12 May 2017

Turnbull federal budget could wipeout Townsville property owners


Image: Cartoonist, Dave Pope
The Turnbull-Morrison federal budget could wipe out many property owners who are hanging on to their investment properties in the Townsville district by the skin of their teeth, enduring sustained cash flow and equity declines over the past 5 years.

Not to mention the property owners (investors and owner-occupiers) whose fate has already been determined, falling victim to the steepest economic and property decline in financial terms in local recorded history.


Many are local residents that have lost their jobs or businesses, foreclosing with the banks or filing for bankruptcy. The highest occurrence of bankruptcy across the entire country has been experienced in Townsville.

Significant numbers of property owners are living from hand to mouth constrained by the debt imbalance. They are incurring losses from which negative gearing and a reliance on taxation refunds are their only salvation.

Despite the Property Council of Australia's (PCA) influence on this budget, the threat at the next election of a more extreme left-wing policy of reducing or eliminating negative gearing, has become a haunting possibility as the country strives for more revenues.

Green and left-wing extremism are likely to swing ordinary voters against the rise of Trumpism and Turnbullism. More anti-business and anti-corporate campaigns like Getup's malicious campaign against Adani coal is an ideology with heavy domestic and international support.

Although a seemingly senseless policy to any economist, a change of government, could be the armageddon for property owners if the Townsville economy continues to dance so far out-of-step with national economic trends and federal fiscal policy makers.

Also, Townsville governance organisations threaten the investment pipeline of the City in the short term, as the Turnbull government has a deep thirst for the "City Deal" mega data deposits from the Internet of Things (IoT) system. Under the contract by Mayor Jenny Hill, the "no data, no deal" is setting Townsville Enterprise up for restructuring or imminent redundancy.

The federal budget announcements targeting big-ticket infrastructure and taxation concessions using superannuation and negative gearing for managed funds to address housing affordability in Sydney and other capital cities is a dumb policy. This is really irresponsible on Townsville North Queensland given the recent and ongoing pain and suffering.

Despite Townsville Enterprise foolishly appealing for more new housing development to meet projected population growth, in other words increasing supply, North Queensland and Townsville districts do not need a housing affordability policy at the forefront of the public agenda when business investment and jobs are what is needed the most.

Instead, a more prudent priority for Townsville district is to seek microeconomic solutions such as the Tax Increment Financing (TIF) scheme, as proposed by the PCA. This is backed up by the Northern Australia Development Facility, with strong and robust relationships, with leading boards and executives of large enterprise both domestically and internationally.

Apart from births, migrations, and immigration, the focus on value-add industries securing property for development in Townsville's Council district, is Townsville's only leverage under the "City Deal" contract, to attract significant federal and state government investment.

The New Residential Land Sales and Supply chart clearly shows the surplus land stocks in Townsville districts.




In his address to the media, the Treasurer Scott Morrison said, "it's not a silver bullet – nor is it intended to be", referring to his federal budget and the media anticipating a fix all budget.

Ironically, this is exactly what this budget is. A silver bullet for property owners being put out of their misery if these measures strike to achieve more housing affordability in a market plagued by asset value declines.

Unemployment rates in Townsville are at 11 percent and the broader economy of regional Australia is hurting from the downturn in mining activity and substantial increases in energy prices.

The centre-point of the budget, being that it addresses housing affordability, could move the sentiments of distressed property owners and buyers to protest and disrupt the political will of what is perceived to be a puppet's play.

This federal budget reaffirms the concerns of local representatives that the Federal and State governments are capital city-centric. They are driven by votes instead of delivering "a fair go for all Australians", which Mr. Turnbull promised in his preamble to this budget.

The Turnbull-Morrison federal budget will go down as the most politically safe budget in coalition history. In fact, many commentators are saying it is a labor policy budget with terms like "centralist budget" and "not traditional liberal".

The Liberals are fully funding social programs such as the National Disability Insurance Scheme (NDIS) and increasing taxes on the banks.

The banks, of course, have already said they will pass on the cost increases to every mortgage holder in the country. As the big four banks have done in recent times, they are well within their rights to act independently to raise their interest rates and fees.

Once again for Townsville North Queensland, the people are being asked to pull up the smelly socks of bad government leadership. Meanwhile, a liberal government slips into their fresh uncharacteristically labor-like federal budget cotton socks to attract votes from the capital cities and the left-wing media establishment driven by ratings and polls.

Even financial and taxation professionals are labeling the budget as a "good strong budget" as there are no additional personal or small to medium size enterprise (SME) tax increases announced. Superannuation by and large has been untouched. 

Just as the people have grown to expect smoke and mirrors from a political funding announcement, the Turnbull-Morrison duo is being socially responsible and hitting the big end of town just like the Labor opposition policies were proposed to target.

By design or coincidentally, it is likely Bill Shorten has been taken out of play in this budget. Not only in policy terms. But it is effectively the "Bill Shorten execution budget".

Shorten's electability, not just as an opposition leader but Labor candidate in the seat of Maribynong, has taken a direct hit with 127 hectares of defense land in his own electorate in Victoria being made available for 6000 new affordable homes under this budget.

Is Mr. Shorten's political career finished? Mr. Turnbull would hope so, if the cold shoulder he gave him in front of the media the morning of the budget announcement is any indication.

Putting the political undertones aside, what if Sydney, Melbourne or Brisbane had an unemployment rate of 11 percent with a median house price of $337,000 for houses, and $272,000 for units? Would the federal budget be focused on housing affordability? Absolutely not!

The House and Unit Prices chart below demonstrates the decline of values and stable affordability environment in Townsville districts. 







