SPEAKER_01 0:05

Welcome to Brick to the Future. I'm Cam McClellan. I'm here with uh good friend Michael Berrissard. Boys, how are you? Great, Cam. We have got a cracking little series we've got going on, which I I really want to dig into because the old way of investing for many Australians is dead. It is done and dusted, and I think it's going to be a big shock to a lot of Australians. So what I want to undo with this is basically look into what the changes are, which is the crap most people are putting out into the ethos at the moment. So what are the changes? But really, why the government has put these headline changes out, but they've got a big underlying reason they've made these changes, and it's not what they're spruking out in the market in the uh in the media landscape. So we can clearly articulate what that is for people, but more importantly, what their bullshit reasons for change are, but how that's going to affect uh the property market and people's investment because it's very different to what they are masking up. You good with that?

SPEAKER_00 1:05

I th I love it. I think yeah, the uh the budget announcement was one of those things where uh clearly a message has been put out, as you say. Um the the the uh the fear, the media headlines are hyping up around certain things. Yeah, what they're actually doing, and specifically the impact on investors, is not well understood, it's not being communicated. And as we always say to people, when uh there are periods of uncertainty, there is amazing opportunity if you know what's going on and how to take advantage of it. And that's the gap that we're not seeing in the marketplace and that we're trying to help people understand today. So if we think about you know what we're gonna cover as a bit of a bit of a framework, it'd be awesome to get into what is the big picture that people are missing, as you said. What are the policies and what are they actually trying to do? Why supply is still the biggest issue, despite all the tax talk, right? Supply is the problem. What we think happens next, uh, the biggest story that most people are missing, and then the good old ding-dong battle of shares versus property, and how's that gonna play out moving forward?

SPEAKER_01 2:06

Yeah, perfect. My whole goal with this uh is really to piece together and allow people to put the pieces of the puzzle together and then step back and have a very clear understanding of why the government's done this and what the property market's gonna do next.

SPEAKER_00 2:20

Yep. Awesome. So in terms of uh in terms of what people are looking at as a first step, they're focused on the tax changes. The common belief out there is that negative gearing uh is gone uh and the CGT calculation is changing. Now, just like we've always heard in previous elections, they're the blanket statements that get rolled out. That's not true. If you invest in new property or you invest in established property, there are very different rules moving forward. The number one thing, firstly, is that uh grandfathering is in place. What that means is if you owned an investment property prior to budget night, then exactly the same tax conditions that you were receiving prior to then are still in place moving forward. The changing rules only take effect from budget night moving forward. If you buy new property and you invest in something that's actually contributing towards the supply in Australia, which is a big problem, then you still get full negative gearing benefit, full tax benefits on depreciation, and you get really powerful, you actually get the choice on what capital gains tax calculation you want to apply if and when you sell that property in the future. So you can choose between the move to the indexation model or you can choose the 50% discount, whichever one you prefer.

SPEAKER_01 3:38

Perfect, perfect. All right, so let's piece all this together. The uh the policies they're um they're putting out there really trying to redirect people to think it's about fixing the supply of housing in Australia. What's it really about, Carol? Yeah. This one is it I mean, and and let's be honest, on this podcast, for a number of years, we've been saying, or I've been saying that I believe negative gearing should be removed from established property. Yep. Because I I don't see the benefit. Um it's not often the government, you know, do something that uh I actually semi-agree with, um, because most things, you know, sort of overshadow that. What I think people uh they're they're they're waving it around though, and this is what pisses me off, they're waving it around like a hero thing, they're trying to be the champions of Australia and fix housing affordability. They don't want that. And there's some very clear reasons why. Um, so you mentioned it's not on established property. Uh, let's just, you know, a couple of minutes we'll unpack what they're trying to do and why. It takes a couple of minutes. Uh give me five seconds. They're trying to take more money. They're trying to take more money. So why are they trying to take more money? So if we think back and we go X years ago, 1960s, there's 13 taxpayers to every retiree. That's slowly coming down to the point where it's transitioning in the next couple of years, it will be two taxpayers to one retiree. So the government, even though they're shit at managing our money, they've actually got much much less tax to manage and actually get it right. So it is harder, it's a harder job for them to get it right, which pisses me off more when they just waste it. But so that's the problem they got. So the problem is how do they get more tax money to run the comp run the country? Uh so that that's their problem that they've got. Yep. If they if they take away uh tax incentives on buying established homes, now you know yourself, was it 82% of investors buy established property? Yep. What's the amount of uh, you know, for a million-dollar investment property, round numbers, the the stamp duty on that both be that? 50?

