Dial M for Mistake

The other week, we went along to a CPR for Babies course run at the local family resource centre. It was pretty good, right up until the end when the instructor suddenly went off the deep end in discussing the emergency 000 and 112 services available on mobile phones. I was pretty outraged by the mistaken and outdated information that was being taught as fact, including the myths that:

  • You need to dial 112 if you want to call emergency services when your phone is locked, or out of your operator’s coverage (but within another operator’s coverage).
  • If you dial 112, then the operators will be able to pin-point your exact location – the instructor gave the example of being found within the Chadstone car-park.
  • Sometimes when you dial 000, the operator will ask you to ring back using 112 because of that feature.
  • “They” don’t tell you about 112 because they don’t want to overload the system.

You might have gathered that I think that all of this is complete bollocks. In fact, 112 is simply the European standard number for emergency services (and hence supported on all GSM mobiles), and you should almost always simply use 000 when calling emergency services in Australia.

The facts are:

Note that 112 does not work on fixed or VoIP phones. The only cases when dialling 112 on your mobile phone is going to be worth a try in Australia are when 000 isn’t working for you and (i) the phone was bought overseas, or (ii) the phone is really old. Even in those cases, 112 may not work either – unfortunately a mobile phone network should not be relied on as the sole means of getting help in an emergency.

The Summit – or perhaps a long way from it

2020 Summit logoI have been pretty interested in seeing the outcomes of the Australia 2020 Summit, and even put my own submission in. And in trying to find some detail on how the first day of The Summit went, I came across Andrew Bolt’s blog posts on it.

Andrew Bolt is pretty amusing, and strongly stands in the conservative camp. But I could not believe what I was reading – it sounded like the first day was a complete waste of time. How could this have happened – surely it was professionally facilitated? Well, I then checked out the the video of the first day’s plenary highlights.

It wasn’t as bad as I had feared, but it was pretty bad. Almost everyone put on camera struggled to communicate their thoughts or articulate what initiatives are looking likely. Most seemed to be in awe of the celebrities and powerbrokers also present. We got a lot of motherhood statements, but they genuinely seemed to feel uplifted by being a part.

However, the Summit’s not for them, it’s for us. Here are the initiatives that were mentioned by people in the video:

  • Put indigenous people on the boards of cultural organisations.
  • Establish a Ministry of Culture (don’t we have one already?).
  • Draft a national Cultural Policy (isn’t that it’s job?).
  • Mandate a national Creative Curriculum.
  • Draft a national Action Plan for Social Inclusion.
  • Provide one-stop-shops for local communities for housing and communal support.
  • Establish a Community Services Commission, like the Productivity Commission.
  • Establish a National Sustainability Commissioner, like the ACCC.
  • Draft a national agreement/treaty with indigenous peoples.
  • Set a policy of continuous disclosure for the government, particularly online.
  • Draft a Bill of Rights.
  • Become a Republic.
  • Establish a “rights based labour mobility programme” to enable Pacific peoples to work in Australia.

Alright – that last one isn’t like the others. It is actually an idea that sounds new.

I understand that each of the ten groups is meant to identify one “big idea” and two or three smaller policy initiatives that could be worked on following the Summit. So, that’s up to 40 actionable items in all. The list above is for 13 items, so they still have 27 to find.

I really do wish them all the best, but if the above represents the results from Day 1 then there’s still a long way to go to fulfill the ambitions of the Summit by the end of Day 2.

Why negative gearing is not going away

Attacking the practice of negative gearing appears to have become a bit of a sport lately. On the 14th March, an article in the Herald Sun stated the government “should look at ways to overhaul an extremely generous system of negative gearing”, and on the 20th March, The Age ran an opinion piece entitled “It’s time to apply the brakes to negative gearing”.

I could speculate that the attention property investors (and their tax deductions) is due to the combination of increasing rents (driven by low vacancy rates) and high property prices (driven by a long stint of housing affordability). However, the cause is not important, and what is important is understanding why negative gearing is an effective housing subsidy.

In the Taxation Statistics  2005-06 publication from the ATO, we can see that:

  • There were 1,561,630 people who declared rental income on their personal tax returns.
  • 66.5% of those had a taxable loss (net return income less than zero) from their rental properties.
  • There were 2,146,685 property schedules completed for those tax returns (note: where multiple people own a property, multiple schedules may be completed for those properties).

And in the Census 2006 QuickStats for Australia from the ABS, we can see that:

  • 27.2% of occupied private dwellings were rented, which corresponds to 2,063,947 dwellings. (Pretty close to the 2,146,685 figure above.)

While in the Australian Social Trends 2007 from the ABS:

  • There were 394,000 first home buyers in 2003-04.