Economic stimulation with tax breaks, grants, and infrastructure investment spending in the regions would be high on the agenda. But not this politically and socially sensitive government.

Its focus is on self-preservation. Obviously seeking to secure the next election with capital city and regional Victoria and New South Wales voters, who are set to benefit from the new $20 billion rail corridor from Melbourne to Brisbane.

With a consolation prize of relatively minor funding, allocated to repairs and maintenance to the Bruce Highway and disaster relief from cyclone Debbie, nothing positive from a Townsville perspective can be said about this budget.

When we look at the median property price for rentals in Townsville, it makes the federal budget's focus on affordable housing look like a joke.

For example, a three bedroom house in Townsville is currently being rented for $290 per week. This is a decrease in the housing price of 6.5% in the last 12 months, with the housing price already starting from a low base and dropping consistently from nearly $400 per week in 2012.

Considering the massive uncertainty in the superannuation sector over recent budgets, the mobile and rental accommodation being so affordable in regional Australia, the elderly are anticipated to snap up the $300,000 per person superannuation top-up option in this budget.

Once again in a Sydney context, this policy might make sense. But in Townsville, adding more supply to an already distressed housing market is like igniting high octane fuel in a fire of despair.

Unless local governments and marketing experts in Townsville and North Queensland target the elderly in the capital city markets by offering comparable or upsize value strategies such as a clean, affordable and healthy tree-change lifestyle, this budget measure is more likely to be detrimental to Townsville's property market.

The likely result is more housing supply as our elderly residents will seek to cash in. This breeds more unhappy owners because the further downward pressure will be put on median house prices.

In addition this budget also, the federal government will establish the housing finance corporation (HFC). From July 2018, the HFC will offer long-term, low-cost finance to community affordable housing providers. Investors are assured to get rental payments from the government with direct deductions from welfare payments transacted to investors.

It's the $1 billion National Housing Infrastructure Facility (NHIF) that is of particular concern in the hands of an inept local government being charged with developing business cases, to win funding and then administering the funds through community housing contractors.

Desperate for new home developments that attract increased revenues, council rates and economic stimulation, the NHIF program in Townsville will have Mayor Jenny Hill and Townsville Enterprise salivating at the mouth.

However, this social housing initiative will be disastrous for incumbent property owners in Townsville based on the accumulated evidence from the NRAS (National Rental Affordability Scheme). The now abolished Labor government NRAS program was a disaster back in 2013, its legacy is still being felt across the City.

Then, NRAS was the catalyst for the sustained fall in rental prices and subsequent fall in sale prices across the City. This combined with softer global commodity prices and carbon tax policies, Townsville's property economy has been impacted by catastrophic losses ever since.

Furthermore, affordable housing investors are being offered a possible 60% discount on capital gains if they build new housing projects with the condition of pricing the accommodation below market prices to low-income tenants managed by a community housing provider.

This is NRAS rebadged! All be it with a 40% less capital write-off, but with a more favourable incentive to control rental cash flow directly from welfare payments or employer direct contributions.

NRAS created a false economy and drove free market prices down just as the combined housing affordability initiatives are now likely to do.

The NHIF is based on the UK model aiming to assist local governments to develop new homes and apartment blocks. For Townsville North Queensland, the combined measures of NFIC and NFC are unfavorable with property prices already falling substantially over the past 4-5 years. NRAS Mark II is what this federal budget is delivering.

But that is not all, a separate Trust is being established by the federal government to encourage both foreign and domestic investors to invest in affordable housing in Australia. 

On one hand, foreign investors leaving properties vacant are being penalised $5,000 in capital gains in this budget, while on the other hand, the government opens up a larger pie for taxation write offs by directing their attention to public housing infrastructure.

In principle, this is a smart measure if it were applied to foreign investors directing their capital into regional manufacturing and new enterprise initiatives that create "value-add" to Townsville's enterprise infrastructure. 

Knowing the influence of Townsville's infamous property development moguls with land to burn (as shown in the New Residental Land Sales and Supply chart above), and a local council habitually grovelling for new subdivision applications, the depth and intensity of the housing affordability measures in the federal budget are bewildering.

To drive the nail in the coffin even further, property owners who claim travel expenses on their tax returns for inspecting, maintaining or collecting rent on their rental properties will no longer be allowed after July 2017.

Consider the fact that over 40% of Townsville's total housing supply are rental properties owned by investors, many travel to Townsville to check on their properties.

With current property yields declining and debt-to-equity ratios increasing, the federal budget is indirectly targeting the 3rd largest contributor to industry output in Townsville's $30 billion economy, this being the "Rental, Hiring and Real Estate" sector at 9.4% (Source: REMPLAN: Dec 2016). This is an industry contributing $2.8 billion per annum to the Townsville economy.

Under prudent management rationale, this budget would normally bring opposition kicking and screaming. But not a whisper from the incumbent Labor representatives in all local, state and federal seats across the Townsville districts.

Patricia O'Callaghan, Townsville Enterprise (TEL) CEO, confirmed in a statement to the Townsville Bulletin that the budget did not address any of the priority initiatives outlined by TEL in their pre-budget wish list. Yet she praised the Smart City Deal initiative and pledged to work with the federal government. 

The property owners and investors of Townsville North Queensland have been left with more questions than answers from this federal budget. With this fresh analysis undertaken by TREN, the property owners and stakeholders of Townsville North Queensland can forge a conclusive understanding of the impact from the federal budget on local real estate investors and owner-occupiers. 

Do you have an opinion about the federal budget? The TREN community wants to hear your story.