Submission to the Productivity Commission Inquiry on First Home Ownership List of tables

Productivity Commission

Chapters

Table 1: House Prices

Table 2: Housing Assets

Table 3: Household Credit Growth

Table 4: Housing Stock and Population Concentration

Table 5: Population and Household Growth

Table 6: Interest Rates, Household Debt and House Prices

Table 7: Rental Yields

Table 8: Restrictions on ‘Negative Gearing’

Table 9: Treatment of Depreciation

Boxes

Box 2

Table 1: Weekly Cash Flows

Box 3

Table 1: Rental Income Cash Flows

Box 4

Table 1: Capital Gains Tax on Sale Price of $651,558

Table 2: Net Effect of Taxation Treatment

Table 1: House Prices
Percentage change from trough in house prices*
Nominal Real
From trough to: From trough to:
March
1989		 June
2003		 March
1989		 June
2003
Sydney 101.4 143.7 77.0 106.7
Melbourne 60.2 150.5 40.8 112.4
Brisbane 46.2 121.8 28.5 88.2
Adelaide 18.2 98.8 3.9 68.6
Canberra 25.4 98.5 10.2 68.3
Perth 89.9 65.2 66.8 40.1
Hobart na 63.6 na 38.8
Darwin na 28.0 na 8.5
Australia 73.6 128.2 52.6 93.6

Source: REIA
* Increases are measured from the time of the trough in the national real house price series (March 1987 and March 1996 respectively). The timing of the troughs in real house prices varies across individual cities.

Table 2: Housing Assets(a)
Per cent of household disposable income
1980 1985 1990 1995 2000 2002
Australia 218 221 259 283 351 462
Canada(b) – 234 239 259 264 267(c)
Japan(b) 380 397 680 468 419 408(c)
Netherlands 204 160 180 234 392 395
New Zealand 162 228 251 311 319 352
United Kingdom 91 148 245 213 331 403
United States 162 168 169 160 174 188

(a) Owned by household sector. Household income includes unincorporated enterprises.
(b) Figures refer to non-financial assets, which include consumer durables as well as dwellings.
(c) 2002 data refer to 2001.

Sources: ABS; Bank of England; Netherlands Bureau for Economic Policy Analysis; Datastream; OECD; RBA; RBNZ

Table 3: Household Credit Growth
Per cent
1996 to latest(a) Year to latest
Australia 14.8 20.6
United States 8.4 11.0
Japan 2.3 3.7
Germany 5.2 2.8
France 5.2 6.4
United Kingdom 7.4 9.1
Canada 6.6 8.1
Spain 17.0 13.3
New Zealand 9.8 13.3
Sweden 7.5 9.6
Netherlands 13.5 3.5
Finland 7.6 11.8

(a) Average annual growth

Sources: IMF; national sources; RBA
Table 4: Housing Stock and Population Concentration(a)
Houses Detached houses Share of urban
population in two
largest cities		 Share of urban
population in
medium-sized cities
Per cent of stock
Australia 85.6 76.5 54.2 0
Canada 66.4 55.9 42.7 20.4
France 56.2 na 48.8 13.0
Germany(b) 45.6 31.0 20.1 21.8
Italy na na 29.3 16.8
Japan na 59.2 19.1 8.4
New Zealand(c) 83.0 73.0 66.0 0
Sweden 45.7 na 61.1 32.8
United Kingdom 80.7(d) 25.6 17.8 4.1
United States 66.7 60.6 16.7 9.7
(a) The United Nations defines urban population as residents of cities with populations 100,000 or greater, and a medium-sized city as one with a population between 500,000 and 1 million.
(b) Housing stock data for West Germany only.
(c) Detached house data refer to Auckland.
(d) England only.
Table 5: Population and Household Growth
Average annual percentage rate
1950s 1960s 1970s 1980s 1990s 2000–2002
Natural increase(a) 1.4 1.2 1.0 0.8 0.7 0.6
Net Immigration(a) 1.0 0.8 0.5 0.7 0.4 0.7
Population 2.4 2.0 1.5 1.5 1.2 1.3
Households(b) 3.7 2.8 2.4 2.0 1.8 1.9

(a) Percentage point contribution to growth.
(b) Annual growth between closest census dates; 1950s is for 1947 to 1961. Figure for latest period is an ABS estimate for 2000–2001.

Source: ABS
Table 6: Interest Rates, Household Debt and House Prices
1983–1987 1997–2003 June quarter 2003
Mortgage interest rates (per cent)
– nominal 13.3 6.9 6.55
– real 5.2 4.4 3.6
Household debt (per cent to household income) 44.9 100.9 134.0
Of which:
– owner-occupier housing 29.6* 59.3 76.0
– investor housing 5.2* 24.3 36.8
House pricesˆ (ratio to average household income)
– REIA measure 3.0 4.6 6.1
– CBA/HIA measure 2.9** 5.2 7.3
* Figures shown are for 1990
** From 1984
ˆ Detached houses, capital cities.
Table 7: Rental Yields
Per cent
Australian Property
Residential Property[1] 3½
Commercial Property[2]  
Industrial 9
Office 8
Retail 9
International Property – Residential
United Kingdom[3] 7½
United States[4] 8
Canada[5] 9½
1. Gross rental yield on houses (Real Estate Institute of Australia).
2. Net rental yield (Property Council of Australia).
3. Average gross rental yield in England and Wales (Paragon Mortgages Buy-to-Let Index).
4. Estimate from industry sources.
5. Median gross rental yield on two-bedroom apartments in Toronto (Royal LePage Survey of Housing Prices).
Table 8: Restrictions on ‘Negative Gearing’
Australia No restrictions.
Canada Losses on a rental property can be offset against all other forms of income, provided that the losses do not arise from depreciation (capital cost allowance) charges. In calculating whether a loss has been incurred, non depreciation costs must be deducted before depreciation costs.

