The following commentary was emailed to me by an ex poster from here. I asked for permission to paste it here but thought it was just too fantastic not to. Please no PM's asking me who this was from, you'll either know or not.
STAMP DUTY
Australia:
Varies by state, but as a rough rule you’re talking at least 3% of the price of the property
US:
Varies by county but seems to be very low, as supported by the fact that Americans seem to be able to ‘flip’ properties more easily than we can. This website (no idea how old it is, though) suggests that most counties in California have a ‘transfer duty’ of 0.1%. That’s $100 per every $100k of property:
http://www.californiacityfinance.com/PropTransfTaxRates.pdf
CGT ON PPOR
Australia:
Generally exempt with no limits on amount.
US:
250,000 exemption for singles, 500,000 for couples (in the US you can file tax returns as a couple and different rules apply)
PPOR INTEREST DEDUCTION:
Australia:
Generally none because deductibility is based on what the loan is used for. So interest on a loan taken out to buy your own home is not deductible.
US:
Interest IS deductible on loans against your PPOR and in some cases second (holiday) homes as well. There is no purpose test: i.e. an American can refinance their PPOR, pay off their credit cards or buy a car or go on a holiday, and because the loan is secured against their PPOR, all the interest is deductible.
PROPERTY TAXES:
Australia:
Council rates are generally low. e.g. a 500k house in Sydney often only has rates of $1,200 ~ $1,500, or about 0.4 – 0.5%. It seems that rates don’t increase much as prices increase, so a very expensive property may still have similar rates, making the % even lower.
US:
Much more variation. Each state levies property taxes (e.g. California’s is 1.25% on the MARKET value of the property, based on some 2007 info I found). In addition, though, there are special levies depending on the local authority to pay interest on debt, etc. One thing to note is that in the US the local authorities (county, city, town, etc) are responsible for, amongst other things, schools, police, hospitals, etc. In Australia, these are mostly state responsibilities. Hence why the CSI Miami people identify themselves ‘Dade County police’ as opposed to ‘Florida police’ the way Sydney police officers would identify themselves as ‘NSW police’.
NEGATIVE GEARING:
Australia:
As we all know and love, losses from property can be deducted against ordinary income, which for most people would be salary income.
US:
I’ve never seen this discussed in US property books, and some scraps I’ve found suggests that property losses CANNOT be deducted against salary income. Which makes sense why US books always talk about making a pre-tax gain from property, and why buying IPs doesn’t seem to be as popular as in Australia. When you already get deductions from your PPOR interest, who needs an IP for tax deductions?
MORTGAGES:
Australia:
Most loans are variable, the rate being priced off the RBA target rate.
US:
The standard loan is 30 year fixed, the rate being priced off the 30 year government bond rate. Variable loans, until recent years, were considered risky.
LOAN TYPES:
Australia:
Full recourse. If you don’t pay, they come after the rest of your assets.
US:
Not ALL states have non-recourse mortgages. However, those that do include the three currently worst-hit states of California, Florida (where Miami is) and Nevada (Las Vegas). Mortgage default isn’t without consequences, mainly that your credit goes down the crapper and if you ever want to borrow money in the future, you either won’t get it or the rate will be higher. The US uses credit scores religiously.
What does it all mean?
The list just shows SOME of the differences between property rules in the US and Australia, and they’re significant. You can see just how significant they are by thinking how property prices in Australia would be affected if, for example, you raise council rates to 3% of the market value, disallow negative gearing, cut stamp duty, limit PPOR CGT exemptions, or allow PPOR interest deductions.
How do we analyse how much different prices should be between the US and Australia? I have absolutely no idea. Even ignoring the fact that the US and Australia are made up of hundred if not thousands of sub-markets, the list above doesn’t include demographics, incomes, geography, zoning, etc. There are simply too many moving parts in the property market to make even a general statement about where prices SHOULD be.
What the above DOES show is that there are significant differences between the Australian and US markets. So saying ‘the US market thought it couldn’t fall, but it did fall, so Australia will follow’ doesn’t make sense either, because there are many differences.
What about, say, Japan? 20 year recession with property prices to match. Why won’t Australia follow the same path? We can, but also look at the differences. The Japanese unemployment rate has been <5% for most of the last 20 years. How does that look like a recession, given that the US is currently around 8% unemployment with some states such as California going past 10%? Any western country that has a 4% unemployment rate would be booming, and how can property go down in a boom? On the other hand, how can an economy maintain relatively low unemployment in a recession?
Japan’s market is again one possibility, where the government protects jobs and companies at the expense of everything else, including property prices. Besides, I don’t know how crazy Japan got in their bubble, though the anecdotes suggest it was big, especially relative to the rest of the world at the time.
On the other hand, saying that the Australian market is undersupplied while the US was overbuilt and therefore the Australian market won’t fall, for example, doesn’t hold water either. The UK is generally undersupplied, but its prices are falling. Not as much as the US, but it’s still falling. About all you can say is that oversupply is contributing to the fall in the US. i.e. everything else being equal, Australia will do better (which includes the possibility that it doesn’t fall as much as the US) than the US. But everything else ISN’T equal. No one has a complex enough model to include all the variables.
e.g., everything else being equal, allowing PPOR interest deductions without a purpose test will increase prices, because effectively owners are paying lower rates, and they’ll be more likely to refinance and buy stuff, which will improve retail sales and hence the economy. Consumption being the greater part of the US economy. How much did the PPOR interest deduction distort prices in the US? Who knows.
The combination of high property taxes, loose lending and PPOR interest deductions partially explains why there are $1 houses in Detroit, as has been reported in the papers, and why we don’t have such houses here in any of our major population centres. The houses are often trashed and stripped, and they would almost certainly have high unpaid property taxes (would you pay council rates if you were being foreclosed upon?) Pulling numbers out of thin air, the property that sells for $1 might have been worth $200k at the peak, now has a market value of $100k IF it’s all fixed up, and have $10k in unpaid property taxes. All this in a neighbourhood filled with other foreclosed and probably stripped homes, probably in developments miles from nowhere. Also remember unpaid property taxes attract a high interest rate, so the more time passes the worse it gets.
In short, everything is possible. Not everything will happen. There are lots of possibilities, but nothing is inevitable, and certainly no one can predict the degree. While it's fairly safe to predict 'all booms bust and all busts end', when? To what extent? What are the details? It's unpredictable. How can it be, when world governments are still trying things that have never been tried before? How can someone’s view of the crisis NOT change when one day the government says we’ll guarantee all retail deposits and allow banks to piggyback off the government’s credit rating? Or when oil drops from $147 a barrel to $50? Or when the government essentially provides unlimited liquidity into the market? No one, of course, knows HOW these will affect the market exactly, but there WILL be an effect. For example, no depositor has lost money in US or UK banks.
In this crisis, the US and UK are well ahead of us. So I’d keep an eye on them to see what can, but won’t necessarily, happen to us. e.g. people are fearing banks asking for repayment of loans even if you’re up to date with payments. That’s a possibility, but is it likely? I have yet to see any news in the US about people being asked to pay back mortgages if their payments are current. Given that it hasn’t happened in the US, I find it unlikely that it’ll happen here. Sure it’s possible, but how many possible scenarios can you prepare for? How about someone nuking us? Or ravening barbarian hordes? Just because there is a chance that I get whacked by a truck tomorrow doesn’t mean I’m staying indoors (looking for planes falling out of the sky).
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. I particularly agree that:
