander is the Liberal Member for Bennelong, in Sydney's inner north-west. He chaired the Parliament's enquiry into Housing Affordability which is due to report this year.

Q. Do think we are seeing an entrenchment of a generational wealth divide in Australia?

JA. Well, I think this is a great concern, and this is what, personally, drove this enquiry because I have three children who would love to buy a home some day. And every person I ever door knocked in this region has the same concern. And so how do you give people the opportunity to buy homes?

... The Millennials: Those who were born from the 1980s onward.
They have a reputation as the Selfie generation - narcissistic, entitled, the kids who got a trophy just for turning up. But they turned up too late to catch the housing boom. John Daley from The Grattan Institute wrote the book on the generational divide in Australia.

it was under Robert Menzies that home-ownership took off in Australia -- as an aspiration and a reality. In 1947, less than 50% of Australians owned or were buying a house. Just over a decade later, that figure had jumped to 70%. As the suburbs sprouted, we rushed into them. As the population kept growing, so did demand. Especially, in Sydney and Melbourne. Especially, from investors.

(Interview with a couple who've bought and sold 18 houses using negative gearing.

To put it simply, Negative Gearing is a clever way of reducing your tax bill. If you have an investment property, and it's losing money, you can claim that loss as a tax deduction against everything else you earn. Other countries do it too. But they're far less generous with their allowances.

In 1985, then Treasurer Paul Keating called Negative Gearing an "outrageous rort" and tightened the rules. But two years later, his decision was blamed for rising rents in Sydney. And with the New South Wales state election looming, the Federal cabinet brought Negative Gearing back. Then, in 1999, the deal got even sweeter when the Howard government halved capital gains tax. That meant investors could afford to lose even more money on the rent, claim it on their tax, then watch the property go up in value and cash in by selling.

And you can see it (graph) taking effect. From 1999, owning property turned from a profit-making operation for investors into a massive loser for the government - taking billions each year out of the budget. And, each year, more and more investors jumped in.

John Alexander: "We're travelling toward a market that's dominated by speculative investors and excluding the home-buyer. And too often, it's the young couple who gets beaten-out at the auction and is then renting that very place that they were trying to buy. …"

In this development, in John Alexander electorate, investors own more than 25% of the buildings. The developer says that's low by their standards. Most schemes like this are more than 50% investor owned.

John Alexander: "Negative gearing has worked very well when it has provided affordable rental properties. The moment that it intrudes on the market-place and stops young families from 'buying the house' that's not ideal, and that's what's happened in this moment when interest rates have gotten so low. So this new dynamic that's come into play -- that has deprived young people of being able to buy homes -- has really created this spike."

Ken Morrison CEO Property Council of Australia:
"No, we don't believe it has had a role in pushing up prices. It's not been the dominant part of the market." The Property Council of Australia: is a big supporter of Negative Gearing. "The big factor pushing up prices has been the chronic under-supply of housing for well over a decade, and the failure of that supply pipeline to match the growing - our growing cities and our growing population."

video promo: Property Council of Australia's campaign to keep Negative Gearing.

Ever since the Hawk government backed out on Negative Gearing in 1987, neither side of politics has been willing to go near it. At least, not while in office.

In his farewell speech to Parliament in October [2015], former Treasurer Joe Hockey stunned his colleagues with some parting thoughts: "Negative Gearing should be skewed toward new housing so there is an incentive to add to the housing stock, rather than an incentive to speculate on existing property." Four months later, Labor announced it's policy to do just that. Chris Bowen, Shadow Treasurer: "Investors are now 50% of all home purchases. That's the highest it's ever been. Guess what! There's a link. There's a correlation. What we've got to do is level the playing field. First home buyers are turning up at auctions with no government support. Investors are turning up at auctions with the Negative Gearing policy in one pocket, with the Capital Gains tax discount in the other, and, of course, investors are out-bidding first-home buyers."

As soon as Labor announced his policy, the government was on the offensive. Turnbull: " What does the labor party want to do? It wants to give the property market a kick in the guts. It wants to send those prices lower. Vote Labor and be poorer. Vote Labor and see your house price go down. That's what Labor is offering: Lower house prices. Poorer Australians."


John Alexander: "It's up to prudent government action. And certainly not the rash proposal of the Labor Party to suggest that you'll only give Negative Gearing to new home construction, because that would just devastate the housing market. That would create a free-fall. That would be devastating."

Chris Bowen, Labor Party, "Shadow" Treasurer: "Absolute rubbish. It's just a scare campaign. And what we need to do is look at policies which really do make a difference on housing affordability. But to claim that this would "devastate" as John Alexander says, -- and that's the Liberal Party "talking points" -- is just a completely fallacious argument.

