Callen Dendle: Every meaningful financial decision comes down to a considered move: the right structure, the right timing, the right tax advice before you act, not after. Welcome to The Considered Move, the podcast from Andersen in Australia. Over this series we work through the tax and advisory questions that matter most, whether you are running a business, looking after family wealth, or advising the people who do. I'm Callen Dendle, National Technical Tax Director at Andersen, and I'll be guiding the conversation. Callen Dendle: With me across the series is Cameron Allen, Chief Executive of Andersen in Australia, who brings the firm's view to each conversation and turns the technical changes into what they mean in practice. Joining us today is Richard Temlett, National Executive Director of Research at Charter Keck Cramer, one of the most widely quoted voices in the Australian housing market, whose work turns property data into the calls developers and investors actually need to make. Callen Dendle: Today we are talking about property, and where the pressure is following the Budget changes. The question we are hearing a lot, in lots of different versions, is what the negative gearing and capital gains changes mean. Is the property market going to turn? Has it already turned? And where should I be moving? That is where we are headed today. But first, let's start with the lay of the land. Cameron, could you take us through a highlights package of the changes in the Budget? Cameron Allen: Thanks, Cal, and welcome, Richard. It's great to have you here. The property reforms are really two reforms working together. From 1 July 2027, negative gearing for residential property is proposed to be limited largely to new builds. At the same time, the capital gains tax (CGT) discount would continue for new builds but otherwise be replaced with indexation. For older stock, negative gearing is effectively off the table. Existing investors are largely grandfathered up until the date of the announcement, but future investors face a much different landscape. Cameron Allen: I'd also like to touch on the existing build to rent rules and the MIT changes, and I know Richard will have some information to share on those. But the real issue is not really tax. It is more about whether investor behaviour will change, and that will have the flow-on effect for developers and for the property market more generally. Callen Dendle: So these are some pretty significant tax changes, but as you say, the real impact is how they flow through to the property market. Cameron, you look at what has changed in the tax rules, whereas Richard, you are looking further downstream at how that affects the developer or the end investor. Where do you think those two views are starting to line up, and where are they diverging? Richard Temlett: These changes, in my view, and certainly in the view of almost everyone I have spoken to in the industry, are some of the biggest in the last 10, 20, even 30 years. There is a lot of uncertainty out there right now, as there always is when changes of this scale come through. The devil is always in the detail, and we still need to wait until some of these changes are fully legislated so we can analyse that detail and truly understand what is going on. Richard Temlett: To answer your question, what we are looking at very quickly is this. Depending on whether you speak to the developers, the financiers or the sales agents, it comes down to understanding the particular asset class or sub-asset class, whether it is an apartment or house and land, and understanding who the buyer is, whether an investor or an occupier. A lot of these changes, at a high level, are probably well intentioned. We know what the intention of the government is, but they carry a number of unintended consequences that are likely to flow through. Richard Temlett: Investment and development decisions need as much certainty as possible. At least we have dates for when everything is likely to start or change. That is the first important thing, because people right now are asking whether to put their investments on hold until then. As we have seen with other announcements, when certain dates arise you get either a pull-forward or a push-back of demand, because investors are for the most part very smart or well advised, and they will make their decisions before or after those deadlines. Richard Temlett: There is still so much uncertainty about what the carve-outs will be, so it is quite difficult to answer fully. At a state level the government has done a good job with planning changes, but tax sits at the federal level and it is very nuanced. One takeaway I would encourage listeners to keep in mind is that when you read media headlines saying the property market is going to crash, or that investors are going to leave, that is not correct, or at least not necessarily correct, because it is always submarket specific. Richard Temlett: The advice we are giving is to do your detailed due diligence, because what we have found is that there are winners and losers. Certain sub-classes will be the beneficiaries of these changes, build to rent or house and land, for example. There will be losers too, for example mum and dad investors, and a number of them were already leaving the housing market before these capital gains tax changes, because of other legislation put in place. In certain markets that will continue, because people