Australian housing bubble risk “overblown” with prices to peak in March 2014: Citi

By Larry Schlesinger
Tuesday, 25 June 2013

Forecasts of a sharp rise in Australian house prices creating a housing bubble are “overblown” new modelling by Citi Research suggests.

Under its expected baseline scenario, which assumes no further rate cuts until the second quarter of 2014, Citi Research expects nominal house prices to rise 3% between now and March 2014 and then start to fall slightly, driven downwards by among other things a slowing Chinese economy, a weaker Australian dollar and reduced Chinese migration.

Even under the most bullish scenario - the cash rate dropping to 2% by March 2014, Chinese growth above 10%, the dollar to remain elevated and the non-FHB loan size to lift significantly over the forecast period – the forecast is for house prices to rise by around 8% from current levels or 5% relative to the peak in June 2010.

“Hardly the definition of a housing ‘bubble’,” say Citi Research analysts Paul Brennan and Josh Williamson, who created the modelling and authored the report.


Under the expected baseline scenario, they say the initial house price increase will be the result of sustained low interest rates which in turn causes increased borrowing.

However, “the downward pressures created by a slowdown of the Chinese economy, lesser appetite for capital inflows as reflected in a lower Australian dollar and reduced Chinese immigration will eventually overtake the upward momentum from positive domestic factors, causing prices to fall slightly” say Brennan and Williamson.

In the short term, they say the main driver for the Australian housing market will be the low interest rate, “which will likely remain low in the foreseeable future”.

“We maintain our view that the official cash rate will remain at 2.75% until second quarter of 2014.

“This implies that the variable lending rate will also stay at current levels over the same period, easing households’ (particularly non-first home buyers’) concerns over mortgage pressures and consequently stimulating the demand for housing.

“We also assume consumer confidence rises gradually later this year. We have allowed for the non-FHB loan size to grow at higher than the historical average rates, which we think is reasonable in response to the record-low cash rate.

“The auction clearance rates in Sydney and Melbourne have been hitting the 70% to 80% mark for the first 5 months of 2013, coinciding with the RBA cutting rates to lows of 3% in December 2012 and again to 2.75% in April this year."

What will be holding back growth in house prices in the longer term are a number of factors, including the “lower growth outlook in China, slowdown of Chinese immigration and reduced appetite for offshore capital inflows associated with the lower Australian dollar as the mining capex boom winds down".

“We expect the nominal house price to peak in March 2014, by which time it will have increased by 3% from its current level," say Brennan and Williamson.

“However, we expect the slowdown in China to flow through to the Australian housing market during 2014, causing downward pressure on house prices.

“Our Chinese economists are of the view that Chinese industrial production (IP) growth will mo...

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Date posted: 2013-06-25 | Comments(0)

Understand different types of rental expenses and their tax treatment

By Michael Laurence
Monday, 24 June 2013

Property investors should:

• Ensure they don’t overlook any of the many expenses that are immediately deductible in the income year of expenditure. These include interest on property loans, repairs and maintenance, insurance and land tax. (See strategy two for our comprehensive checklist.)

• Claim annual deductions over a number of years for the decline in value of removable depreciating assets. (Such items include stoves, blinds, dishwashers, carpets, hot-water systems and air-conditioners.)

• Claim capital works deductions, spread over a number of years, for certain capital expenditure. Capital works deductions are generally claimed for buildings as well as improvements such as adding a bedroom or remodelling a bathroom. (Investors can write-off 2.5 per cent a year of the construction costs for 40 years if construction began after September 15, 1987.)

• Add eligible capital expenditure to a property’s CGT cost base to reduce the CGT eventually payable. Capital expenditure includes the acquisition and disposal costs of a property – such as purchase cost of the property, conveyancing costs, advertising expenses, agent’s commission and stamp duty – and costs of improvement such as renovations. (All capital works deductions already claimed may reduce the cost base when eventually calculating capital gains upon the disposal of the property.)

• It is also possible to claim deductions over a number of years for certain borrowing expenses incurred involving a property loan. These expenses include loan establishment fees, title search fees, costs of preparing and filing mortgage documents, mortgage broker fees and stamp duty on the mortgage. (However, a borrowing expense of $100 or less can be wholly claimed upfront.)

See our eBook on thetop 24 tax strategiesfor property investors.

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Date posted: 2013-06-24 | Comments(0)

Seven rental property deductions property investors are allowed to claim to reduce their tax bill

By Larry Schlesinger
Tuesday, 18 June 2013

Property Observerrecently reported that the Australian Tax Office will write to110,000 property investorsover concerns they may have claimed rental property deductions they were not entitled to claim.

The ATO now has sophisticated data-mining tools that pick up inconsistencies in tax returns compared with previous years,

With around two-thirds of property investors negatively gearing their rental properties, knowing what you can claim is vital.

These are seven allowable rental property deductions:

1. Claim straightaway for interests on loans

Some expenses may be immediately deductible in the income year in which they are incurred. For example, you may be able to claim an immediate deduction for interest on a loan used to purchase a rental property, purchase land to build a rental property, purchase a depreciating asset for the property - such as an air conditioner; or to finance renovations or home improvements, like a deck.

2. Claim straightaway for depreciating assets

Deductions can be claimed in the income year in which they are incurred for the decline in value of some types of depreciating assets in residential rental properties - for example, curtains, blinds, dishwashers, refrigerators, stoves, television sets and hot water systems. However, construction costs are not depreciating assets

3. Claim straightaway for costs to repair and maintain your rental property

You can claim a deduction for the costs that you pay to repair and maintain your rental property. For example, replacing part of the guttering or windows damaged in a storm; replacing part of a fence damaged by a falling tree branch; or repairing an electrical appliance.