So, from that barrage of stats, it should be clear that the number of renters outnumbers the first home buyers (in any one year) by over five to one, and the number of renters combined with the property investors outnumbers them over nine to one. Why compare with the first home buyers? Because they are really the only housing segment that is disadvantaged by negative gearing. Beneficiaries include renters, existing home owners, investors and the state governments (through higher land tax and stamp duty fees).

Renters have their rent subsided by the ATO, though the tax deduction on costs provided to their landlords. What other business but property rental is regularly undertaken at a loss? It should be admitted the “obvious” effect of removing the deduction – rising rents – is unproven.

I would expect it to be likely that rents would rise, both from scarcity due to fewer landlords willing to operate without such a deduction, and from those willing to be landlords increasing their rents to maintain their investment yields. However, back in 2003, the ANZ’s Saul Eslake analysed the last time negative gearing was removed (by Paul Keating, between 1985 and 1987) and commented that:

It’s true, according to Real Estate Institute data, that rents went up in Sydney and Perth. But the same data doesn’t show any discernable increase in the other State capitals. I would say that, if negative gearing had been responsible for a surge in rents, then you should have observed it everywhere, not just two capitals.

So history is inconclusive. And, rents aside, although you might think that renters would benefit from being able to escape the rental market, many of them don’t want to. A survey by AAMI published on the 3rd April indicated that 39% of renters are “happy to rent and have no plans to have a mortgage.”

Existing home owners benefit from rising house prices since while prices go up, their morgage does not. Although when they come to buy another house, they will need to pay higher prices, they will typically sell their old house into the same market. Also, at some point, they will exit the housing market, and benefit from selling their house without having to buy one.

And that brings us to the conclusion. The group of people able to remove negative gearing are democratically-elected politicians. It’s highly unlikely that such a person will remove a policy that benefits so many, particularly when it’s a Labor government and renters are one of groups that benefit. True, it was a Labor government that removed it last time, but that also means they will clearly remember the embarrassment of having to reinstate it.

Earth Hour vs. Daylight Savings

Next weekend the world will follow an Australian initiative called Earth Hour. At 8pm, on March 29, many cities (including Australia’s mainland capitals) will turn off lights in order to raise awareness for energy conservation. An hour’s worth of energy will be saved.

Ironically, the following weekend, most of those same mainland capitals (including Melbourne) will follow a world initiative called Daylight Savings. At 3am, on April 6, the same hour will be repeated. An hour’s worth of extra energy will be spent.

Of course, different hours equate to different amounts of energy, but Earth Hour is primarily a symbolic activity. It’s about sending “a powerful message about the the need for action on global warming”.

I think it’s a nice gesture, and encourages candlelight dining, which improves the taste of food. But the timing is delicious also.

Rock the Vote

2020 Summit logoPerhaps I’m naive about what can really be achieved, but I felt the need to provide a submission to Kevin Rudd’s Australia 2020 Summit. Here’s what I wrote:

Over a quarter of a million Australian citizens work for the betterment of this country, but are denied the right to participate in our democracy.

According to the ATO, in 2004-05 there were 280,325 people under the age of 18 years who submitted tax returns. These people earn tax dollars for the government, and yet have no say in how it is spent.

In 1973, the voting age was lowered from 21 years to 18 years. It is time to lower it again, and directly connect our government to the youth of today and the future.

No taxation without representation” was a political catch-cry in 18th century America, and was the philosophical basis for the American colony to reject the rule of their country from the disconnected British parliament. Here in Australia, we have a section of our population who still do not have that representation, over 200 years later.

Although around 4% of the Australian population is aged between 15 and 17 (according to the 2006 Census), many more than the entire state of Tasmania, they cannot influence the election of governments that directly impact their lives through:

  • Funding of schools
  • Educational curriculum
  • Driving age restrictions
  • Smoking/drinking age restrictions
  • Youth wages and working restrictions
  • Entertainment classifications
  • Juvenile justice system
  • in addition to laws, policies and taxation rules that apply equally to all Australians.

This is essentially a moral question: is it right for the voting population’s government to impose rules on productive, yet non-voting, Australians?

This is particularly relevant in the context of the Australia 2020 summit, where it is the younger Australians who are inheriting the consequences of the decisions made today. Decisions made by elected officials that they did not have a say in the election of.

It is true that the constituency of a democracy is only those who vote. We have given the vote to Aboriginals, and Australia led the way in giving the vote to women. How can it be just to with-hold the vote from other productive citizens?

In the last couple of decades, as trading hour restrictions have been loosened, and the cost of living has increased, youths in this country have increasingly taken up jobs in establishments such as supermarkets, fast-food outlets and service stations. This is clearly different to 1950s Australia, and requires different laws that recognise the importance of our younger citizens.