cannot negatively gear any more. Richard Temlett: So it is hard to line everything up and say where it is all aligning. With respect to governments, I don't think they truly understand how the housing market works. I don't mean that in a condescending way. It is much more sophisticated than people give it credit for, and it is not something that changes overnight, particularly when you look at demand and supply. Demand can change very quickly. Overnight, people can decide to purchase or not purchase. Supply takes months or years to build. Richard Temlett: That is probably the largest misalignment right now. If you have buyers who are not making a decision, you cannot get pre-sales for projects, you cannot get the funding to build them out, stock does not get built, and then prices or rents increase. That is what is happening now. The government is starting to stress, because auction clearance rates are falling off a cliff. Some are turning around and saying it is because of interest rate rises and the war in the Middle East. It is difficult to unpack, with four or five huge metrics changing at once. The cash rate has a huge impact on the market. The war in the Middle East and the broader geopolitical uncertainty are huge for uncertainty. Then you have these changes overlaid. It is difficult to say specifically what percentage change or impact any one of them has had. Callen Dendle: It's never easy to say it is one driver or another. Cameron, from your perspective, and the client base you are talking to, who is feeling it first? And do you have a view on Richard's point about the lag between the tax change and its implementation, and how that is playing out at the client level? Cameron Allen: It's an interesting one. Clients are sitting back and assessing. They are not necessarily making decisions. But to Richard's point, there are many different drivers: interest rates, the cost of building, the war in the Middle East, macro and micro. Tax will influence behaviour to some extent, and that has a flow-on effect, because a lot of developers are dealing with trading stock. It is a different proposition for them, but at the end of the day it is part of their supply chain. If they don't have the customers and the tax changes are driving that, that is not good. So we can see things stalling. Cameron Allen: Then there is the way the changes have been targeted at existing property. The question is whether people will exit those investments, or retain them, because it is essentially going to be grandfathered. If you were in a negatively geared property up until the Budget date, 12 May, you are all right and you can continue. But a lot of these rental properties are not big portfolios. There are exceptions, of course, but usually it is one or two, and usually it is a mum and dad investor. So it remains to be seen whether these changes will determine the market. That is really a supply consideration. Importantly, it is about whether the conditions are there to allow developers to create new housing that meets demand, and the national crisis these changes have been developed to address. Tax is part of it, but it is not the whole story. Callen Dendle: It's not the only reason anyone will make a decision. Cameron Allen: No at all. Richard Temlett: Just to build on that, as we were talking I realised that a lot of the work I do, and the advice I give clients, comes down to this, and it is another message for everyone listening today: you need to understand your target markets, and then target your target markets. I say that all the time. What do I mean by that? If you are selling to a buyer, or you are doing a commercial office development and you have a tenant, that is your target market. These changes have a real impact on the target market, particularly the buyers or renters, whether residential or any of the real estate asset classes. So the first change will be on them and their behaviour. Richard Temlett: It is a very well-made point that these taxes often distort buyer behaviour. We are already seeing it on the ground. There are examples of buyers in the house and land market saying, fantastic, I can purchase a house and land package and get capital growth in the land, so I am going to proceed. First home buyers are also beneficiaries of some of the additional incentives in this Budget. So house and land packages have been a beneficiary of these changes. But it always comes back to who your target market is. Who are the buyers? Who are the investors? Their behaviour can change very quickly. That is the demand side, very elastic, and it has changed very quickly. The first point in identifying and mitigating risk is to ask who we are targeting, and how we anticipate they will behave in response to these changes, linking back to the asset class. Richard Temlett: The next segment of people to be affected are most likely the developers, because they are the ones carrying the risk and making a decision about whether to proceed with their projects. There are certain asset classes, as I said, like house and land packages, or build to rent, which is carved out. The end users, the renters, are less affected there. But the developers, and the overseas or local capital, have received very positive signals. They have clarity. They know they have been carved out of these changes so they can proceed. There may be other issues to grapple with, but MIT has been changed in their favour, which makes it