4. Claim straightaway for tenancy costs

Tenancy costs such as the preparation of a lease agreement, or costs associated with evicting a tenant are also immediately deductible expenses.

5. Claim deductions over a number of years for assets that are part of the property

You can claim some deductions over a number of years, including the cost of depreciating assets, structural improvements and most borrowing costs. Assets that are part of the property such as stoves, refrigerators, air-conditioning and hot water systems can be claimed over a number of years as a 'decline in value' deduction.

6. Claim deductions over a number of years for assets on construction costs

You may also be able to claim over a number of years the cost of building, construction and structural improvements made by you or a previous owner as a capital works deduction, for example adding a room or constructing a retaining wall or fence.

7. Claim deductions over a number of years on stamp duty and other fees

Another example of expenses that need to be claimed over a number of years is borrowing costs such as stamp duty charged on a mortgage, loan establishment fees and title search fees charged by the lender. If these amounts are less than $100 in total they can be deducted i...

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Date posted: 2013-06-18 | Comments(0)

How Ignoring Depreciation Shoots You In The Foot

You can be forgiven if you’ve heard of depreciation, but don’t know entirely how it works – few do. In reality, it is fairly simple and can dramatically improve your property’s cash flow

Depreciation is the generic accounting term used to describe how an asset declines in value over time and is accounted for with a taxpayers return.

In property investment terms, it is a legislative allowance made under the Income Tax Assessment Act (1997) to recognise the decline in value of the physical asset, during a period where it is used to produce an income.

Depreciation of an investment property is based on its ‘useful life’, or the number of years a property is expected to be in use. Depending on the type of property and when it was built, a property’s useful life ranges from 25 years to 40 years.

Investment properties can depreciate in two ways – depreciating assets and building allowance depreciation.

All investment properties experience depreciation in the first category, more commonly referred to as plant, articles and machinery. Depreciating assets include items such as:

  • Carpet
  • Ovens
  • Cook-tops
  • Dishwashers
  • Clothes dryers
  • Blinds and curtains
  • Air conditioners
  • Heaters
  • Hot-water systems.

For these items, depreciation is based on the acquisition cost of the item, which may vary in value depending on the type of asset. Carpet, for example, can vary in price and quality, and this will be reflected in the depreciation allowance.

Some investment properties also qualify for the second type of depreciation: ‘capital allowance’ or ‘building allowance’ depreciation.

In this case, depreciation is related to the building itself, and is based on the cost of construction of the building rather than the acquisition cost. For example, you might pay $500,000 for a property, with the land portion accounting for $275,000, and the actual building cost being $225,000.

Capital allowance depreciation ranges from 2.5% to 4%, depending on the type of building and when it was constructed.

For residential properties, depreciation on the building is calculated at a rate of 2.5% per annum if construction started after 16 September 1987, and 4% if construction started between 18 July 1985 and 15 September 1987. Residential properties built prior to 18 July 1985 do not quality for building allowance.

For commercial properties, depreciation is calculated at a rate of 2.5% per year if construction started between 21 August 1979 and 21 August 1984, or from 16 September 1987. A rate of 4% applies if construction started between 22 August 1984 and 15 September 1987.

How do quantity surveyors fit in?

Quantity surveyors are one of few professionals recognised by the Australian Taxation Office (ATO) to determine the cost of building components for tax depreciation purposes.

Other professions, such as real estate agents, valuers, solicitors and accountants, are not recognised by the ATO as being able to determine the cost of construction.

Quantity surveyors determine the value of depreciation based on historical data on the cost of construction and the cost of assets. The ATO will not accept cost of constructions based on published area rates, unless the Quantity surveyor uses them only as a guide. The rate of d...

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Date posted: 2013-06-13 | Comments(0)

Crackdown on landlords after surge in claims

The Australian Taxation Office is targeting more than 110,000 rental property owners who have been identified through last year's tax returns as making incorrect claims.

A team within the office known as ''the doctors'' is using sophisticated analytical techniques, including data mining, to identify unusual patterns of claims. It is also targeting work-related expenses.

Rental property deductions have surged in recent years as investors prefer bricks and mortar to shares.

For the 2010-11 year, the latest for which data is available, almost $39 billion was claimed by landlords in deductions, an 18 per cent rise on the previous financial year. Investors are taking advantage of negative gearing, where the interest costs on the loan used to buy the property, and other costs, are greater than the rental income. The shortfall reduces the investor's income on which income tax is paid.


Almost 1.3 million people own at least one investment property. About two-thirds of those with rental income reported a loss on the investment.

The assistant commissioner of client services and assistance at the ATO, Graham Whyte, said expenses can be claimed only for the portion of the year where the property is rented or available for rent. Expenses that cannot be claimed include those incurred while the owner is occupying the property.

The Tax Office is targeting the work-related expenses of 218,000 building and construction workers, and sales and marketing managers, as June 30 nears. It is writing to them because of rising work-expense claims and a high occurrence of incorrect claims in last year's tax returns.

The main problem with work-related expenses is taxpayers not separating private expenses from legitimate work-related ones. Workers should make claims only where the expenses are incurred to earn an income.

Mr Whyte said about $18 billion of work-related expenses were claimed last financial year.

''The ATO focuses on occupations where the pattern is of large or rising claims, as well as claims that do not fit the pattern of a particular occupation,'' he said.

Work expenses claimed incorrectly in last year's tax returns include sales managers claiming for mobile-phone calls based on the time spent at work, rather than for work-related use.

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Date posted: 2013-06-12 | Comments(0)