Cameron Kusher On Why CGT Change Will Not Fix Housing

In this episode, we tackle one of the most talked about policy levers in property right now, the capital gains tax discount. It's often positioned as a potential fix for housing affordability.

But before jumping to conclusions, we want to take a step back and ask whether the impact of any changes is being overstated, misunderstood or simply misdirected. We're joined by Cameron Kusher, a housing market analyst known for his data-driven approach and long view across market cycles.

And together, we're going to unpack the realistic reform scenarios, what each could mean for investor behaviour and supply, who stands to benefit and who doesn't, and why focusing too narrowly on investors risks missing the bigger structural drivers of housing outcomes.

welcome to the elephant in the room this is the podcast where we love to talk about the big things in property that never usually get talked about i'm veronica morgan real estate agent buyer's agent and buyer's agent mentor co-host of foxtel's location location location australia author of auction ready and co-host of your first home buyer guide

Hi, I'm Chris Bates, ex-financial planner and mortgage broker, currently ranked number three in the annual MPA Top 100 Mortgage Broker Awards. Before we get started, everything we talk about today is not personal advice, and we recommend you engage the services of a licensed and experienced professional.

Today, we're joined by Cameron Kusher, one of Australia's most respected housing analysts with decades of experience across property data research and market commentary. He spent his career interpreting how policy settings play out in the real world, giving him a clear-eyed view on what actually moves the needle and what doesn't.

And it is very good to see you again, Cameron. Always enjoy our chats with you. Thanks for coming.

Thanks for having me. Cameron, I know you're doing lots of different work at the moment in sort of the consultancy space, and I'd love to sort of unpack that a bit later on, but let's get to the topical

thing first around the CGT changes and potentially also negative gearing changes that sort of is kind of getting snuck into this debate as well. I mean, there's been a parliamentary sort of Senate inquiry. There was heaps of submissions from industry foe to just anybody really, to be honest.

And they're all online, but they've come out with a report and it's looking kind of inevitable. There's going to be some changes in the next budget. I mean, what's your take on this? Is it oversimplifying our issues in the housing market and just touching on one issue like CGT?

Or do you think it's a really valid and it's going to make a meaningful difference?

I don't think it's going to make a meaningful difference. I think what we're seeing is it wasn't actually the government that brought on this Senate inquiry either, if you remember. It was actually the Greens.

But I think Labor were probably quite happy for them to bring this on because we know that previously Labor's taken changes to negative gearing in the capital gains tax discount to two separate elections where they were unsuccessful.

But I do think it looks like it's inevitable that there's going to be some sort of proposal to change it. Now, it...

I think the word discount is interesting here because everyone thinks that by the term capital gains tax discount that you're throwing a bone to investors or giving them some sort of discount.

But basically what you're doing is you're giving them a discount on their tax if they hold that property for more than 12 months. And discount, again, probably not the right word. You're reducing the amount you tax them. But that's because when you buy an investment property or you buy any property,

Part of the capital gain is actual capital gains and part of the capital gain is what's happening with inflation. And we all know about inflation over the last couple of years, given how strong it's been.

So the idea is that the reduction in your capital gains tax that you pay if you hold a property for more than a year is to basically say that's the part of your growth that you've seen in the value of your property that was

due to inflation rather than due to the whole market. Now they previously did a really complex way of indexing this, which I think if they're going to make change, they probably should just look at going back to the previous method.

It was very hard to calculate back then when we didn't have computers, we didn't have AI, it would be a lot easier to calculate that now. And I guess the argument is that then if you own a property for two years and you get the capital gains tax discount,

you're probably well out ahead. Whereas if you own a property for 20 years and you use the capital gains tax discount, you're probably not. So it's probably not as it is equitable, but I think when it was introduced, it was the best possible system.

And it was the easiest way for people that owned investment properties to calculate capital gains when they sold it. But it can definitely be improved. And I think taxes more generally around housing can certainly be improved. But I don't think it's a panacea that's going to fix the market.

If anything, I think it's going to discourage investors in the market. When we look nationally at the moment, rental vacancy rates are sitting at some 1.5%. A normal market is a vacancy rate of 3%. You need investors to provide housing to people that can't afford to

own their own homes because governments don't do that anymore. We've got a very strong population growth. We've added about 450,000 people over the past year. They've all got to live somewhere. And most of them, when they turn up in Australia, aren't in a position to buy a home. So we need rental accommodation.

And if the government's not going to provide it, someone else has to. And at the moment, that's investors. And there has to be a reason for investors to actually provide that housing.

And you take away any sort of incentive for them to do so, you're going to get fewer investors and you're going to exacerbate the challenges that we're facing in the rental market in particular at the moment.

In simple terms then, if you own a property for a year and you make a gain, so you make a $100,000 gain. So the assumption is that $50,000 of that was due to inflation and $50,000 is capital growth.

And so if I read into what you've, or if I interpret what you've just explained to us, that means that the shorter you own that property, that sort of percentage is sort of is weighed in the favor of the owner who sell.