much more attractive. Hopefully GST is also changed, because that will make the financial equation for build to rent more viable and the economics will start to work. Social and affordable housing is another winner, because there are still incentives in there that work. Richard Temlett: Then there are the end users, the mum and dad investors, and even first home buyers, who with interest rate rises, or reading the headlines, are asking why they would take advantage of the first home owner grant or the government guarantee on a 5 per cent deposit when they are worried that house prices may fall 10 per cent and they will be in negative equity. Even if it is only a media headline, most buyers are not fully educated. They are not all property analysts, I accept that. They will freak out and say, these are some of the biggest purchases of our lives, we are not going to make this decision overnight, and we are terrified of reading a newspaper headline about going into negative equity. Richard Temlett: As a result, across all markets, there has been a slowdown and caution in buyer behaviour. It is most pronounced in Victoria, because of overall weak sentiment, which is such a shame. But even in the stronger performing markets, whether Brisbane or Perth, there has been a slowdown in certain sectors where buyers have said, let's take a deep breath and see what is going on. So it is that uncertainty, and that buyer behaviour, that we really need to understand. When we get more line of sight on that, finance will start being able to make those risk-adjusted decisions. Callen Dendle: In terms of the segments you mentioned, are there pockets still performing well through this? Is it downsizers looking at certain types of higher end apartments, or particular development sites that, in Victoria for example, are still performing well? Not everything is down. Richard Temlett: That is another important finding from our research. There is no one size fits all, and no blanket statement that a given change means a certain outcome for all asset classes. There are sub-sectors or submarkets within markets, and some of them are performing well. As I said, house and land, build to rent and affordable housing are the ones that have performed really well. Richard Temlett: In terms of the downsizer or right-sizer market, unfortunately, even in Melbourne, that has slowed dramatically. Those downsizers don't necessarily have mortgages. They have paid off their detached dwelling. But their dwelling is the same price as it was a few years ago, and the housing market is very much linked to where the cash rate is. Even the downsizers, who are incredibly cautious and conservative and want to protect their children's or grandchildren's inheritance, are asking what they do now. A lot of those right-sizers are also investors, either through their super funds or in their personal capacity. They are saying, I need to reassess everything, because perhaps I have left the workforce, I need to right-size, and I need to work out what is happening with all our investments. My parents are in that position, asking what they actually do now. If we have shares, an investment property, money in term deposits, where are we going to be taxed the most or the least? So again it comes back to getting appropriate tax, legal and property advice to understand what is going on. Richard Temlett: In terms of the assets that have performed best so far, those are some of the beneficiaries. The one that has struggled, and will continue to struggle, is build to sell apartments. Investors can still buy new product, but build to sell apartments are strata titled and don't typically have land attached. You get capital growth in the land, whereas an apartment is much more of a yield play. A lot of people in the sector don't understand that. The conventional wisdom is that property doubles every seven to 10 years. The reality is that certain types of property, like house and land, or land, do double, but apartments don't. The value is in the structure, which after a number of years reaches functional obsolescence. Richard Temlett: So the apartment market stands to struggle, because even if a new buyer goes into a new apartment, it loses that new status after a period, and in the secondary resale market those buyers don't get the same tax advantages. There is discussion about that, and we are starting to work on a piece to try to quantify what that discount might be. It is obviously a very difficult thing to do. A lot of the financiers have said, all right, these apartments, if they get purchased by an investor, typically after three to five years leave the rental market and go to owner occupiers anyway. People probably haven't understood that, and it is not widely known, but investors historically would purchase that product, get tax depreciation benefits, take advantage of the incentives, and then exit after a few years once it had been fully depreciated, and it would go to the owner occupier market. Richard Temlett: Build to sell is one that will continue to struggle. It didn't need any more challenges, given the cost of delivery, interest rates, and the perception that they are all poorly built and going to leak. The government's intention is good, to try to get new supply mobilised by directing investors, and thank goodness they didn't remove those incentives for new supply. But it is much more nuanced than I think the government has fully