The specifics of the changes to the Commonwealth Electoral Act are for the political process to decide on. The specifics will include the precise age, whether voting should be voluntary, and whether it should be connected to the employment situation.

I trust that the above has made a compelling case that we are doing wrong by a significant fraction of our population, and that our democratic government is all the poorer for it. Fortunately, the solution is simple: lower the voting age.

“Taxation without representation is Tyranny” – James Otis (1725-1783)

Where have all the people gone?

It turns out they’ve all gone to Queensland.

The above is from the ABS Year Book Australia, 2008 and, sucker for stats that I am, I’ve been checking it out. This diagram actually refers to the interstate migration from 2005-06, and so it shows some of the migration to W.A. that drove the property boom that happened around that time.

Amusingly, every state is sending a significant number of people to Queensland (in particular, NSW). But there isn’t a significant number of people moving to NSW from anywhere. If people weren’t having babies, or migrating to NSW from overseas, it would be going backwards.

Funds and Property

I’ve written about it before (“I am not a nutter” and “That’s not a Housing Affordability Crisis”), and I’m about to write about it again. Today I received a letter from my accountant (who, admittedly, is more savvy than the average accountant when it comes to property) confirming, and even encouraging purchase of geared property in a super fund. I quote:

If you have over $120,000 sitting in Superannuation you can now buy property through your superannuation fund … the SMSF makes the first installment of 20% deposit plus stamp duty/ legal costs plus the first year’s interest repayment.

And I have also come across a company called the Quantum Group that is setting up a similar structure for superannuation funds, calling them property warrants. So, there’s also an option for people whose accountants aren’t quite as savvy.

The residential property market has been performing quite well recently. For example, the average annual growth of median residential property prices in Melbourne over the last ten years has been 10.65% (according to this article, reporting Residex figures). If a property purchased at $450,000 (the current Melbourne median property price) grows at the average figure of 10.65% annually, and is purchased at a gearing level of 80% (as in the example from my accountant), then the growth is considerably higher. Ignoring tax, rents and interest payments, the $90,000 invested would become equity of around $880,000 after ten years – that’s about 25% annual growth. Not bad, and will be hard for super fund investors to ignore.

I would expect that once superannuation funds start investing directly in residential property, the big players in Australian superannuation will want to address the demand by packaging up property so that it is easy to invest in, i.e. indirect investment in residential property, or funds of geared residential property which a SMSF can buy units in. The catch will be that while the SMSF area is regulated by the ATO, the wider superannuation funds industry is regulated by APRA, and they are not going to want to see superannuation funds gearing up and putting people’s pensions at risk. The gearing cat is already out of the bag, so perhaps all they can do is cap it at a more conservative level, of say 60% (this would have produced a return of around 18% in the example above).

It is worth considering what sort of property funds the industry would be looking to set up. Generally they look to the blue-chip end of the market, so in property this would be houses or whole apartment blocks (rather than individual apartments) and in well-established suburbs such as Hawthorn, Toorak and South Yarra in Melbourne, and their equivalents in Sydney and possibly Brisbane. Such property typically goes for multiple millions of dollars, but I would expect that people living in such houses would prefer not to rent it. I don’t really know – I’ve never been in that position myself! Innovation in rental / purchase contracts will probably be required to give residents in such houses the certainty, control, or capital gains that they require. However, where there’s money, there’s incentive to fix such problems.

So, initially, I expect to see the big funds going after apartment blocks, then eventually houses, then when supply is exhausted in the blue-chip areas, moving into neighbouring areas or the other cities in Australia. A side-effect of this staggered buy-up is that these funds may not be particularly diversified. There could be a “Toorak houses” fund, or a “South Yarra apartments” fund. It may not be a bad thing – it doesn’t matter if a particular fund is not diversified as long as someone’s overall portfolio is diversified. And it could enable people buying that type of property in that type of area to invest in something that tracked the investment performance of their dwelling without having to invest in (i.e. renovate) the dwelling itself.

Is this complete speculation, or have similar things happened overseas? Well, to be honest, no. Real-estate Investment Trusts (REITs), as they are often known overseas, tend to invest in hotels, office blocks, shopping centres, and sometimes apartment blocks. Although I’m no expert, I’m not aware of big REITs buying up houses. So, this is all in the realm of speculation. But the fact that it hasn’t happened overseas should not be an indicator that it won’t happen here, as Australia tends to lead the world when it comes to putting real estate into retail funds. According to Wikipedia, the first real-estate trust was launched in Australia in 1971.