And the longer you own that property, that percentage is weighed in favor of the government. Because really and truly, there's actually probably more inflation involved the longer you hold a property. Even in that, maybe a sliding scale could be more appropriate to less favor short-term trading, perhaps, and actually more incentivize long-term holds.

Would that be fair to say?

Look, I think it's very fair to say, and I think it's probably something they should look at because yes, you don't want people flipping properties in a year that are investors, but equally you want people that are investing for the right reasons.

So not someone that's just in there to grab some cash after a couple of years and then exit the market. So I think some sort of sliding scale could definitely make a lot of sense. Because you want people that are going to buy and hold assets for a long term.

I mean, from a renter's perspective, if you're going into properties and someone's selling them constantly, you've got this uncertainty. Are they going to sell to an owner-occupier that then wants to move in and I'm going to have to move out? Then I'm going to have to go and find another property.

And I think in some ways, this is why the government's actually trying to encourage people to rent more because you can sign longer leases. Now, The reality is there's nothing stopping an individual owner of a property letting someone sign a five-year lease. It's just that it doesn't happen all that often.

But yeah, I think a sliding scale would definitely be something that makes more sense. Give people a larger discount if they hold onto their property for a longer period of time and they get less of a discount on their capital gains tax if they hold it for a shorter period.

It's interesting about, you know, you're saying that individual landlords could offer a longer lease. And yes, of course they could. And I've spoken to a lot of property managers over the years and many of them have said to me that tenants are not interested in committing themselves for five years.

So the build-to-rent model may well have tenants, I guess, approaching that with a different expectation and potentially a more willingness to sign those longer leases. But it is, you know, one of the benefits of renting is that flexibility. So it's a two-way street, obviously, there's flexibility for the owner as well.

And I think that often that's not considered. It's like if a landlord, I want a tenant for that long, I want to commit to that, you know, finding one who's going to lock in is actually hard.

Yeah, I agree. And I think it's, you know, if you look at the profile of renters, a lot of them are either younger people studying at university or, you know, early in their career.

And they might be like, well, I don't want to commit to this for five years because I might want to move overseas or a job might take me interstate. So I think people really want that flexibility. And then you've got people coming in from overseas that are renting.

They're here to study for a period of time. they're not really familiar with the city at all. So they might not even like where they've chose to rent. So if they're only locked down to rent in that area for maybe 12 months, that gives them the flexibility to go, you know what?

I actually don't like it here. I want to move somewhere else. I think the built to rent model is more for people that are a little bit older, don't want to own their own property, but

I want to have a place they can, you know, make feel their own, commit to it for five years. And maybe they've got a goal, you know, in the next five years, I want to buy a property. Let's just sign a lease here for five years. I know I'm going to be here.

I know what, well, I should roughly know what the rental increases are going to be. And that's the model for them. But the built to rent model is obviously still tiny in Australia. So it's still in its infancy.

And I don't think it's at the moment having a huge impact on the market, but you know, 20, 30 years down the track, I think there's aspirations from government and from lots of these big businesses to have that model be much larger than it is currently.

We want to get into that in a minute because there's incentives going towards that end of town. But before we do that, in your understanding, is the build to rent model sort of targeting more towards family accommodation, for example? Because family tenants do want stability.

They probably is the sector that is more likely to want a longer lease, perhaps, once their kids are in school. Is that sort of part of the demographic that they're trying to attract?

I think potentially, although you look at a lot of those buildings, it's still one and two bedroom apartments. There are more three bedroom apartments potentially than sort of the general market, but you're still not really catering to that family market. I think it's more...

couples with higher incomes, maybe they're gonna have one child in the next five years and that's what they're locking into.

But I think the main thing to remember with the built to rent model as well is that generally so far what's been built, they come at a significant premium to the established rental market. You're looking in a lot of areas sort of 15 to 20% premium. So it's not providing a cheaper alternative

to the rental market that we already have. Now, again, maybe over time that starts to change, but very much at the moment, it's a premium product with a premium price attached to it.

I mean, when you've got 11 million dwellings and potentially 100,000 they're gonna build, it's just really a drop in the ocean. Even when you've got 3 million plus investment properties, right? 100,000, maybe new build to rent.

I think there's this idea of we're going to become like the US and have this institutional ownership in landlords. And I feel like it's great to be creating a new market and an alternative to the model. But I think it's really hard to stack up.

Hence why they've got to try to make these concessions for them. And And developers have only got limited capacity who want to play in this space as well, right? Because it's such an infant industry. Back on the CGT though, like, you know, there's so many unintended consequences.

I mean, you mentioned the big one around just another attack on investors. Like this has been going all the way back for the last decade at least. Keep throwing investors under bus, blame them for all the issues, right? That's just the story.

And this is just another sort of, you know, shot at them, really, But it's not just property, right? If you change the CGT discount for property, then you've got to change it for shares, right? So aren't you also encouraging people to invest in shares, start businesses, invest in companies?

It's also, is that counterintuitive, right? Shouldn't we be encouraging that as well? What's your take on that? And it's not really fair just to make it towards property, right? You've got to make it towards all investments to be fair.

Yeah, look, I think you do. But I wouldn't be surprised if they only make this change towards property because the focus is very much on property.