understood. Cameron Allen: The question I have, Richard, is whether what we are seeing now means the Great Australian Dream of home ownership is slipping, and more people are just going to rent. Richard Temlett: To answer your question, the Great Australian Dream is still alive, but what we have realised is that there is more than one Great Australian Dream. Again, it goes back to fully understanding the housing market. To unpack that a little for our listeners: you have different people at different phases of their lives, wanting or needing different forms of accommodation. A first home buyer who is not yet married and has not yet had a family doesn't need to live in a five-bedroom house in a school zone. A downsizer, or a couple where one of them passes away, also doesn't need to live in a five-bedroom house in a school zone. There need to be different types of dwellings in the same area to allow different household types to live there. We are already seeing that in some of the best urban renewal areas in Melbourne, Sydney and Brisbane, where you are getting more diverse forms of dwellings so different household types can live in them. Richard Temlett: Overlay that with the fact that in our largest capital cities, Melbourne and Sydney, 80 per cent of population growth is migrants. I'm a migrant myself. They bring their living preferences with them. A lot of them do aspire to a house and land, whether a house and land package or a detached dwelling, but not all of them do. Some, particularly if they have come from North America, would prefer to rent, because that is what they have done overseas, and they put their money into the share market. Richard Temlett: So the Great Australian Dream is changing. Some of it is a forced choice, where the reality is that it is extremely difficult to get a 20 per cent deposit. Some of it is preference, because renting suits certain people at certain points in their lives. And so that Great Australian Dream is changing. Callen Dendle: Is there any planning reform coming through? Cameron Allen: The second part of this gets back to housing affordability and the cost of building new stock. Is that going to throw more into the mix and make affordability even more problematic, as well as increasing supply, which is the intended target of these measures? Did the government think this would be better received when they announced these measures, and that it would stimulate things more quickly? That probably goes against all the observations you have made earlier, but it seems to me there is reduced activity, certainly in the short to medium term. Richard Temlett: Taking a step back, for a number of years we have been saying we need planning reform, tax reform, immigration reform and construction reform to resolve the housing crisis. At the state level the government is starting to do that with planning reform, and we have seen huge announcements to try to get supply mobilised. With planning there is still a lot of resistance from NIMBYism, but at least it is heading in the right direction. Tax reform is probably the hardest, because it is so unpopular and you can typically only really do it from a budget surplus. Richard Temlett: But to your comments about construction, I anticipate we are going to see reform in that space too. I have spoken with the Productivity Commissioner, Danielle Wood, and that entity has put out a report on how inefficient the construction sector is. We are still building houses the same way we did 100 years ago, so it is ripe for disruption. New South Wales seems to be taking the lead on construction reform to support things like volumetric and modular construction, which is a huge step forward, because it will decrease the costs of delivery, which right now have exploded because of wars overseas, the cost of materials and labour shortages. The federal Budget has tried to do that too, with certain changes to legislation and the adoption of modern methods of construction. But more needs to be done with building and construction to work on that variable in the delivery of housing. Callen Dendle: If you were to suggest one sensible next move for people to think about in the next month, as an investor or as a developer, what would you suggest they need to be doing as these changes play out over the next 12 months? Richard Temlett:: I have already said this to my team. Yes, you can read the media headlines and articles to try to form your own views, but do not read them and let other people's opinions become your own, because they may not be correct. Right now there is still so much in the media that is not correct. So even if you are reading that, go and seek proper legal and tax advice to truly understand the asset class and your target buyers. Learn a little more about that, because there are opportunities that do exist if you can understand some of that buyer behaviour. Richard Temlett: In the next month, that is exactly what I would be doing, particularly with everything still going through the Senate and, as you are already hearing, there may or may not be carve-outs for certain things. That makes things confusing right now. So I would be proactive rather than reactive, and not make knee-jerk decisions unless it is absolutely critical, and sometimes it is. It is about speaking to people who specialise in tax and the legal side of things, and understanding what these changes might mean. To be honest, that is the first thing