John Daley says Labor's policy would probably push house prices down, but not as much as the government claims. "Chances are we would see property prices fall a little bit relative to where they would be otherwise. Maybe 2%. So it's not a big change in the scheme of things. And at the margins we would see slightly fewer investors and slightly more home-owners."

The current Treasurer Scott Morrison says Labor's latest attempt to change Negative Gearing is the politics of envy. "But what they don't understand, Mr. Speaker, is that ordinary Australians, moms and dads are the ones who invest in Negative Gearing, Mr Speaker. Two-thirds of those who engage in Negative Gearing have a taxable income of 80,000 or less, Mr. Speaker."

One reason for that is there are millions more people in that lower tax bracket than there are in the ones above it. But some recent figures from the Grattan Institute show that it's the top 10% of income earners who are getting 50% of the benefit from Negative Gearing.

It's why some Liberal 'elders' support Labor's policy of winding it back.

Jeff Kennett, Premier of Victoria 1992-1999: "In fact, our PM Malcolm Turnbull once described Negative Gearing as "tax fraud" and in many cases he's right."
Actually, what Malcolm Turnbull called Negative Gearing was "Tax avoidance" in a speech in 2005.

Jeff Kennett: "I don't quite understand why he's now arguing against the proposition he put out before in supporting Labor. And I'm sure if Labor hadn't introduced the policy on Negative Gearing, the conservatives would have - which is the great disappointment of politics today."

Q. Why has the PM changed his view?
JK: "I think there's a very simple reason. It's all about winning the next election."

Gerard and Libby Holmes, daughter Milly and son-in-law Ben -- One solution - move back home with parents - 6 adults and a baby - waiting for the "bubble to burst"]

Gerard and Libby Holmes "It's a blessing to be able to have the whole family in the one house - 3 generations as well. It's a really exceptional experience that I know Libby and I are really enjoying.

Milly and Ben aren't the only ones who think there's a housing bubble.

Prof. Steve Keen, Kingston University, London: "It's a bubble. It's a pony scheme. And like all Ponzi schemes and all bubbles, it's driven by people taking out debt."

Steve Keen has predicted a crash before and he's been spectacularly wrong.

He predicted houses would fall by up to 40%. He says the only thing he got wrong was the timing.

SK: "So we've actually managed to keep it going but we've only done it by boosting debt to the highest level in the Western world."
To a record 1.5 Trillion dollars. Mortgage debt is now equivalent in value to 94% of Australia's GDP. Australian banks are more exposed to the mortgage market than in any other country.

John Alexander also compares the housing market here to a Ponzi Scheme: "A Ponzi Scheme is based on that there will be new people coming into the market all the time - willing to buy. But it's solely based on the fact that the market will always go up. Well, that's what investors who are borrowing at 100% are relying on."

The point about a Ponzi Scheme is, once everyone stops 'buying in', it all comes crashing down.

Speaking with Amy Reynolds Hedge-fund manager - Apt Capital Management, Singapore: It's one of the funds that's shorting Australia's banks. A multi-million dollar Stock Market play is betting that Australia's banking sector is headed for a fall from its exposure to the mortgage market.
"values have deviated by 40%"
"price to rent ratio - debt to GDP - proportion of investor loans - most of all, the price to income ratio, the gulf between what houses cost and whet people earn.

(30:00) Ireland - price to income ration was '8' just before its housing market collapsed.
U.S. = '5'
Sydney = 12.2 times the median salary.
Melbourne = 9.7

But John Daley, CEO Grattan Institute, says the Australian market is different. "We have a rapidly growing population. That means there's this underpinned demand for housing that, say for example, Spain did not have. We also have a much better regulatory system and if you look at the fundamentals in terms of how much you have to pay to buy into the housing market, given current interest rates, it doesn't look wildly out of kilter with the past, so long as interest rates don't go up, and that's the big 'if'. (30:51)

But last month, The Economist magazine also calculated that Australia's housing market was overvalued by 40%. The OECD has warned of a sharp correction.
Over the past year, Sydney's house prices gained more than 14.3%. Melbourne, just over 8%

Last year Treasury Secretary John Fraser was warning of a bubble in parts of Sydney and Melbourne: "Certainly, I think the case in the higher priced area of Melbourne."

"It's a bubble. It's a glut as well."
In Melbourne, you can see the Bubble before your eyes, in the explosion of high-rise apartments fuelled by investors that buyers advocate Catherine Cashmore says are largely empty.

Catherine Cashmore, President, Prosper Australia: "I've walked through so many buildings where there have been a large number of empty apartments, and it's clear that people are buying them and they're not interested in renting them out. And it just seemed counter-intuitive. But they rents - the yields in Melbourne are so low.