For rental losses to be deductible against other income, the taxpayer needs to satisfy the ‘reasonable expectations of profits’ test. Historically, this test has required the taxpayer to be able to demonstrate that the rental property will produce a profit within a reasonable number of years. Recent court decisions have, however, effectively weakened this test.
The Netherlands Negative gearing not possible. Taxation of investments is based on an assumed yield of 4 per cent.
United Kingdom Losses on a rental property cannot be offset against non-rental income. Instead, they must be carried forward and deducted from future rental income.
United States Losses on a rental property cannot be offset against non-passive income if the taxpayer's gross income exceeds US$150,000.* Instead, they must be carried forward and deducted from future profits from ‘passive’ income.

For taxpayers with a gross income of less than US$100,000, rental losses of up to US$25,000 can be claimed against other income, provided the taxpayer ‘actively participates’ in managing the property. For taxpayers with incomes between US$100,000 and US$150,000, the maximum rental loss able to be claimed, provided the active participation test is satisfied, is reduced by $0.50 for every dollar of income over $100,000.
* This limit applies to married couples, and is halved if each person files separately.
Full negative gearing is permitted if the taxpayer meets the ‘real estate professional’ test. This test requires the taxpayer to perform more than 750 hours of property-related work during the year, and more than half of all services performed during the year were in property businesses in which the taxpayer actively participated.
Table 9: Treatment of Depreciation
Rate for Buildings Rate for Fixtures and fittings Other details
Australia

2.5%

(straight line depreciation over 40 years)

5–20%

(straight line)

Rental property buildings can be depreciated in Australia provided they were built after July 1985.[1]

Depreciation is fully deductible against non-rental income and reduces the cost base for calculation of capital gains.[2]

Canada

4%

(declining balance)

20%

(declining balance)

Rental property buildings can be depreciated on an accrual basis using the declining balance method.

Depreciation deductions cannot be used to create or increase a rental loss. Where depreciation is claimed it reduces the cost base for calculating capital gains tax.

The Netherlands not applicable not applicable Taxation of investments, including rental properties, is based on an assumed yield of 4 per cent.
United Kingdom 0% 0%

There are no depreciation deductions for ‘residential’ rental property buildings.[3]

For properties that are rented furnished, a deduction of 10 per cent of rental income can be claimed for wear and tear. The cost of replacing fixtures and fittings is deductible for non-furnished rental properties.

United States

3.64%

(straight line depreciation over 27.5 years)

20%

(either declining balance or straight line depreciation allowed)4

As in Australia, rental property buildings can be depreciated on an accrual basis using straight line depreciation.

Depreciation charges that lead to an overall tax loss can only be used to offset tax payable on other income if negative gearing is allowed (see Table 3). Depreciation deductions reduce the cost base for calculating capital gains tax.

1. For buildings built before 1985, only those used for short-term accommodation for travellers and non-residential buildings are depreciable.
2. The impact of depreciation deductions on the cost base for capital gains differs if the property was purchased before 1997.
3. Furnished holiday letting accommodation does not count as residential accommodation.
Box 2 Table 1: Weekly Cash Flows
Rent $269
Rental expenses $92
Interest payments $508
Cash flow (before tax) −$331
Depreciation deductions $184
Taxable Income −$515
Reduction in tax on other income* $250
Out-of-pocket expense $81
* Assumes that the ATO approves the investor's application under Section 15.15 of the Taxation Administration Act to reduce tax withheld from other income.
Box 3 Table 1: Rental Income Cash Flows
Year Rent Interest Rent − Interest
1 $10,000 $22,440 −12,440
10 $12,489 $22,440 −9,951
20 $15,987 $22,440 −6,453
30 $20,464 $22,440 −1,976
40 $26,196 $22,440 3,756
Box 4 Table 1: Capital Gains Tax on Sale Price of $651,558
Treatment Cost base after
depreciation		 Calculated
Capital Gain		 Tax Rates Capital Gains
Tax
UK $430,000 $221,558 $221,558 @ 0.2425 $53,728
Canada $334,500 $317,058 $221,558 @ 0.2425
$95,500 @ 0.485		 $100,045
Australia $334,500 $317,058 $317,058 @ 0.2425 $76,887
Box 4 Table 2: Net Effect of Taxation Treatment
Treatment Benefits from depreciation deductions Capital gains tax (−) Net effect
Reduced tax over
10 years		 Interest earnings
(after tax)
UK $0 $0 $53,728 −$53,728
Canada $46,320 $5,753 $100,045 −$47,972
Australia $46,320 $5,753 $76,887 −$24,814