But I mean, our tax system in Australia is already so complex and we want to go and make these kind of changes that make it even more complex. It's just it just does your head in. And I think investors have got a really bad name by governments over recent years.

Like you go back. We had the investor credit growth cap back when it was at 2014. We had the interest-only borrowing cap that was introduced. Obviously, when we were building a lot of new housing, a lot of new housing was funded by investors, both onshore and offshore.

Government decided to rein in the number of offshore investors that could buy into a brand new off-the-plan apartment project. You know, it was uncapped. They brought that back down to 50%. And then when you discourage investment in residential property, you wonder why we're not delivering enough housing.

And you wonder why people look around and go, well, why are developers only building expensive two and three bedroom apartment projects? It's because investors aren't playing in that space. They've been discouraged from playing in that space. And that's now the only thing that really stacks up.

In my view, I feel like the government actually wants developers to focus on that higher-end owner-occupier segment of the market, and they want to replace that investment end with build-to-rent product funded by big offshore businesses.

And again, why are offshore investors more worthy of owning housing in Australia than local investors? They don't always necessarily have the best track record of doing what's right by people as well. And there's a lot of incentives that we're unclear.

You know, people talk about, oh, you know, investors in Australia, they get the capital gains tax discount. They get the negative gearing benefit. You know, the government's handing over all this money to investors.

Well, how much are they actually handing over to these offshore investors with, you know, the land tax discounts, the depreciation, the faster depreciation they can get on these built to rent properties as well? I mean, it's probably still too early to figure that out, but I suspect that they're very large sums of,

money that they're handing over to these institutional investors to try and build this product.

And this is the thing, isn't it? Because it's like, okay, for decades now, individual investors have been providing the lion's share of rental accommodation in this country. And now it's like, well, you've done your job now.

We're going to actually turn all those incentives and we're going to disadvantage you compared to other investment classes. And there's arguments for and against that. But we're going to go and turn all that attention to the big end of town and offshore money as well, offshore investors as well.

But how much transparency is around those deals? Everyone knows what the CGT is, everyone who knows what negative gearing is, right? And it's highly publicized, but will we ever get to understand what tax breaks and what incentives have been given to these institutions?

Oh, look, I mean, there's taxation stats information that comes out every year. The capital gains tax, this down, and negative gearing is very clear in that data.

I suspect that a lot of this will be lumped in with other business taxation data, so we'll never really have great clarity on exactly what the impact is. So, no, I don't think we'll get clarity on that. And I think, look, if...

I think that the individual investor market has served us pretty well for a long period of time. If we've now decided that there's issues with that, well, change the legislation and do things, but don't encourage investment in residential housing that provides...

rental properties for people that the government's decided they don't want to provide that for them anymore.

I mean, you made a really good point, right? They're discouraged by new builds because they moved the build to rent or whether they want the first time buyers or the downsizes.

But if we are, one of the benefits of that last building boom, and this is not something we were discouraging, people were doing this for the last... 10 years is all those investors basically build a lot of rental accommodation in our capital cities that we needed for renting, right?

Like whether it's overseas students or young or old, and hence why we've got 1% vacancy rate. So we haven't got this oversupply of all this accommodation, right? And unfortunately, a lot of the first home buyers are now buying all that under the 5% deposit scheme.

They don't know what they're doing, unfortunately, and they are buying all these poor high density apartments that the investors are bailing on after owning them for sort of 10, 15 years and not really having any growth, right?

So, but if you, that to me was really a successful model for creating more rental accommodation, right? While I wouldn't want to be the investor on that. So shouldn't they just be going, okay, if you want to buy an established property You get no CGT discount, right?

You just have to pay full freight. But if you buy a new property, you get completely CGT free, right? Because a lot of investors won't go anywhere near new property because they know how bad it is from an investment point of view. So you've got to give them wins, right?

And the win is you won't pay capital gains tax one day, but it's good because the government makes so much money on new builds anyway. So they might not be making money on tax, but they make money on other taxes. So do you think that would be a better change?

Because that was part of the submissions as well, is just try to funnel all investment to new property and try to get people building.

Well, it's an interesting one, right? Because even if you look at things like the first-time owners grant, it used to be targeted at... at brand new builds and they've completely gone away with it.

I mean, you go back to the incarnation at the start of the 2000s, it was a first time buyer's grant of $7,000, right?

If you buy a brand new home and the justification was the GST was coming in and the price of a new home's gone up 10%, whereas the price of an existing home hasn't gone up 10%.

But they've basically just turned their back on any of these incentives now trying to grow the supply of housing stock And most people are buying established properties because they're cheaper.

But, you know, I think that the investor side of things with brand new properties is a really interesting one because quite often brand new apartments don't do very well on the resale market. You know, they buy and it's like a new car.

You buy a brand new car, you drive out of the lot and it's worth less. But people buy those properties because there's a lot of depreciation to be had on a brand new property.

So maybe they're willing to forego the capital gain that they would like to get because they get all this depreciation benefit. They have higher rental returns because their apartments in inner city areas. So I think we need to get back to encouraging people to invest in that product.