[View of Melb. from Eureka tower)
It's really only when you get up to this kind of height that you get a sense of just how incredible the scale of building has been -- especially here in Melbourne. And the numbers are phenomenal:
Melbourne has added around 13,000 new apartments each year for the last 2 years, that have lost value before anyone even turned a key in the lock. Now in the next years, that figure is going to rise to 22,000 apartments. It's a hell of a lot in the market that's already saturated. (32:30)

Catherine Cashmore,: "Take a look over there. There's your office block. And over here - these are apartments - you can see that there are no lights on. There's only a handful of properties in here where the lights are on. And this is the evidence that's showing, really, that the lights are off when nobody's home."

Q. That's significant because it's 8 o'clock on a Tuesday night -- we're so close to the CBD of Melbourne that if anyone was going to be home, they'd be off that tram now. They're not. It's basically empty.

CC: "That's right. These properties are not fully occupied. They are vacant."

It wasn't supposed to be this way. The State Government's planning blueprints, for both Sydney and Melbourne, assumed that 'empty-nesters' would down-size into apartments and leave their houses in the suburbs behind, opening them up for young home-buyers. But the "empty nesters" aren't coming.

Jeff Kennett: "We're still building units that to be quite honest, you wouldn't put your dog in. I mean, some of these "one bedroom" vertical - fridges - are appalling. And I couldn't imagine anything worse. That's why I'm so opposed to down-sizing."

Prof. Steve Keen: "There could be lots of developers who end up being unable to sell their off-the-plan properties and going bankrupt."

Jeff Kennett: "I think we're in for a crunch."

Yet, still, people are banging down the door to get into the market.

[Liz Moss - speculating in order to fund her retirement, "because, obviously, pensions are going".]

[Real Estate developer on clients over investing."If interest rates go up - they don't make those allowances. - 1% would hurt a lot of people."]

Consumer Advocates say banks have been signing people up for mortgages they can never afford without their knowledge.

Lindsay David, Founder LF Economics: "There's a lot of evidence that banks are actually fudging the application forms of borrowers to make them a lot more credit-worthy than what they really are."

Economist Lindsay David has presented more than 1100 examples of altered loan forms to the Parliament. He said it shows that banks are engaged in predatory even fraudulent lending. "The banks are literally using 'liquid paper' or other types or ways to clear out the income of a loan applicant and raise it. Lending to home-buyers that have no ability to be able to pay off their loan and basically depending on the property market to continue to rise at a consistent rate."

We didn't have to go too far to find someone who'd had their loan application changed by a bank.
When ABC Business reporter Elysse Morgan got her loan documents back, she found something wasn't right.

Q. So what did you spot?
EM: "Oh, we spotted that my income had been massively inflated above what it normally is. There's a line that says "Your monthly income" and it was correct for my husband's and then for mine it was inflated by around 38%."

She says she never found out who changed the figures on her loan application.

Q. What were they thinking, trying this, not just on any member of the public, but on an ABC Business journalist?
EM: "As a business journalist, you have to think to yourself: What's in the interest of the organisation or the institution to pump that up? I'm on a pretty good salary. So you've only got to think to yourself: Are they taking it from, say, a double-A to a triple-A rating? Is it more convenient for them to have those sorts of figures? I don't know." (38:00)

Which is exactly what Lindsay David says IS going on: "If the banks show the international investment community that they're lending to very, very credible borrowers -- credit-worthy borrowers -- then it's very, very easy for the banks to tap into very cheap debt and to be able to sell-off residential mortgage-backed securities with a triple-A rating. For one reason of another, politicians do not want to touch this. ASIC does not want to touch this. and, basically, that is a serious problem because we know that the mortgage market in this country is contaminated with 'junk debt'. (38:45)

Bank behaviour is now firmly in the spotlight. The government has restored more than a 120 million dollars of funding to the corporate watch-dog ASIC, and the Prime Minister has warned the banks to lift their game. Last year, the banking regulator APRA finally acted to rein-in bank lending to investors, limiting loans to 80% of a property's value and making it harder for people to qualify. That change has undoubtedly slowed the market down.

House prices in Sydney have dropped for the second straight quarter Melbourne is still rising but at just over 1%. (39>25)

John Alexander: "This is the beginning of things calming, which is a good thing."

Amy Reynolds, Apt Capital Management, Singapore : "Our feeling is that it's too little too late. There's too much debt. There's too much vulnerability. We think the banks will be shaken by this, Yes.". (39:45)

Here's what the "Great Australian Dream" looks like in 2016: pointing to sub-standard home construction, "I'm fixing a brand new home!"

Closing scenes: coverage of development "Moondah" - sub-standard construction on ever-shrinking blocks of land - 30k and 2-hours peak-hour drive from Melbourne CBD. The median price has doubled in the last 5 years to more than 400K because they're competing against investors -- 1/3 houses and 1/2 units owned by investors.
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