I would do. Richard Temlett: Some of that advice coming back will be that we need more clarity, and we need to understand what the legislation says. That is the reality. Right now, almost every day you open the paper and the government is saying it is considering carving this out, or maybe doing this, or maybe not doing that. It is difficult to give advice, even though we are doing it right now. Richard Temlett: So what are we doing in that space? We are running scenarios. What if this happens? Because there is a lot of finance available right now, chasing a return, chasing investments, and it doesn't know where to go. It is quite amazing. When I fly to Sydney and speak with a lot of the private credit players, or even the big banks, they say they have all these buckets of capital but don't really know where to place it right now, and they can't wait another couple of months. Some have literally said that, and I have said, all right, let's work together, look at your risk-adjusted returns, and do a worst case, best case and most likely scenario in the short term until we get more certainty and clarity. That is what the market needs. Private capital will then price the risk accordingly. Richard Temlett: It will say, we know what the rules are, and hopefully they don't change. One of the most catastrophic things the government could do is make retrospective changes, because that completely undermines investor confidence. I have had a number of people, whether the Big Four or private credit, say that if that happens, how are we supposed to invest in Australia? It reminds me that there are capital gains tax changes that may well affect development sites in Melbourne and Sydney that have been held in families, perhaps as industrial businesses now being converted into residential developments, that are caught by these changes. That again is a disaster in my mind. It undermines investor confidence, because how can you make decisions if the government is going to change its mind after a number of years? So I hope the government does that as little as possible, if at all. We need that certainty to be able to move forward. Callen Dendle: Cameron, from your perspective, are there any critical client discussions that need to happen next month, or is it a longer view from a tax perspective? Cameron Allen: With anything in property, whether old or new, you should recalculate the after-tax economics before making an acquisition. But the point I will make is that property should still be judged primarily on fundamentals. Tax should support a good investment, not create one. I would also say that this uncertainty is not good. There are a lot of unintended consequences, and carving out as you go, just to appease the electorate, is not necessarily a good thing. So I hope common sense prevails, and that there is sensible consultation with people like Richard and with industry, because I can see this becoming very challenging for all parties. Callen Dendle: Richard, from your perspective, or Charter Keck Cramer's perspective, are there any final thoughts or a message you would like to leave listeners with? Richard Temlett: There are a number, but the one I will leave everyone with is this. We do a lot of work for government clients, and what I have said to them is that the federal government has taken a step, and hopefully it is a step in the right direction, or at least a well-intended one. For these measures to be successful, the state governments have to come to the table, because of the way Australia is structured, particularly when you look at the housing market and who is responsible for which tools and levers. If the state governments don't come to the table, a lot of these measures will be badly undermined, and it will end badly for us, the voters. Richard Temlett: If the state governments do come to the table, and I commend the Queensland government here, the example I would point to is the infrastructure funding package in the federal Budget, a couple of billion dollars to support infrastructure works in greenfield estates. When I speak with industry and do the research, that is a huge issue. Those land lots need to be appropriately serviced before developers can proceed, sell them and get people into these estates. In Melbourne, Sydney and Brisbane in particular, a lot of them do not have these connections readily available. It sets up the preconditions for success in the housing market. That infrastructure funding package is linked to state governments also coming to the table and supporting the delivery of housing. There is a residential activation fund in South East Queensland where they have started matching some of the federal government's figures, which will then allow development and supply to occur. And that is fantastic. Callen Dendle: And that is where we'll leave it. Richard, thank you very much for joining us. If today's conversation raised something close to home, the considered move is to talk it through before you act. Your Andersen adviser can help you work out what it means for your situation. A quick note: everything we discussed today is general in nature and not advice for your circumstances. If this was useful, please follow The Considered Move and pass it on to someone who might enjoy it. You'll find the series at andersen.com and on LinkedIn, YouTube and your other favourite streaming services. I'm Callen Dendle from Andersen in Australia. Thanks for listening.