Analysing the Impact of Taxes and Other Influencing Factors on Housing Prices in Australia - Research Proposal Example

OF TECHNOLOGY, SYDNEY "Analysing the impact of taxes and other influencing factors on housing prices in Australia" TABLE OF CONTENTS 0 Abstract 3 2.0 Introduction 4 3.0 Purpose and Objectives 5 4.0 Literature Review 5 4.1 Introduction 5 4.2 Performance of Australian Property Markets 5 4.3 Report from the Property Council of Australia 8 4.4 The ABS Statistics 9 4.4.1 CPI Groups 9 4.4.2 Housing 9 4.4.3 Analysis on the Consumer Price Index 10 4.4.4 Employment/Unemployment Figures 10 5.0 Research Design 11 5.1 Research Data 11 5.2 Research Methodology 12 6.0 Significance 13 7.0 Limitations 13 8.0 References 14 1.0 ABSTRACT According to surveys by prestigious institutions like Standard and Poor’s, property Market in Australia over the years can be described as stable. If we look at history and the ratings conducted, there has been a record of a relatively low, by global standard, on delinquency and default rates on residential mortgages, with a relatively stable residential property market. Emphasis is placed on the period leading up to and immediately following the 1991-1992 economic recession, conducted by the Standard & Poor’s. A very recent report, however, by ABC News, in its website ABC News Online dated May 14, 2007 (2:33pm AEST), states a reversal of the stable market. The headline says: “Government policies, charges ‘stifling’ housing growth.” The report says that “the Property Council of Australia is warning of a looming housing shortfall as prices and taxes increase.” The surge in median house prices in the last seven years has shut many people out of the market, ABC News quoted the Council as saying. The report however is on Western Australia and not on the whole of Australia, but still there has to be concern to avoid a possible downturn. From a stable property market, there is a trend of slowing down due to circumstances or causes that are the primary focus of this study. However, the situation may not be serious. The causes will be enumerated in the literature review. 2.0 Introduction Property market in Australia is a major source of wealth creation for investors, contributing to the socio-economic well being of all Australians. The Real Estate Institute of Australia states that in the financial year 2005/2006, property sales totaled $186.1 billion. The Institute further said that 67% of Australians owned their houses and 28% rented on the private market. Property affects everybody in Australia. Those who are renting their houses and those who own their houses are a subject of surveys by the prominent institutions in Australia and even from outside Australia. The Real Estate Institute of Australia follows and conducts studies and trends in the real estate business in Australia. It is the national professional association for the real estate industry. Over the past years, right after the 1991-1992 economic recession, there has been a stable residential property market in Australia. But there is a growing defect that the Property Council of Australia has warned in its latest press release. This pertains to the higher taxes imposed by the government. 3.0 Purpose and Objectives This study will examine the underlying growth on the property market of Australia and the impact of the higher taxes. Surveys conducted by prestigious organizations like Standard and Poor’s and Real Estate Institute of Australia and other similar organizations that have stakes in the property market have revealed a steady growth. This was recorded over the past 35 years by Standard & Poor’s and the years preceding the 1991-1992 economic crisis. We will also study the present policies of government over real estate and their imposition of charges and taxes, whether these taxes or fees are bearable by the general public. The people who are at stake here are those who own or rent their houses. Following are the questions to be answered in the study: 1. Is the stable growth registered by the property market of Australia continuing? 2. Can there be shortage of properties due to bad government policies and higher charges across Australia? 3. What remedies should be done to maintain the steady growth of the property market in Australia? 4.0 LITERATURE REVIEW 4.1 Introduction All researches and data recorded a growth in the residential property markets of Australia. Most of the basis for our report was from Standard & Poor’s RatingsDirect, the premier source of real-time, Web-based credit ratings and research from an organization that has been a leader in objective credit analysis for more than 140 years. However, recent news from ABC News On line have been added to our report to give a clearer view of the study. 