And again, you know, maybe less capital gains tax if you buy, sorry, a greater capital gains tax discount if you buy one of these off the plan properties as opposed to an existing property. But again, you then run into the issue that you're making the tax system even more complex again, right?

True, but you're sort of not giving away anything because given the high proportion of these properties that do resell at a loss, there's no gain anyway. So just give away what they're not even getting. So they feel good about getting this bigger discount, but it's like, it's all right.

It's a discount of a tiny number.

Yeah, but you're getting faster depreciation or something like that. If we want more housing and we want more housing in areas in inner cities where people are going to be renting, we need to get investors buying that product again. And it hasn't happened now for about 10 years.

And I don't see anyone really making steps to try and get more people investing in that property.

Well, that's right. I mean, and activating the international capital as well, right?

Like, so, you know, if Aussies don't want to buy this stuff and Aussies don't want to build it, but we need to build it, like, is it so wrong that we don't just access capital markets around the world to basically fund these developments, right?

Like, you know, if Aussies aren't wanting to do it because they know the investment returns aren't there, they know it's not a good investment, but other countries are saying, well, I'll buy it because it's getting money out of different countries. It feels like a store of wealth for me.

I don't care about the capital value going up. Then shouldn't we be and try to encourage that? I mean, you know, at some point they either own it and they rent it. Maybe you put a huge tax on them having actually rented out. They can't just leave it empty.

But, you know, isn't that still a good solution rather than just no building happening in this sort of you know, medium density sort of apartments because Aussies aren't doing it and no one can make it stack up.

So we're just going to compound this problem and then all investors and all first-time buyers are buying all existing.

And so, I don't know, I feel like, you know, while I hated the old model because I think Aussies buying, you know, these investments didn't know what they were doing and they're getting duped and they had building issues and they got poor investment returns.

It's almost kind of what we need to get ourselves out of this mess.

We're willing to have a very large number of people from overseas come and move here and study in our universities, but then we turn our nose up at people from overseas wanting to invest in residential property.

I think that the problem became that a lot of people that had bought from offshore weren't actually making that property available for rent.

And I think we should allow people to invest in Australia, but we have to be very clear that you have to make that property actually available for someone to rent if you're not going to live in it yourself.

And I think that's the sort of policy that they should be looking at if they're going to open it back up. But I think opening it back up to more local investors and more foreign investors to get the inner city apartment market moving again is really going to be essential.

Cameron, can you remember a time when they've done grandfathered or... I mean, there is a bit of... The superannuation has been a good test of this, to be honest.

But there's a bit of an argument of if you don't grandfather it and you say, hey, anyone who's got an investment property, you're going to have to pay more tax after this date, which they might do with a budget, which would be pretty a bit of a blindsided.

But they did do it with... expats living overseas, actually. They basically said, if you're living overseas and you sell your home, you're going to pay CJT on that full freight, even though it was your own old home. And they had a date.

And a lot of expats had to bail out of the housing market a few years ago, if you remember.

But I mean, doing it for investors in Australia, it's kind of highly political to say, hey, you thought you were going to pay roughly 25% tax, but now you're going to pay 35% or 40% tax on all your gains.

And it's going to go all the way back to when you bought that property 20 years ago. Like, And you'd make sense to bail, right? Because you would go, well, if I sell it now, I would pay X.

But if I sell it after that date, I have to pay an extra amount of tax. So anyone who was thinking about potentially selling in the next few years would bail.

So do you think it'll be any retrospective or just be completely grandfathered and then just say, look, after this date, this is the new tax rate if you buy a property after that date, but not if you bought a property prior?

I think they'll have to grandfather it because I think politically it's not going to work if they don't. I mean, Victoria went down the path of not grandfathering changes when they increased land tax on investors. And we did see a lot of investors leave that market.

But also at the time, there's essentially no opposition in Victoria. So they could pretty much do what they want. And maybe you can argue that there's not much of an opposition at the federal level at the moment. So they can do what they want.

But I think they'll be a little bit more cautious. So I do think that any changes will probably... be grandfathered, but it's definitely going to change people's opinions about what they're going to do.

And again, if people are thinking of selling anyway soon, it will probably speed up that process for them to get rid of properties. But it will also be a challenge, particularly in Sydney and Melbourne, where there's already quite a lot of stock available for sale at the moment.

So if you make these changes and people go, okay, well, Let's just move now. Let's do it now. You're going to add a lot more stock to the market at a time when interest rates have already gone up and the market expects another three interest rate hikes this year.

You know, you can exacerbate the potential downturn in those markets if we add a lot more stock to the market, particularly investment stock.

I think in my sense, being in Sydney is interesting at the minute because we are definitely feeling that change in sentiment. And we've only had two really steady years previous to this. We haven't been in boom for some time.

And we've also got in New South Wales anyway, we've got new anti, sorry, what do you call it? Underquoting laws coming in. And if my memory serves me correctly,

The last time we had a change in underquoting legislation that also was at a time of market downturn and it just, it took the wind, whatever wind was remaining in the market was taken out because then all of a sudden you've got this massive situation where you've got agents having to quote accurately and buyers go on upon that, you know, because they're used to dealing with price guides that are a lot less than what the property is going to sell for.