SPEAKER_00 5:45

50, 55, 60 grand, depending on the state.

SPEAKER_01 5:47

Yeah, so that's pretty much the the tax that they receive from that. From a new build, about 43% of the cost of a new build is taxed. Now that's just the cost of the build, and we'll and that's from the farmer selling to the developer, the developer uh piecing everything together, the roads, rails, splitting it up into little lots, selling it to the end mum and dad or investor who are gonna buy it. That building of the house, there's taxes they receive. No, that's just that component. There's taxes they receive along the way from all of the workers who earn wages along that. All the materials are taxed, there's you know, um, GST and all those things. I was gonna say, what about the white goods they put in their house? There's GST on that. Absolutely. The white goods, everything that goes along with that, the curtains of you know the carpets.

SPEAKER_00 6:31

The whole way along the whole way through.

SPEAKER_01 6:33

They are picking up along the way. They don't get that on established homes. So they want more money. The two ways they can get that is to dip into Australians' assets like that and go, I want to take more money from the type of assets that make us money. So they encourage new builds by getting rid of any um, you know, decent tax advantage of an established home that forces more people into building new. Uh, the other way is they can tax into businesses. So the capital gains tax, people selling businesses is the really big one that they're gonna you know nail off. So for new people starting new businesses, it's a real slap in the face. You're going, so if I'm a you know an angel investor um wanting to look at investing in a new startup, I've just been disincentivized dramatically for so young Australians wanting to start new ventures, it is not very attractive anymore as someone trying to invest in those, because you've potentially gone from 30% tax to a 47% tax. The other way they can uh increase their tax dollar is by bringing more migrants in and increasing the wage pool, which is what they're doing. So they want property prices to go up, specifically new properties, because the higher the price of new properties go up, the more tax they get from it. Correct. And so so that's where we come into going, all right, sounds fucking great. You're uh incentivising new properties to get built, but you're also restricting supply of new properties because you know it's going to jam the prices up. So they've factored that into the budget. Anyway, I think the uh the thing we need to get into now we understand their problem, the way they can get money and why they've made these changes is what's it mean for the Australian property market.

SPEAKER_00 8:17

I think that the one thing that I would add to that is from a migration perspective, when you look at year after year after year after year, they can talk about what the forecasts are for immigration. Every year they blow it out of the water. Yeah. It's always so much higher than uh the actual is always so much higher than the forecast. And for the very reason that you've talked about, the government has a revenue problem. The way that they make more money uh is to increase the taxes that we've spoken about, plus the income tax on the people. So if there are more people coming into the country and they're working, there's another tax grab in terms of how the government's making the money to solve this problem of the number of taxpayers to pension is dropping down over time.

SPEAKER_01 8:56

And if they restrict the supply with the urban growth boundary around our cities, which restricts the amount of land becoming available, and it takes about six to ten years for them to expand that at any point in time at the fastest rate they can possibly do it, then they need developers actually get on board and decide it's profitable to build those, um, those developments, to add more supply to the cities. Uh so they've got every incentive to restrict that and every incentive to jam more migrants into Australia, not only because they pay more taxes and income, but they then push land and property prices up, which therefore all of those new properties getting built that government make more money on. So they're driving price growth strategically under the fucking false pretenses of trying to help affordability.

