Sydney is still the gateway to the rest of Australia. It sucks in almost half of Australia’s new arrivals. It serves as the regional headquarters for nearly every international corporation and is the Australian headquarters for most Australia-wide corporations. Its glittering harbourside real estate is said to be among the most desirable in the world.
But in the last year or so, it has begun to fall apart. Unthinkably, the unemployment rate in NSW is now almost the highest in the country (eclipsed only by Tasmania and the Northern Territory). The State is technically on the edge of recession and Sydneysiders are fleeing Sydney at the rate of thousands each month.
Even with the lion’s share of immigration, Sydney’s population is now scarcely growing. It climbed by just 0.7 per cent in the last year. By contrast Melbourne grew by 1.1 per cent; Brisbane by 1.9 per cent.
Who’s to blame?
As unlikely as it seems, I believe it is a Sydneysider....
John Howard is perhaps the ultimate Sydney Prime Minister. Aside from mainly enforced overnight stays in Canberra, he’s never lived anywhere else. Even though it is just down the road, Canberra was too far away for him and his family to live when he became Prime Minister ten years ago. He commandeered Kirribilli House — Sydney’s most impressive piece of real estate. Then, a year or two later, his Government set about feeding Sydney’s real estate obsession.
It wasn’t widely understood at the time what he was doing.
Added to the otherwise innocuous terms of reference for an inquiry into business taxation was one oddly specific measure dealing with personal, rather than business, taxation. The Ralph Committee, chaired by one of Howard’s friends, businessman John Ralph, was asked to examine the scope for ‘capping the rate of tax applying to capital gains for individuals at 30 per cent.’
At the time, income from capital gains was taxed at the individual’s marginal rate, often 48.5 per cent, minus the rate of inflation.
John Ralph did even more than he was asked. He recommended that only half of each capital gain be taxed — effectively cutting the top rate to 24 per cent.
Ralph’s report spoke of the boom in investment in Australian companies that would result, ‘particularly in innovative, high-growth companies.’
Others saw the likely result more clearly.
At the time Mark Latham was in self-imposed exile on Labor’s backbench. His then-leader Kim Beazley ensured that the Party supported the capital gains tax cut.
Latham described the cut in Parliament as ‘the thing that tax avoiders want. They want incentives to move out of trading income into trading assets. They want the opportunity for property and asset speculation in the Sydney land market rather than a taxation system which promotes value-adding in the information technology sector.’
He was prescient.
As the Macquarie Bank’s Rory Robertson observed later: ‘Since September 1999 it is almost as though the Australian tax system has been screaming at taxpayers to gear up to earn increased capital gains rather than to work harder to earn increased wages or salaries.’
Borrowing to buy properties became amazingly tax effective. Much of the interest expense could be written off as a tax deduction — if the house or unit was new, the investor could claim a deduction for depreciation (whether or not the property had actually depreciated) and half of the capital gain was never taxed.
Property prices roughly doubled in the avalanche of buying and selling that followed, pushing up the already-high Sydney prices to levels previously unimaginable.
Those of us already well advanced on the property treadmill didn’t mind. In fact we felt richer. Howard’s then Parliamentary Secretary to the Treasurer, Ross Cameron observed succinctly: ‘[rising prices] makes for happy voters.’
But for many of those Australians not yet into housing — often too young to vote — Sydney was suddenly out of reach.
They are now leaving the city in droves. Six thousand more Australians now leave NSW each month than move to it. In South Australia and Victoria the net outflow is less than 1000. Queensland, Western Australia and Tasmania are actually drawing people to them.
It isn’t only those who can’t afford houses who are leaving. Many Sydneysiders who’ve done well out of the Ralph/Howard property boom are cashing in and buying more, cheaply, in more affordable cities. The ABC’s Richard Glover calls the phenomenon ‘Hobartering.’ Others are moving in order to find jobs.
Industry appears to be leaving Sydney as fast its people. The land prices in Sydney’s Inner West have made factories uneconomic. The owners can get far more by selling their land for housing than they can by continuing to run their factories . Some are relocating interstate or to the country, others are closing for good. Sydney’s Inner West is awash with so-called ‘brown field’ apartment developments, many with the factory exteriors intact.
In a less obvious way the Ralph/Howard property boom has also devastated Sydney’s State Government. It got it hooked on ever increasing stamp duty revenues, which eventually collapsed. Last week Premier Morris Iemma announced spending cuts worth $2.5 billion over four years. Five thousand public servants are to lose their jobs — at a time when the State’s unemployment rate is the highest it’s been in years.
Success is said to have many fathers; failure, very few. But it seems fair to acknowledge that John Howard is one the fathers of Australia’s manic real estate boom, the aftermath of which is set to send his beloved home city into recession.
