Property taxes are about to fall! (and why this is bad news)

Auction clearance rates are falling, sales volumes slowing, and prices are coming off the boil in the formerly red hot markets of Sydney and Melbourne. This is bad news for State Governments who have increasingly relied on property taxes to fund a growing list of infrastructure promises from transport to schools to hospitals. It could also be bad news for the Australian economy because one of two things could happen: falling forward property revenues will see infrastructure spending curtailed (even though we continue to have an infrastructure deficit) or we will go into more debt to keep the tap on even when the tank’s running dry. Neither is a great outlook and let’s hope it doesn’t happen.

The remarkable thing is just how dependent State Governments have become on property taxes – chiefly stamp duty on transfers. (Remember, this was the tax they promised to abolish in exchange for GST revenues. Paul Keating once said: “Never stand between a State Treasurer and a bucket of money.” He was so right).

Nationally, total State Government taxes on property (according to the ABS data) have soared from around $30 billion per annum in 2009 to over $50 billion in 2016-17. That figure will probably climb for 2017-18 and could even approach the $60 billion mark, given how white hot Sydney and Melbourne were in 2017 and into the first quarter of 2018. Imagine if a slowdown in markets (mostly a fall in volumes) brings that revenue back to even 2013 levels… that would be a $20 billion per annum hit to state budgets. Ouch.

NSW is going to feel the pain. Its last State Budget announced a raft of infrastructure projects which had the country weeping in envy. Their stamp duty revenues alone grew from $4billion per annum in 2011-12 to $9billion in 2016-17. Property tax dependency also grew – from around a third to nearly 45% in the same period. A sustained fall in sales volumes combined with a fall in prices could see $3billion per annum wiped from future state revenues.

Victoria doesn’t fare much better. With both stamp duties and land taxes steadily climbing, their annual revenues have swelled by over $3billion per annum. Their property tax dependency has grown from around a third to over 45% of all income. Nearly one in two state tax dollars comes from property. That’s going to take some delicate fiscal balancing if revenues fall on the back of a slowing property market.

Queensland has less to lose. Its market (mostly the Brisbane region) never reached the fever pitch of Sydney or Melbourne. Stamp duties rose by just over $1billion per annum (but I bet State Treasurers had hoped for more). Property tax dependency in Queensland actually fell as other income sources (payroll tax, gaming taxes and motor vehicle taxes) rose faster. Plus, having never overheated, the prospects of a substantial cooling are less, meaning the likelihood of falling forward state revenues tied to a slumping property market are less. So in this case, it’s perversely not a bad thing if property taxes don’t fall in the years ahead?

What would low population growth mean for Australia?

Australia relies mostly on net overseas migration to sustain its rate of population growth. Our population grew by 1.6% in the year to March 2018, or by around 380,000 people. Of this, natural population growth contributed over a third (144,000) while overseas migration contributed the rest (237,000 people).

So what would happen if growing community opposition to population growth – and in particular high rates of overseas migration – meant a slowdown in our population growth rate? The pressure is growing for just such a change in policy, and many in industry fear the worst for Australia – especially property – should our growth rates slow.

To try understand what this might mean, I’ve taken a look at some low population growth countries and also at high growth countries. The data sources aren’t consistent from one measure to the next nor are the time periods the same for each country due to differences in reporting times (and data availability) but the results are pretty confronting nonetheless.

First, some countries with low rates or negative rates of population growth are listed below. Australia is there for comparison purposes only – our rate of population growth easily eclipses this group.

Is there an obvious correlation between population growth and the economy and housing? The answer it seems is no. Japan’s population is shrinking, but its GDP per capita is healthy and on a par with the UK and NZ and certainly among the wealthier of nations by this measure. Its housing, relative to incomes, is on average cheaper than the Australian average (for all major markets… Sydney and Melbourne are of course in a league of their own) and Japan is experiencing housing price growth of around 1.46% - even with a shrinking population.

Denmark also has a very low rate of population growth but a high GDP per capita and modest housing price growth. The Asian tiger economies like Taiwan and Hong Kong have negligible population growth rates but high GDP per capita and in HK’s case, outrageously expensive housing which has been rapidly rising in price.

Canada and New Zealand have rates of population growth that are roughly half ours while their GDP per capita is high by global standards. They also have expensive housing markets and high rates of price growth. (Australia’s high GDP per capital reflects our high value resources exports with a relatively small population, leading many to argue that a growing population only dilutes our prosperity given resource sector exports are not related to population).

