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Ben Kingsley Blog post by Ben Kingsley

RBA Rate Decision – June 2016

Today the Reserve Governor and the Board met and they kept interest rates on hold. So the cash rate remained at 1.75% leading into the federal election on July 2. So there’s a couple of things that I want to talk about.

Firstly is negative gearing. We know that the Liberal Party is not making any changes to negative gearing but the Labor Party is proposing changes to Negative gearing. Even though we are apolitical, it is important to know what these changes will do to the economy as a whole. Now, one in four jobs in this country relates to property. So it has been a very important part of the transition that we’ve been making away from the mining boom and it has been the reason why we’ve seen good and strong economic growth. I’ll get back to that in a minute. But in terms of the policy, what Labor is proposing is changes to negative gearing where by it will only be available to new properties. And they are also going to change capital gain provisions which will means that you will pay more tax if you sell your properties. Now the problem with this policy is, it is going to encourage the building of high and medium density accommodation which is not necessarily attractive to both owner occupiers and also tenants. In addition to that it may also attract mass building on the fringes of the city which is going to affect property prices. So it is my belief that this type of policy will actually see values of properties drop in that particular categories and it’ll make land close to the city very expensive as people look to knock over existing homes to build townhouses or duplexes. So it’s not a good policy and that’s why we don’t support changes to negative gearing.

If you are an investor, it is important to have this conversation with yourself and your family around what this could do your household’s wealth and to also make sure that you can see the long term challenges of such a policy.

Now, I want to get on to the economy. The reason why changes to negative gearing could impact the economy. As mentioned before, one in four jobs are linked to property. So we are seeing this transition occur and we’ve actually seen some good GDP numbers. For the first quarter of 2016, we’ve got growth in GDP of 1.1% which lead to an annual increase in the GDP of 3.1%. But even though that’s a great top line number, if you dig down deeper into the layers, we’ve got some problems. What GDP measures is actually revenue. It measures the amount of revenue generated over that quarter period and increase on the increase before is how you get those GDP increases. Now it’s all good to have revenue increasing but what we’ve got is a challenge. So we’ve got all these exports, we are exporting iron ores and gas but the values of these commodities have come down. So even though we might be generating a greater money or revenue, what happens is the income or the profit margin that we are generating is actually lower. So it doesn’t actually benefit the economy in the sense that the tax revenue is being received by government. In addition to that, we also saw that in the last GDP quarter numbers is that business investments is continuing to fall and that’s coming back to, and again I’m sounding like a broken record here but it’s coming off the back of the mining CAPEX that is no longer occurring. We are not seeing small business or medium sized business pick up that slack because profits are falling. We saw the last round of profit announced on the share market. We saw the margin of the profits are actually slowing down and that also leads to no income growth. So we are not seeing income grow dramatically.

We’ve got this situation where we need to see three critical things moving forward. We need to look at business sentiment and confidence, we need to look at consumer confidence and finally, we need to look at consumer spending because what if the consumers aren’t out there spending, this is when the deflationary number comes in. The RBA doesn’t want to see a deflation because what it means is basically the economy is going backward. Confidence is going to slow and people would spend less. This also comes back to the negative gearing point. If people feel like the value of their home is going to be less it’s called the ‘Wealth Effect’. What it means is, household would say, “I’m not feeling confident about my position, my job and the wealth of my household so I’m not going to do the discretionary spending that I was doing before.” So it has a flow on effect.

Now this is dangerous for the short and medium term of our economy and we could be heading towards, potentially a recession. I know that’s a big statement but I reckon there’s a chances that we might be in recessionary pressures. What that means is two negative quarters of GDP in the next 12 – 18 months. The Reserve Bank is very conscious of that and that’s why there is commentary around a further rate cut in August or September. This comes back to this whole point around the economy which is not as strong, people aren’t that confident and if you want to put a sledge hammer in to that, changing negative gearing is going to do exactly that where confidence will drop dramatically. Because once people work out that these high and medium density high rise, apartments and house and land packages on the fringe of town aren’t worth as much in terms of the investment returns anymore, it’s going to dry that confidence up and dry that building up. When you’ve got all the developers, HIA and associations like the Property Council, all saying it’s a bad idea. People might say that’s is a self-interest but the reality is, they know. If you think that developers who are going to get a boom in terms of a so called ‘boom’ if negative gearing was all going to new stock and think this is going to be great for us, they are all saying no because this means the secondary market is going to be a disaster. It’s going to be like buying a second hand car where the value of the car drops dramatically as soon as you drive it out the lot. So we think that it’s a poor policy in this particular circumstance. We think there does need to be some changes made around a broader spectrum on taxation and we would say that negative gearing needs to be in that mix in terms of the overall scenario of tax reform. But on its own and this policy is actually not a smart policy at all. That is why we are anti the changes to negative gearing. So we’ve got a big decision to make on the 2nd of July in terms of how the economy is going to move forward. We are transitioning and so far, we’ve transitioned fairly well but those changes and those sort of playing with the economy can have a dramatic effect on our economic prosperity and that is going to flow on to household’s wealth. So it’s a big decision to make, I hope you make a smart decision.

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