So there's this sort of massive market mismatch. So it'd be very interesting to see how all of this does play out. But do you think there's any other credible CGT reform scenarios that are being discussed that might see the light of day?

My take on what's happening is it's clearly going to be some sort of change. And I can see the discount. At the moment, it's 50%. Probably we move down to 20% or 30%.

And I will say, obviously, yes, some people will be worse off under this, but other people, you know, it's more equitable. And I think a lot of this, the discussion around it is that the people that access this CGT discount are overwhelmingly higher income earners.

So they're saying that higher income households get the benefit of this, but equally higher income households pay more tax. I'm on a personal mission to help more people make better property decisions.

You know, most people don't realise that they can cost themselves hundreds of thousands of dollars over the medium to long term when they make property decisions without all of the information that they need.

And what I do is help people with tricky real estate problems, which often masquerade as simple questions like, should I sell my investment property because the interest repayments are hurting or should I buy before I sell or the other way around?

You can connect with me and access all of the tools that I've created to help you make better property decisions at veronicamorgan.com.au. And there you will find resources for first home buyers, details about my buyer's agent mentoring program.

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This is the same argument, you know, back in 2019 when there was this argument that 80% of the negative gearing deductions went to high income earners.

And of course, because they pay a higher percentage of tax, as opposed to 80% of people utilizing negative gearing deductions were actually in the lower income, in the lower tax bracket. So it's like the volume of people versus the volume of dollars. And I think this is the bit that it's completely...

It's so logical, but everyone avoids that in the answer. It's like, of course the big end of town gets bigger deductions because, you know, are you paying 48 cents in the dollar tax? You know?

Definitely right. But I think it's coming back to the, you know, the war between the haves and the have-nots and, you know, then... I mean, this is going to go on forever, right? But I do see that they're going to wind back that capital gains tax discount.

I'm not really clear what they're going to do with negative gearing, if it's going to be part of this or not. But again, negative gearing is not just on residential property. It's on other asset classes as well. So...

If you're going to change it on property, you're going to change it for those other asset classes. Why not just actually review the whole tax system and make broad-based changes to the tax system rather than picking little bits and pieces?

But I don't think there's a political will to make the big reforms that we used to.

So I can think of a negative theory. Why wouldn't you? If you're in this situation and you've got the Greens, you've got this and they tried the last election, they've got really strong votes, why not go? Why make a tiny tinker?

And people are going to go, particularly if you grandfather CGT, you're not going to raise any tax revenue anytime soon. This doesn't change anything.

And if anything, it actually slows down tax revenue because people say, well, if I sell this investment property and I want to buy another one, I'm going to pay a higher CGT on that. So I'm less likely to sell that because And you only pay CGT when you sell.

It's not like an annual thing. So I think that there's not really any revenue gain from that. And the consequences they'll realize is that it's actually hugely not great for rental supply. It's not great for the construction industry. It's not great for rental supply.

So I feel like they're going to have to come up with something else to discourage investors. And the only thing they can probably do is try to limit the people who have built portfolios, right? Who are getting big... you know, negative gearing tax, because that's an instant increase to their revenue, right?

Because they give less tax deductions today every year to investors. And so I feel like they'll either go to one or two properties you can have. And probably two makes more sense than one, right? Because I feel like it's probably pretty hard on one.

Or they'll limit the deductions at, I don't know, $10,000 or $20,000 a year or something. But I mean, it makes sense. If you're going to have a crack at it, now's the time when you're in power and the polls are in your favor, right?

I'm going to be a little bit controversial here because I think they should cap it at two properties.

I actually do too. I just think it's kind of an equity reason, right? Like why should someone be in a position to have 10 properties and continue to get these benefits over and over again on every single property that they have?

You know, I think one or two, and most people only have one or two investment properties. So we're realistically talking about a very small proportion of people, but then you hear the stories of the people that got 150 investment properties.

And why are we giving away taxation revenue to these people that have got 150 properties that are levered to the gills? I think it's reasonable to encourage some ownership of investment property, but you want to make sure there's not excessive ownership of investment property as well.

I agree with those reasons. I've got two additional reasons. One is that if you are limited to one or two properties, let's say two, I think two is reasonable, then you're going to be much more careful in your asset selection.

Because at this volume portfolio play that it's fashionable at the minute, it was fashionable about 10, 15 years ago as well. It never ends well really for the people buying double digit crap properties. But they feel good in the short term.

And there's also a whole industry that has really been burgeoning, which is the buyer's agent space, the borderless buyer's agents who love to find ways to, you know, get their clients buying multiple properties, you know, buy under your borrowing capacity, leave borrowing capacity for the next one.

buy something in an area that you're helping pump up prices in, get instant equity uplift, go back, revalue that. Yippee, aren't I a genius? The clients love you. And let's just keep reinvesting into this Ponzi scheme.

And so I actually think that if you cap that at two, you're going to cut that terrible investment industry off at the knees. And the government's not worried about that yet, because I don't think they've really seen how this will play out in the long term.