SPEAKER_00 9:43

Right. So there if we if we focus on the the policy is pro-supply, uh, you know, take the cape off it, that's that's what they're talking about, um, and favoring new builds. The the real challenge, the underlying challenge, is that housing supply is hard to create. Yeah. And being able to do that is a lot harder than most people realise. So one of the common things that we're hearing is, oh, the government's pro-supply, that's going to mean that there's a whole lot more properties on the market. We know that's not going to be the case. Uh let's unpack, and I think it'd be worthwhile helping people understand why that's the case. And there are a few different components to that. The first is the construction workforce. Doesn't matter how pro-supply the policy is, uh, if we don't have the manpower to be able to build the houses, then AI can't do it. Yeah. You know, we we're going to be constrained moving forward.

SPEAKER_01 10:35

So, how is the government, and this is one of people, it's really important for people to understand, how is the government ensuring there's not enough labor force for residential build?

SPEAKER_00 10:44

By choosing who comes into the country, because with these record numbers of uh immigration they're coming in, just over six percent, six out of one hundred people, actually have the skill set to contribute towards building a house.

SPEAKER_01 10:58

Yeah, a lot a a large portion is uh is healthcare and aged care, um, because we've got a huge amount of boomers going out there. The issue that's gonna screw Australia up in 20 years is when the boomer numbers start dying off, which is you know, we're gonna have a huge amount of healthcare workers that then need to go and find other income streams. I reckon the biggest one why the government is fucking cutting the Achilles heel of Australian the possibility that we could build anywhere near the the amount of housing to handle our current needs, let alone the migration coming in, is because they're not training enough tradies, and any tradee that is trained up, they're putting enough government projects out there for the next 15 to 20 years that there's no way you would go and be a domestic plumber or electrician or builder when you can get three times the amount and work rostered days on, because fuck you know, that's pr uh that should be called rosted days on, not roster days off, and get it paid a sh absolute shit ton of money. The government are therefore taking the labour that is around and putting it on their own uh job sites. We haven't even started the you know the com games and those sort of things. So anyway, you know, Brizzy.

SPEAKER_00 12:08

And I think that that's evidenced by the National Housing Accord. Again, big announcement. We'll solve the housing supply issue and bring 1.2 million homes to market over the next five years. What are we, 18 months into that five-year period, and they're already tracking you know 30% below target? So we know that this is a real uh a real issue. Um if supply remains constrained, Cam, the good old supply and demand thing, uh, what does it mean for prices, uh, especially at the affordable end of the market, and what does it mean for rents?

SPEAKER_01 12:36

Boz, knowing that these headline changes are pro-supply, um, I've known speaking to a number of people, I feel the common mistake that's being made out there is that this will dampen rental prices, it'll pull property prices back and make it more affordable. Um, I want to articulate for people so they really understand the facts of this matter and how these changes have will have an absolute opposite uh flip on this. And so confident a bit my firstborn child that uh that rent prices and property prices are going to climb based on their changes. Talk people through that so they're really clear on why that's the case and what our analytics team to get have put together.

SPEAKER_00 13:17

Great. Lot to unpack here. Uh firstly, budget night, the government came out and said uh two things in particular. First thing, they said that they only expected rents uh to maybe increase a couple of bucks a week as a result of this policy. That is false. Second thing that they said was that they were investing two billion dollars in an infrastructure fund to help bring more land supply to market that was going to create 65,000 new homes. What they didn't say was that the policies that they are implementing are actually going to reduce supply by 30,000.

SPEAKER_01 13:55

That's the fine lines in the budget.

SPEAKER_00 13:57

So what they're doing in the budget papers is basically saying we acknowledge this is it's going to reduce supply in reality. We'll spend 2 billion to cover some of that supply, and we'll only be 35,000 net homes better off for the $2 billion spent. So that's the first thing.

SPEAKER_01 14:13

As a result, just so people understand $35,000 net homes is like a grain on a beach when you're trying to match up the current supply-demand issue we've got currently, let alone the immigration coming in.