Anyway, for the everyday investor, who can’t pony-up a few million to buy a house in Toorak, the impact of competition for real-estate from the major fund managers is likely to be limited. You’re more likely to be bidding against someone running a SMSF. Unfortunately, the number of SMSFs is growing rapidly.

Finally, one thing to watch out for will be unscrupulous operators. There are already dodgey property marketers who prey upon interstate investors, e.g. Perth people buying overpriced property in Melbourne, or Melbourne people buying overpriced property in Brisbane. This will give them one more tool to exploit: that vulnerable people can invest their super into a dodgey scheme, and possibly not realise for many years that the property that they’ve bought was massively overpriced because the whole thing is so hands-off. Hopefully people know not to invest in something they don’t fully understand. It’s a vain hope, I know.

Blame it on the rain

A week ago, Australia voted in a new government, and there are many theories going around as to why. Politicians and commentators are pointing to leadership issues with the Liberals, interest rate rises, the Tamar Pulp Mill, WorkChoices legislation and the Kyoto Agreement. Well, I’ve got another theory: it was due to water restrictions.

The the last twelve months leading up to the election on Saturday November 24, most states of Australia introduced legislation that made life of “working families” tougher, resulting in people needing to get up earlier to water their gardens, lawns dying off, and cars getting grubbier. Water is seen as an environmental issue, and the last Federal government was not seen as doing much about the environment. Hence, they got they axe. But let’s look at the data:

City Water Restrictions Introduced When introduced Wash your own car? Water your lawn? Swing against Govt ***
Sydney Level 3 1 Jan 07 Bucket only Hand-held hose or bucket 5.7%
Melbourne Stage 3a 1 Apr 07 No No 5.5%
Brisbane Level 5 * 10 Apr 07 No No 6.4%
Perth unchanged (permanent) Yes Yes 1.7%
Adelaide Level 3 1 Jan 07 Bucket only Hand-held hose ** or bucket 5.8%
Hobart none removed 28 Feb 07 Yes Yes -0.4%
Canberra Stage 3 16 Dec 06 No No 2.0%

* – Brisbane upped their water restrictions to Level 6 the day before the election (November 23).
** – Adelaide allowed limited use of hand-held hose from October 1.
*** – Swing figures from The Age, Saturday December 1.

So, you can see that the two cities (Perth and Hobart) where water restrictions were unchanged, and in fact allowed watering of lawns with sprinklers and washing of cars with a hose, the swing against the Federal Liberal government was the lowest. Also, the city (Brisbane) with the harshest water restrictions, increasing them the day before the election, had the highest swing against the government.

I’d never suggest that elections are simple affairs, decided by a single issue, but this particular issue seems to have had a significant weight, and hasn’t yet received the full credit it deserves in the analysis.

I am not a nutter

My previous post on the possibility of superannuation funds taking out loans to buy property (“That’s not a Housing Affordability Crisis”) has now been shown to be more than the ravings of a complete loony. A mere 6 days after my post, Robin Bowerman, no less than Head of Retail for Vanguard in Australia started talking a similar line. I’m going to quote from his article on “Super changes open the gearing door” from November 16:

… by investing through an instalment warrant structure it means super funds may be able to gear any of the usual investments a super fund can buy … perhaps a residential property for example. The super fund receives all the rental income and gains.

He has based this on a tax office ruling from September 24 on whether and how installment warrants could be bought by SMSF (self-managed super funds), which are regulated by the ATO. This wasn’t something I included in my grab-bag of references, so it adds to the weight that there’s a-change a-foot.

The implications are interesting to speculate about (other than significant price rises for residential property). For example, will we get a whole heap of funds appearing that buy up houses in a particular suburb, e.g. Toorak. Then, instead of parking their money in a bank account after selling their home and before buying a new one, a vendor could put it in such a fund so that it tracks the rise in house prices to help them avoid a movement in the property market in the mean-time.

A good telco analysis

Telstra’s pretty good at internal comms – almost every article or TV story about Telstra gets sent around the company in no time flat. However, it has emphasised to me the amount of confusion that is out there about the current situation with Telstra, the ACCC, the G9 and the Government. It’s not surprising – it’s pretty complicated.

But then I came across an article written by Greg Peel at FNArena that summarised the Australian telco debate all in lay terms. I’d never heard of FNArena before, but it seems that they have people who appreciate the messiness of the current messy situation. Not that I agree 100% with it all, but it’s the best writeup I’ve seen in the mainstream media. If you’re a little confused by it all, I do recommend a read of it.

And recently Greg Peel’s written another piece; a shorter one this time. It basically brings the previous article up to date with the recent government announcement. It will be interesting to see if his forecast comes true.

Anyway, I’m going to be keeping an eye out for his writing in future.