But I see it from inside the industry as being, well, that's actually could be quite advantageous.

I think also if people can't get negative gearing benefits after they've owned two investment properties, you're right, they start to make better choices. So they're not buying something for the negative gearing benefit. They're being much more deliberate with their asset selection when they start investing over that second property as well.

And they're looking for positive gearing.

Well, that's the scary thing. That is actually the danger zone, positive gearing, to be quite frank. Positive gearing with investment property, unless you've got a huge amount of cash you can put into it, particularly if you're borrowing 105%, positive geared property with high debt is extremely risky.

And that's actually one of those comfort things that makes you feel like it's not really costing you, but the cost is invisible and it's insidious.

And good luck getting positive gear at 6.5% interest rate plus costs. You'll be looking at like an 8% yield. And I mean, I would not want this to happen.

I don't think this would be good for a lot of people, but the reality is I think they've got to encourage people to buy new.

Already there's an encouragement there because they get more deductions and more depreciation on all the fixtures and fittings on brand new that they don't get the minute that's been lived in even one night.

Yeah, but they've cut back the depreciation matter, particularly if you have to resell that property, right? So if you buy it when you first knew, that's okay. I'm not sure 100% because I don't do a lot in this space, but I think they've got to make sure that you can really deduct it.

Two, you don't pay stamp duty because a lot of states will give you free stamp duty. And it's obviously a little snack for the bear, right? A little crumb to lead you into this disaster. And then you give them a no CGT. And then you say, right, you can actually negative gear it.

You will absolutely sort of flip it and go, well, actually, I'll buy new for those reasons. Now, we would probably still say, hey, maybe just upgrade your home. And I think that's actually what people would do. And I think this is one of the unintended consequences.

When you make it anti-investor, it doesn't mean people haven't got borrowing capacity. It doesn't mean that they can't borrow more money. So if they think, oh, I don't want to get... you know, another property for some reason, they may either want to upgrade their home or be able to buy shares.

And or because at some point they go, oh, I can't put my money into my super. I don't want to start a business. I need to do something to build my wealth for my retirement. I'm more worried than ever than cost of living.

And so whenever you make a change, there's like these unintended consequences that sort of pop out. Is there any that you sort of come to mind for you, Cameron, where you think the government is just going to one day go, oh,

You know, because I think in New Zealand, I think they, was it New Zealand, they did it and they reversed it.

Yeah, they removed negative gearing and they, and I mean, we made changes obviously in the 80s as well. I think your first point there, those are really interesting one, because I think, you know, people can still invest in brand new houses, in housing estates and make a profit off that.

You don't see the same sort of reduction in prices quite often in new housing estates that you see in apartments. So I think apartments are the real challenge because

inner city apartments are where people are going to want to rent, but often the inner city apartment, the resale performance of those inner city apartments is really poor. So I think the government should be looking at ways that they can help incentivize people to invest in those properties to get them built.

on the understanding that when you come to sell this property, it's probably going to be worth less than what you purchased it for, but there's depreciation benefits, there's other benefits if you are going to invest in this.

And it works for the investor, it works for the developer, and it works for the government because we get more housing supply.

I absolutely agree. If you can encourage people to go and build townhouses, particularly and make the finance around that much easier. And then you have zoning changes around sort of this missing sort of gentle density.

And then you make it really attractive for the people, the ones who are taking on the risk, buying the land, doing the development. If you make it, give them a bit of a free kick with some sort of tax changes and make them... GST is another one.

I think there's a huge issue with GST on these developments. But yeah, you're going to encourage a lot of the sort of money that's initially going into sort of just buying a house that's, you know, a family wants.

And you might get that money to funnel in and do a four sort of block townhouse development. And the investor might do it.

So I feel like that's another one that they're completely forgetting about here is encouraging the sort of everyday Australian to invest in sort of small scale developments because it's just really hard to do that.

It is. I mean, a lot of people don't have the capital to do it or the know-how to do it. But equally, you know, you go and talk to even big developers, they say the biggest challenge at the moment is feasibility.

And it's people, the price is a big one, the construction costs are a big one, but also the new developments fund, all these infrastructure upgrades, all these people that already live in these areas. And they're... the kind of justification is, well, they've already paid for those infrastructure upgrades.

But the reality is most people are not living in a home that they bought the first time and paid for those infrastructure upgrades. And especially in inner city areas, that infrastructure was built 150, 200 years ago. So they haven't paid for that infrastructure.

But I guess the responsibility for paying on that infrastructure comes on that new development and that cost gets passed on to the end user. And I think that's really a problem as well. And not to mention the fact that those charges have to be paid up front.

Whereas if you could actually say, I think some good quality developers with a history of delivering, you say, give us a bond, but you can pay the rest of the infrastructure once it's complete.

You're going to get a lot more housing than now where you go, no, that all has to be paid up front. Our feasibility just doesn't work anymore if you do that.

You know, one of the issues that I see is that, you know, this is political, obviously, the CGT thing and the negative gearing thing. And the whole affordability thing, when you think about it, is highly political. And the investor bashing has been going on for a long time.