SPEAKER_00 14:27

Spot on. Let's say you got for Ease, three and a half people per household. There's 10,000 new families, immigration's running, well over 400,000 people into the country at the moment. So it's a drop in the ocean. Yeah. These numbers sound big in terms of new homes. The reality is they're not enough. Yeah. When we think about this pro-supply policy pushing investor demand towards new, uh, yes, it will uh it will do that. We've still got this housing supply issue that we've already spoken about around not being able to bring that supply to market. Let's have a look at land prices as a result and the land market at the moment. Going back to August last year, we had about 7,000 titled blocks of land in Melbourne. So using Melbourne as the example. Melbourne's the example, 7,000 uh titled blocks of land on the market. Yep. If we look only nine months later, we're down to two and a half thousand title blocks on the market. So in English, what does that mean for people? It means that developers aren't bringing land supplier to market, or at least land in a ready form that we can construct on. Okay, so that's why we know that the housing supply is going to be constrained moving forward. Let's have a look at what's happened in the last three months. The short answer is nothing to be able to help that scenario. Reason being is with the conflict in the Middle East, uh, the number one building material that is increased in price is PVC piping. If you've been through a new estate anytime recently, there's a truckload of PVC piping in the land development. There's a truckload of PVC piping in the early stages of building a house. So what developers are doing, as we know, because we know 90% of them in Melbourne, they're actually not starting any new land stages. And they're openly telling us, well, for us to be able to make a profit, the land price needs to go up for us to cover the cost of these PVC piping. So that 2,500 title blocks of land is going to dramatically shrink in the months ahead. And we estimate land prices will be 40,000 more expensive in six months' time than what they are today as a result.

SPEAKER_01 16:34

Yeah, the the and the reason why it will become more expensive and will not come back is as you know, supply the the building industry love taking advantage of a crisis to push supply prices up. So you mentioned PVC, that's a main one, but petroleum is in it's in Ashfeld, it's in concrete. Nearly every material it takes to develop a land estate and a house, there is petroleum in. So the price has been pushed up and until the war stops, they're not going to come back down. Even if they do come back down, the suppliers have never in 30 years of developing myself and building suppliers never bring back the price of an escalation of material. So the baseline cost of building something goes up and it stays there. So that has to, for a developer, if the baseline supply costs go up, the sale price of land needs to go up, and the developers at this point in time will sit there and go, I'm not going to develop my next stage until I see some sales happening at that price point. And only then will they kick in and start doing the next stage. So you're right, it's like a double whammy of supply getting tighter and tighter and tighter. Doesn't matter what the government say and go, we can we're pro-building, developers aren't building at the moment because it's too expensive.

SPEAKER_00 17:50

Yeah. Exactly right. Let's look at the housing side. So obviously, house prices are going to go, are going to go up, um, and rents are going to go up as a result. So if we put ourselves in the hardworking shoes of a renter right now, uh, you're saving a deposit, you're trying to get into the market, uh, your rent's just gone up. Priority number one is to shift heaven and earth to become a home buyer. And the majority of that demand is going to be at the affordable end of the market. So that's why this is dressed up as a message to help affordability, but it's actually not going to help affordability because you've got investors coming in for new for the tax benefits and competing with exactly the people that are trying to get into the market as homeowners. Now, as that demand comes in, then that's what's going to drive the cost of build up. And that entry point of the market is never going to be cheaper to get in than what it is today. Yeah. Okay. So this is why we're so particular about these things because when you understand the long-term structural impacts as opposed to getting emotionally reactive about the headlines, you're far better placed to make informed investment decisions.

SPEAKER_01 19:00

All right, so we've nailed off property pricing going up and the rationale behind that. And the reality is that it's not coming down. When we look at the rental pricing, I was talking to Felicity about this because she said, explain to me how rent prices are going to come down while the government's saying it. I said, Oh, let's let's flip it. Let's uh it's like let them prove that it's gonna come down, but I'll tell you why it's not. So I just you know, she's pretty good with understanding the property market. Um, but I said, look at the local suburb we've got around us. I said, investors aren't it's it's fully built out. So no investor's gonna buy there anymore. So the only people who are gonna buy there are upgraders or downgraders or first home buyers.

SPEAKER_00 19:39

Just to interject that, um, why wouldn't they be doing that? Well, because if you look at even an affordable property, let's say $800,000, yeah. Uh the cost to hold, if you buy that property new with maximum tax benefits and solid rental yield is on today's interest rates, 200 bucks a week.