Here is the table showing a selection of low population growth countries compared with Australia:

Country	POP GROWTH RATE	GDP PER CAPITA (IMF data)	Housing median multiple (Demographia, major markets 2018)	House price growth (IMF Global Housing Watch, latest for each country)
Japan	-0.21%	$38,440	4.2	1.46%
Russia	-0.08%	$10,608	na	-5.45%
Taiwan	0.17%	$24,577	na	0.69%
Denmark	0.22%	$56,444	na	3%
Hong Kong	0.32%	$46,109	19.4	11.80%
China	0.41%	$8,643	na	3.18%
United Kingdom	0.52%	$39,735	4.6	1.94%
Switzerland	0.69%	$80,591	na	-0.86%
Canada	0.73%	$45,077	4.3	5.53%
New Zealand	0.79%	$41,593	8.8	4.78%
Australia	1.60%	$55,707	6.6	3.02%

So economic prosperity and housing markets are not, on this sample at least, connected to high rates of population growth. There are nations very similar to ours with much lower rates of population growth but which are equally prosperous and with equally healthy (or too healthy?) housing markets.

What about nations with higher rates of population growth than Australia? Again, the list is not convincing. Without even looking into their housing markets or economic measures, the list of nations with higher rates of population growth than ours gives little comfort to any link between high rates of population growth and economic prosperity.

I’ll leave you to peruse the list below (which lists all countries with population growth above our 1.6% per annum) and choose where you’d rather live. 

In the meantime, where does this leave us? Do we still need “a big Australia?” and is high growth essential to our prosperity? Personally, I have always believed we need a larger population to give us a critical economic mass across a range of measures and for many different reasons. Equally though, it seems odd in a country so large as Australia to concentrate nearly all growth in mostly two cities and ask them to bear the infrastructure burden to cope with that growth while other regions perfectly capable of absorbing growth with less stress are overlooked.

It’s going to be an interesting and ongoing debate and opinions will not be in short supply. Pro-growth and anti-growth proponents will dig their trenches and wage their wars. The evidence (also known as truth) is - as the saying goes - the first casualty in war and this will probably be no different. But hopefully a quick look at the evidence might leave some of us better informed. Balanced arguments, while possibly overlooked in the short term, may just find an eventual foothold in public policy debate about a very important topic.

Now here’s that list of countries growing faster than Australia, in descending order:

1	South Sudan	3.83
2	Angola	3.52
3	Malawi	3.31
4	Burundi	3.25
5	Uganda	3.2
6	Niger	3.19
7	Mali	3.02
8	Burkina Faso	3
9	Zambia	2.93
10	Ethiopia	2.85
11	Tanzania	2.75
12	Benin	2.71
13	Western Sahara	2.7
14	Togo	2.64
15	Guinea	2.61
16	Cameroon	2.56
17	Iraq	2.55
18	Liberia	2.5
19	Madagascar	2.5
20	Mozambique	2.46
21	Rwanda	2.45
22	Egypt	2.45
23	Equatorial Guinea	2.44
24	Nigeria	2.43
25	Senegal	2.39
26	Sierra Leone	2.38
27	United Arab Emirates	2.37
28	Congo, Democratic Republic of the	2.37
29	Afghanistan	2.36
30	East Timor	2.36
31	Gaza Strip	2.33
32	Yemen	2.28
33	Qatar	2.27
34	Bahrain	2.26
35	British Virgin Islands	2.25
36	Mauritania	2.17
37	Ghana	2.17
38	Djibouti	2.16
39	Turks and Caicos Islands	2.16
40	Central African Republic	2.12
41	Congo, Republic of the	2.11
42	Gambia, The	2.05
43	Jordan	2.05
44	Oman	2.03
45	Cayman Islands	2.01
46	Somalia	2
47	Luxembourg	1.98
48	Anguilla	1.97
49	Namibia	1.95
50	Solomon Islands	1.94
51	Gabon	1.92
52	Chad	1.86
53	Guinea-Bissau	1.86
54	Vanuatu	1.85
55	West Bank	1.84
56	Cote d'Ivoire	1.84
57	Singapore	1.82
58	Belize	1.8
59	Guatemala	1.75
60	Sao Tome and Principe	1.72
61	Papua New Guinea	1.71
62	Algeria	1.7
63	Kenya	1.69
64	Comoros	1.64
65	Sudan	1.64
66	Tajikistan	1.62
67	Honduras	1.6