And the Greens obviously love investor bashing. And...

It's sort of putting this forward as if this is going to solve the problem is really cheating the electorate. It's really, and it's kicking the can further down the road again, because it's like, you know what, going to have to wait a while before we work out that it didn't work.

And while we're waiting to see if this is going to work, because we all believe it's going to work, isn't it? Then we're not doing anything else that needs to make this work. So how do you see that sort of roll out depending on what changes are made?

Well, that's it. I mean, it's going to take a while for any proof of the success or failure of this policy to come to fruition. But it's almost, I think a lot of governments will go, okay, we've done that. We've tackled that. Nothing else to do here.

But then they're going to sit back and wonder, well, why aren't we getting any new housing built? Why is the market still really expensive? Why are vacancy rates falling even lower? And then, yeah, and rents are continuing to rise.

And then, you know, you're going to get three or four years down the track and they're going, oh, okay, well, that didn't work. We have to roll it back. We have to think of something else.

But I think the challenge is that certain political parties in Australia think that no one should make a profit. Everything should be owned by the government. The problem is I'm a firm believer that the government should build more housing, but

everything the government does costs a lot more money because they want to gold plate everything. And they can't deliver housing at the moment cheaper than what the private sector can. And what the private sector is delivering it up is a very high price as well.

And that's because you're a developer, you take on significant risk. to go and start a development, you want to be remunerated for that risk. So people are looking for a 20% margin and by the time the project finishes, they might get 10%, but they've put a lot of capital up.

They've taken on a lot of risks to do this. And without investors in this market, it's going to be even riskier for developers to go ahead with these projects as well.

But surely governments could actually deliver cheaper. I mean, for starters, they own a lot of land. And secondly, they don't have to be building these, you know, we're back to granite benchtops, aren't we? Because we don't use Caesarstone.

But, you know, we don't have to build with the finishes that the private market expects. You don't have to have double tube bathrooms. You don't have to have parking in the same building even. Like, look at the Nightingale model. You know, that's a...

not government, but that's proving that you can actually strip back costs in construction and provide a more affordable housing, right? And so governments could do that if they wanted.

Yeah, they should, but they don't seem to be willing to do that. I think, you know, it was social housing. It's now all become community housing providers. And they do a good job, but they struggle with access to capital.

They're competing for sites with people that are private developers that have a lot deeper profits. But as you said, the government's got a huge amount of land that they could be using. I mean, they're selling off all this defense land.

Like, wouldn't it make sense to do a PPP on some of this land and deliver affordable housing instead of going to private developers and saying it has to be 15% affordable? Because that just doesn't stack up for them.

but actually build some themselves.

They already own this land. They could do it cheaper. They could do a lower, more affordable grade of property, but there just doesn't seem to be the willingness to do that, unfortunately.

Yeah, Cameron, it's going to be interesting to see how this plays out. I think it's obviously six weeks time or whatever it is to the sort of budget. I mean, it's at a time though when consumer confidence, I mean, I think it's as low as 1973.

So in my living lifetime, I won't go around the room, but in my living lifetime, that is the lowest it's ever been. I mean, what's your take on that?

Yeah, I mean, I think consumer confidence measures are more about people's expectations of interest rates these days, which probably speaks to where we are as a society with our debt in housing.

But I think it's interesting that consumer sentiment last week was lower than it ever was during the pandemic, lower than it ever was during the DFC. But I think it's also because this is snatching people in the face, right? They've seen their petrol price go up $1, $1.50 a litre overnight.

They've seen that the RBA has lifted interest rates twice, and the expectation is that there's going to be another three interest rate increases on that. I mean, I certainly think about it. Okay, petrol prices have gone up, but what does that mean?

It means, well, if this goes on, food prices are going to go up because everything's shipped around by diesel trucks and diesel is a lot more expensive than unleaded petrol is. So I think people are starting to make those connections and going, okay, unless this can get resolved,

This is really going to hit me quite hard on the hip pocket and I'm going to have my mortgage going up. I'm going to have inflation high. I'm going to have everything costing more. So I think it's really spooked people quite significantly, quite rightly too.

I think too, because this seems to be a bit of a new world order out there, even going to Trump. You know, you've got some pretty crazy reasons for going to war and there just seems to be no accountability, no guardrails anymore. It's like all the rules have been thrown out.

So I think there's a lot of reasons why people are, you know, apart from their own hip pocket nerve, it's like, God, this isn't going to end in a way a war would normally end, perhaps. You know, it's like, this is...

And you think about our Black Swan events, you know, what we've had, the GFC, COVID, and potentially this, we don't know yet what's going to be Black Swan, but that's all in the space of COVID. less than 20 or actually include 9-11, right?

So in 25 years, we've had three black swan events. Now I am old enough to remember the 25 years before then. And I can't remember any black swan event.

Oh, there was the, you know, Black Friday, the stock market, but that only affected really the people that were in the stock, you know, like that didn't affect everybody. I don't think quite the same way. Am I being naive and thinking that we've had more shocks in the last 25 years than normal?