SPEAKER_01 19:56

Yep.

SPEAKER_00 19:56

If you were to buy that same property established, same street, same area, same all that, uh, the holding cost is between $600 and $800 a week. So you imagine that $30,000 to $40,000 post-tax out of an investor's pocket to hold that as an established property.

SPEAKER_01 20:12

So they can hold three to four new properties in a different suburb and obviously get the benefit of it. In 10 years, you're millions behind. That's the bottom line. Yeah. So so let's say in an established area, no one's going to buy established housing or they've got rocks in their head if they do. Yep. So as people buy into those areas, being upgraders, downgraders, new home buyers, the rental pool, people still want to rent in those areas, but the rental pool starts to decline in those areas, which means more people still want to rent there. People still want to rent in those areas that are established, which means fewer rental properties competition, doesn't it? And pushes rental prices up. It's just there's no logic or forethought to this uh this rollout except for how can I take more tax out of people's pocket and jam it into the government coffers so they can fuck up spending it next time.

SPEAKER_00 21:02

So you mentioned the word spending. Let's pivot and have a look at that. So uh part of what's contributed to this inflation problem is the government's overspending. So they're overspending, they're not doing anything to address that, but they'll just take a tax grab from more people. Uh, we've talked about the percentage of taxpayers or the ratio of taxpayers to in um uh to retirees dropping historically and continuing to drop over time. And believe it or not, the pension for a couple right now is about $44,000. Just have a think about the cost of food, the cost of petrol, what kind of lifestyle does that look like? What I want to be giving everyone out there is a 30 to 40 year head start to think about with all of these market conditions that we're talking about and the government's revenue problem, is the pension going to be around when most of us get?

SPEAKER_01 21:54

That's a really good question, and I want you just to pause on that for a sec. Is the pension going to be around? In 20 years time. It's not gonna happen. It's gone. And the pension is absolutely gone. And they've openly said that. They openly said that when they came up with superannuation. They said we haven't got it anymore. They can't afford to run the country currently. So it's gone. If your retirement age is 15 years down the track, you need to do something yourself. Alright, so we've unpacked a fair bit and we've looked through some of the fundamentals. But if I'm a new investor and there's so much white noise out there, what is a sure bet? What should I be sure that is going to be a safe investment going forward for me and my family? And what should I steer clear of? Okay.

SPEAKER_00 22:41

As we've always said to clients for 20 years, the best way to build a portfolio stably and safely is to invest in something where you always have the government on your side. And I think that's what we've learned in the last week or so has been exactly that. A strong and stable housing market is economically critical to Australia. The government have nothing else? Without stamp duty revenue, without GST revenue, and without uh a commitment to international migration, which they've shown they blow the blow the forecast on that every year, it's all about how they continue to generate revenue. And uh a housing collapse would be the worst thing for them because they would stop being able to take that tax money. So knowing that we are investing in something where the government has a vested interest in it being strong and stable is critical. Doesn't mean it's going to go up every day, but it sure as hell means that it's not going to go down and they're going to do anything possible to prevent that. Yeah. So let's start to unpack some of the different uh, you know, investment assets out there and think about through a lens of long-term structural performance, which ones make the best sense.

SPEAKER_01 23:48

Perfect. Because the government's made it really clear that when it comes to housing, they want new build only. They, if you're investing, forget established housing. You need to absolutely take it out of your vocabulary. So you need to be investing in new property. But let's, and and that is their number one prime driver at the moment. Um let's look at uh let's look at shares. We'll talk through shares as an option because there's been some changes to shares, been some changes to business. Um but uh as we're thinking through shares, we've always um made sure that we compare shares as you're gearing up on shares because you don't invest dollar for dollar. Um so property used to still does, but property um in all my calculations, the reason I chose property over share investment is because you could leverage up at a higher rate. The banks saw property as a safer bet, but therefore would allow me to gear up residential property to 80 plus percent. Um and the consumer lending laws mean that the banks can't come in and sell it out from under me if I can't make the repayments for a period of time, versus shares that you can gear up to about 50% safely. Um the um the global financial crisis, people's shares dropped underneath what their value were. Um obviously the uh companies came in and said you need to sell out for that, banks came in and said you need to sell out for that, and then people lost large amounts of money. But the government, like established homes, they don't make taxes from people's shares on a trading basis. And that's what when you think about new property, that's why they encourage that, because they make all of that tax from the the steps we um outlined earlier. From established property, they don't make that, they don't make it from shares either. So they've also said, well, established property and shares, we don't make enough money from the trading aspect of it. So where are they hitting us? On the uh the 30% uh tax rate now for trusts. Yeah, and that's it. And then any capital gain on it, um, they've jacked up to potentially 47%. So yeah.