4.2 Performance of Australian Residential Property Markets Standard and Poor’s recorded a relative growth in the residential property markets in Australia. In comparison to world market, Australian residential property market differs from overseas markets as they are not exposed to the same level of speculation; they display a different level of volatility. Population centers are concentrated in and around the major cities on the east and south-east coasts of Australia, principally Sydney, Melbourne, and Brisbane. Population trends show a strong shift away from rural areas to cities. AUSTRALIAN MEDIAN HOUSE PRICES The figure above cites the trend for the cities in Australia. The largest correction was in the period leading up to the 1991-1992 economic recession. Property values fell in most markets with the largest market, Sydney, experiencing the most severe falls. Nevertheless, Standard & Poors market value decline assumptions were not tested. The Australian Bureau of Statistics says the number of new home sales surged by 5 per cent in March but there was another downturn in the investment market. The historical performance of Australian residential mortgages has been exceptional by global standards for a long time, including the time of the economic recession. The cumulative claims frequency and floss experience of the Australian mortgage insurers and changes in the median house prices in key residential property markets across Australia formed the basis of the analysis. This is according to the Standard and Poor’s. Standard & Poors also captures and maintains surveillance data on the performance of mortgage portfolios collateralizing all Australian RMBS transactions. Standard & Poors publishes the "ABS Performance Watch" quarterly, which includes details of the level of delinquencies, cumulative mortgage insurance claims, and annualized prepayment and repayment rates on the underlying mortgage pool of each Australian RMBS transaction. The "Standard & Poors Mortgage Performance Index" (SPIN) is also included in the publication. The SPIN measures the level of aggregate delinquencies on all Australian RMBS transactions, and is the only comprehensive measure of the performance of mortgage loans in Australia. The SPIN provides further evidence of the exceptional performance of residential mortgages collateralizing Australian RMBS deals, although it does not cover a period of economic downturn. Since 1980, residential property values in all key markets across Australia have shown consistent growth with low levels of volatility. The most notable correction occurred leading up to the 1991-1992 economic recession. Property values fell in most markets with the largest market, Sydney, experiencing the most severe falls. Although property values declined during the correction, the market value decline assumptions applied in Australian RMBS deals more than covered this eventuality. 4.3 Report from the Property Council of Australia Lately, however, the Property Council of Australia warned of a looming housing shortfall because of high prices and taxes. The overall value of borrowing for housing declined during the period due to a slump in sales for investment properties. HSBC economist John Edwards says the results were very mixed. "Theyre very helpful on the purchase of new dwellings by owner-occupiers and thats a very good sign for the industry - thats the most important sign for the industry," he said. "But they also underline the continuing weakness in houses bought for rental purposes and thats bad news for tenants." Council spokesman Ross Elliot said in a latest interview by ABC News that “State Government revenues from property taxes have gone from around 10 percent or maybe 15 percent to around a third in the case of West Australia, half the income of the state Budget from property taxes.” In a bold statement, he said, “So the market is being raped and pillaged basically.” This is causing slowdown and an increase in the affordability problems. Mr. Elliot recommends that state governments must reduce stamp duty tax to avoid a housing shortfall. He further said that the government is depending on the property industry to “fuel state budgets.” He also recommended that to stimulate more supply, which is the key to increasing rental vacancies to avoid shortage of rental accommodation, tax burden on new housing should be reduced. 4.4 The ABS Statistics Consumer Price Index on products and services including Housing 4.4.1 CPI GROUPS Weighted average of eight capital cities, Percentage change from previous quarter Figure above adapted from the ABS Report (website) 4.4.2 HOUSING (+1.0%) The rise in housing this quarter was mainly due to house purchase (+1.0%) and rents (+1.4%). Increases in house purchase prices were recorded in all capital cities except Adelaide, which was unchanged. Rises in other cities ranged from 0.4% in Sydney to 3.3% in Brisbane. Average rents rose in all capital cities, ranging from 0.9% in Adelaide to 2.6% in Perth. Through the year to March quarter 2007, the housing group rose 3.5%. This rise was mainly attributable to rents (+4.4%), house purchase (+2.9%), and property rates and charges (+5.6%). Annually, housing increases were led by rises in Darwin (+8.5%) and Perth (+6.9%). 