Well, we haven't had big wars like they had back in the 50s and that, but it does seem like there's more black swan events happening. And I mean, COVID was probably the biggest one because no one really saw that happening.

Potentially this one we should have seen happening given who's in charge in the US at the moment. But yeah, it seems like there's no real plan. There's no real... way that this is going to end. And I think it's got consumers really nervous quite rightly as well.

I think everyone would just like things to calm down for a bit.

I don't think it's going to though. I think we just have to get used to uncertainty. I think that's just the way the world is now. And so, but yeah, at the same time, the impact on consumer confidence is quite stark.

Well, I think the other thing to think about here is like the GFC, yes, interest rates were high and the RBA had the ability to cut rates, but inflation is still really high. And if this rolls on, inflation is going to get worse.

So it's not like even if the economy slows, which potentially if this rolls on, it does,

I don't think the Reserve Bank's necessarily going to be in a position to cut rates or cut rates as aggressively as they did in the GFC, because we're still going to have this inflation problem of potentially staring down the face of stagflation, which would obviously be horrible.

And for the housing market, it could be really detrimental. We talk about generally prices haven't fallen too much when we've had a downturn.

But if we have a downturn in the economy, unemployment starts rising and inflation is still at 4% or 5%, the Reserve Bank's not going to really be in a position to cut interest rates like they were in the GFC and like they were during COVID.

So for me, I think that's the biggest risk.

And we haven't used the word recession yet, but perhaps we should.

Well, I mean, if you role play it out right, so let's say there is a recession and you're higher inflation and interest rates have to stay high. This is just the irony of our property market, right? We've got 11 million dwellings. say $4 million of those are paid off.

I mean, they don't care about higher interest rates. They get actually a better return on their cash. A lot of them have got kids. And yeah, the kids are struggling with their mortgage, but maybe they'll give some money to the kids to keep paying the mortgage.

It's not sort of this, maybe they've got quite a small mortgage. I mean, if you've got a $300,000 mortgage on a million dollar property, even if rates go up, you could release buffers and get you through it. And the last thing they want to do is sell.

And so I think there's always these like doomsday scenarios that sort of, you know, we can play out and absolutely it would hit you hard if you had a huge mortgage and people who had those mortgages find it really hard to keep them.

Unfortunately, though, the problem with inflation as well is if you did have to sell, inflation actually wipes debt away every year, right? Actually, you know, a million dollar mortgage with high inflation is only a $950,000 mortgage next year and it's $800,000, $900,000 the next year. And so

the real people who lose out in those markets are the people who haven't got assets. And two, the people who have to sell out of assets who can't afford then to go buy back in because they couldn't basically ride that wave. But it actually drives prices up.

It actually drives wages up, which will then in time when interest rates come back down, it actually will drive borrowing capacity up. And then it will actually drive prices higher if you can hold on. And I think that's a

It's a bit of a funny world, that scenario playing out, but I don't think it's a doomsday for the property market.

I think it would be in areas that have got high debts, a lot of new estates, a lot of young families in those markets, or a lot of investor-driven markets would absolutely be smashed because the investor's got a lot of debt. But typical homeowner markets that are very established

it's only a very small number of people who'd be smashed and those wouldn't just hit the market at once. And often they have access to intergenerational wealth or other assets.

And so it'd be a flight to safety, I feel, a flight to holding these good assets and money falling in, obviously those other markets. Is that sort of your take on this as well?

I mean, I think there'd be definitely pockets where we did see some big corrections. I mean, we saw that in the GFC, we saw that. But I think the other thing as well is, you project that forward.

Like if interest rates stay higher for longer, we're going to get a lot less new housing being built as well. And that's then going to exacerbate the issue.

So when interest rates do eventually come down, prices will take off again because we've got this insufficient number of houses because higher interest rates are going to make it harder for developers to continue to build. And we saw this week that Reece Plumbing said that plastic piping is going up 30%.

And it's just a matter of time, I think, until those building material costs start escalating again as well, which means, again, less new housing and tighter rental vacancy rates and the cycle kind of rinse and repeat.

Yes, we might have some weakness at the moment, but then when interest rates come down, prices will start shooting up again.

So with the plastic piping, I mean, plastics are made with petrochemicals, right? So is that purely due to the cost of oil? And it's flow on effect through to other supply chains of other products, other than literally fueling our cars.

Yeah, I think the justification was essentially that they can't make it on shore. They don't have the access to the fuel, the chemicals that they need. So the price is going up. Plus they've got to get it here then too. Yeah, and you've got to get it here.

Cameron, can you hit us with the final property Dumbo? I don't think I've got a new property Dumbo since the last time I spoke to you.

Come on. You're dealing with so many different clients now. You're consulting across the board. I can't believe you haven't come across something.

What about a consulting client that came to you and you thought, what the hell is going on here?

No, I haven't had any of those. So I think last time I was here, I said my property Dumbo was just selling out of properties that I knew I could hold on to because it seemed like a good idea at the time.

And looking back now that I should have held on to them.

Yeah. Yeah. It's a funny one. Thank you. It's been great chatting again. Really appreciate your time.

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