SPEAKER_00 25:48

Uh so gig given given you're investing in in shares and you've got a capital gains tax impact, and given that you're investing in uh shares are effectively businesses that have been exposed now to more tax, um, which is going to impact profitability, doesn't have the same level of reliability moving forward. Just to touch on one thing that you you uh you covered very quickly there, the biggest risk with shares is is is margin calls. Yeah. Right. And uh so if that's uh not a term that you're familiar with, in essence, uh if you borrow uh and leverage up to 50% on a share portfolio, but the value of that share portfolio drops, then you need to inject cash to rebalance that loan-to-value ratio. So if the share portfolio drops by 20% on a uh on a bad day and you had a $100,000 share portfolio with 50 grand of debt against that, then you're pumping in 10 grand cash on a couple of days' notice uh to rebalance that portfolio, which obviously you don't need to do with uh with property. Yeah, the banks see it as a far more stable long-term investment.

SPEAKER_01 26:50

So if we remove, and and again, people are going to invest in shares, that's uh that's the way it goes, but investors forget residential property, invest in shares, but understand it's now a much less favorable investment. The government's making it so. A more riskier one is investing in startups. This is what kills me. Australians need to have a go. We love having a crack, and and I've started lots of businesses over the years and failed at a couple of them, but always wanted to push forward. For people now, young people, trying to create a new business with the dream that they might sell it for a million bucks down the track and make all that hard work and slave away. The government is now taking about an extra 20% of the profit you would make on that. So hence the reason all of the memes out at the moment saying, here's my new business partner, Elbow. There's thousands of them out there. I'm fucking loving them. But you know, you are soul, a new business owner starting out who is put their livelihood on the line, taking time out of their own professional career, potentially drag money in from their mums and dads and friends and family and banks and out of their home or wherever it is to go and invest in something with the dream of building something, doing hard work and building up to then be able to potentially sell it down the track, and not for a you know, we're not talking about startup Ubers, we're talking, you know, build up a small business and sell it in 15 years, and that's enough for me to just to take the pressure off life a little bit. No, Elbow is now scraping out about another 20% of the profit you'll make.

SPEAKER_00 28:28

It's uh fucking arsehole. It it it beggars belief that you could actually want to back yourself, take some risk, employ some people, create something amazing for the country, and get penalized in a tax grab as a result. So I guess um to wrap up, Cam, been a great discussion today about a lot of the moving parts in the market. Hopefully, we've been able to help you understand the reality behind a lot of these uh messages, uh, the reality behind a lot of these headlines and understand, like I said at the start in the opener, that the people that understand the uh the opportunity are best placed to be able to take advantage of that where you can make informed strategic decisions as opposed to getting caught up in the hype and the emotion of the uh of the headlines.

SPEAKER_01 29:12

Look, yeah, look, um it costs us a huge amount of money. We run an uh an analytics team that um do market research, about 19,000 hours a year, and it costs a lot to that. So look, uh guys, hit subscribe. The more people that uh follow us, the more we uh we don't mind spending the money on gathering that data and trying to put it into plain English for you so that you can make informed decisions.

SPEAKER_00 29:33

Awesome. As we said, this is one of a uh a part of a series. If you found this valuable, uh then make sure you check out the rest of the budget series where we unpack exactly what this means for investors and how you can take advantage of it over the next decade. So, Kim, thanks for joining us. Always. We'll catch you next time.