4.4.3 Analysis on the Consumer Price Index As we can see, from the previous year through March 2007, there is an increase in housing group (3.5%) which was due to rents, house purchase, and property rates and charges. Increase for rentals and purchases could add more to the coffers of the government, as reported by the Property Council of Australia. The government has become dependent on increases in housing. The trend of stable growth in housing from the recession in the nineties could not be maintained if reforms are not made on the imposition of taxes, as alleged by Mr. Eliot of the Property Council. 4.4.4 KEY FIGURES FOR EMPLOYED/UNEMPLOYED PERSONS Mar 2007 Apr 2007 Mar 07 to Apr 07 Apr 06 to Apr 07 Trend Employed persons (000) 10 379.2 10 397.8 18.5 2.8 % Unemployed persons (000) 490.4 488.4 -2.0 -8.9 % Unemployment rate (%) 4.5 4.5 0.0 pts -0.5 pts Participation rate (%) 64.9 64.9 0.0 pts 0.3 pts Seasonally Adjusted Employed persons (000) 10 367.0 10 416.6 49.6 3.1 % Unemployed persons (000) 488.3 482.7 -5.6 -10.8 % Unemployment rate (%) 4.5 4.4 -0.1 pts -0.7 pts Participation rate (%) 64.8 64.9 0.2 pts 0.4 pts Employed Persons Unemployment rate The above key figure on the employment statistics of Australia is adapted from the Australian Bureau of Statistics and here examined to give a view of the employment and unemployment rate of Australia. It is also the aim of this study to determine the people’s capacity to rent/own houses, because this influences the market prices of property. The figures are for a one year period. There is an increase of 2.8% of employed persons and a decrease of -8.9% unemployed persons, which means that there is still a steady growth in the economy. 5.0 The research design 5.1 Research Data Research was conducted from ABS data and the Standard & Poor’s surveys through websites. Other data were taken from Australian Business Statistics and the Real Estate Institute of Australia. There were a number of informal interviews conducted on persons with knowledge and background regarding property markets in Australia. There was a comparison of surveys on some historical data from Standard and Poor’s, the Real Estate Institute of Australia, and the present news from ABC News Online which quoted some known personalities from the Property Council of Australia. The Standard and Poor’s data is not yet up-to-date, e.g. the 2007 report. Therefore, we have to wait for this report because it is very reliable. Other reports from the Property Council of Australia should not be ignored, like its own recommendation to the government to reduce taxes. 5.2 Methodology Method used is secondary research from the internet, books and magazines that could give valuable data and information on the property market of Australia. A proposed methodology should be done on the property market by conducting primary data collection from the agencies involved, private or government, which has stakes in the property market in Australia. This was not done because of time and financial constraints. 6.0 Significance of the Study With this study, a possible downturn in the property market of Australia maybe stopped. Recommendations should be forwarded to the agencies involved so that a thorough study will be done on the lowering of taxes and other charges by the government on the property market. There should be a collaboration among the different stake holders. 7.0 Limitations A formal and budgeted survey should be done on the property market of Australia, but this study could not conduct the necessary survey, e.g. questionnaires and formal interviews or taking a population sample from the people of New South Wales/Australia because of time and financial constraints. A recommendation is made that a similar survey and study should be conducted on the government’s charges or taxes on rentals and other fees for property ownership. Surveys or informal interviews were only conducted on a few individuals, such personalities who have direct knowledge in the property market of Australia, but it was explained that this was only for the purpose of this study. No questionnaires are formulated and no surveys have been conducted on the topic. 8.0 References ABC News On line dated May 14, 2007, http://abc.net.au/news/newsitems/200705/s1922203.htm, retrieved 2007-05-24 Australian Bureau of Statistics (ABS) website, http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/6202.0Explanatory%20Notes1Apr%202007?OpenDocument Australian Property Review, can be found on line at: http://apr.cpmresearch.com.au/apr/News/tabid/36/articleType/CategoryView/categoryId/5/Property-Trusts--Syndicates.aspx Commercial Real Estate of Australia, Your guide to Australian Commercial & Industrial Real Estate http://www.commercialrealestate.com.au/ Feature Article: Focus on the New South Wales Construction Industry, can be found on line at: http://www.abs.gov.au/AUSSTATS/abs@.nsf/featurearticlesbyCatalogue/B50895CF382A55D5CA256E6700062A55?OpenDocument, retrieved 2007-05-26 Government policies, charges stifling housing growth, ABC News Online website, http://abc.net.au/news/newsitems/200705/s1922203.htm, retrieved 2007-05-23. Market Research.com, http://www.marketresearch.com/product/display.asp?productid=1482110&xs=r&SID=81078884-384790803-305814391 Real Estate Institute of Australia website, http://www.reiaustralia.com.au/institute/index.asp Standard & Poor’s website, www.standardandpoors.com/ratingsdirect. Read More