gold-coast-queensland-australia

In February, B.C. raised its foreign buyer tax on homes in certain regions to 20%. The move came 18 months after the province introduced the tax; Ontario’s own version followed in April 2017.

Australia is even stricter: in addition to extra property tax, non-resident foreigners can only buy new dwellings or vacant land, and they must pay vacancy taxes if the building is empty for a total of more than six months of the year (holiday rentals and Airbnb don’t count). The government has also forced foreign owners to sell their properties if they breach the investment rules.

The result has been “a significant cooling in foreign interest in Australia’s housing market over the past year or so,” said Paul Bloxham, chief economist of Australia, New Zealand and global commodities at HSBC, in an email. China tightening its controls on capital outflow and local banks enforcing stricter rules about lending to customers without domestic incomes have also played a role.

However, “a strong appetite from domestic investors“ is offsetting the reduced demand from foreign buyers, says Paul de Josselin, vice-president, portfolio manager and research analyst at Templeton Global Equity Group in Melbourne. He points to low interest rates, households prepared to take on significant debt to invest in real estate, and tax breaks on investment properties as contributing to real estate demand. While a house in Melbourne or Sydney might have cost three times household annual income from 1960 to 1990, it now costs 10 and 12 times respectively, de Josselin says.

Like Canada, mining and oil play important roles in Australia’s economy, accounting for 6.9% and 2.5% of GDP respectively. But while de Josselin notes that energy supply and demand appear robust, he’s concerned that China’s decreased demand for base metals, such as iron, will hurt Australia’s struggling mining sector.

“Its contribution to the GDP looks to have peaked, and probably what is a concern in Australia is there is no evidence of a substitute sector in the economy to offset the contribution from mining,” de Josselin says. “We’re not investing into Australia as an index. We’re looking into individual stocks.”

Long-term value opportunities can be found in Australia’s agricultural sector, de Josselin says. A poor East Coast grain harvest season has driven profits down, but he anticipates it’s a short-term blip, as was the case with energy shares two years ago. “When the oil price drifted down in early 2016, we owned a number of Australian energy stocks, but subsequently these stocks rallied with the recovery in the oil price and we have exited these names as the share prices reached our assessed fair value,” he says.

De Josselin is less optimistic about Australia’s financial services sector. “What the market valuations appear to ignore are the excesses that have built up in the Australian economy, most notably with household debt levels and residential housing valuations,” he says. As Australian households cut back on their debt levels, they will need less, not more, credit, which is what banks sell, he says.

The basics

Official name: Commonwealth of Australia

Capital: Canberra

Government type: parliamentary democracy

Population: 23.2 million

Head of government:Prime Minister Malcolm Turnbull (since September 2015)

Currency: Australian dollars (0.77 USD on March 27)

Citizenship: via parentage only; dual citizenship permitted

Source: CIA World Factbook

Economy

GDP (purchasing power parity): US$1.235 trillion

GDP growth: 2.4%

Inflation rate: 1.9%

GDP per capita: US$49,900

Unemployment rate: 5.6%

GDP by sector

Agriculture: 3.6%

Industry: 26.1%

Services: 70.3%

Source: CIA World Factbook

Taxation

Corporate

Income tax rate: 30% for most companies; 27.5% for smaller companies with aggregate annual turnover less than AU$25 million in 2017-18 and less than AU$50 million in 2018-19. By 2026-27, companies with less than AU$50 million annual turnover will access a 25% corporate tax rate.

Branch tax rate: 30%; 27.5%

Capital gains tax rate: 30%; 27.5%

Real estate tax: Up to 3.7%, with some states levying foreign-owner land tax surcharges of up to 1.5%

Stamp duty: Up to 5.75% on the transfer of business property, including mining rights and buildings on the land. As with real estate surcharges, some states have introduced foreign-purchaser duty surcharges, which range from an extra 3% in Queensland to an extra 15% for properties in New South Wales worth more than AU$3 million.

Wage tax: 9.5% of each employee’s “ordinary time earnings” into a superannuation fund or retirement savings account.

Individuals

Income tax rates: progressive to 47%

Capital gains: progressive to 47%

Inheritance or gift tax: none

Source: Deloitte’s Taxation and Investment in Australia 2018

Stock exchange

The Australian Securities Exchange (ASX Group) is the country’s primary stock exchange. It began trading in 1987 when six state-based exchanges amalgamated, and evolved into its current form in 2006 after merging with the Sydney Futures Exchange. Today, its total market capitalization is AU$1.5 trillion.

In December 2017, the ASX Group announced it would transition its clearinghouse system to distributed ledger technology, or blockchain. This technology provides a digital record of shares bought and sold that can be seen and updated by multiple organizations in real time. It does not require a central administrator or a central data store. (Bitcoin also runs on blockchain technology, though the exchange is not using any sort of cryptocurrency.) The ASX will share its implementation timeline in June.

Australia also has several smaller, alternative stock exchanges. The National Stock Exchange of Australia (NSX) specializes in listing companies in the agricultural and natural resources industries. Its listing requirements are lower than those of the ASX—for example, the NSX requires AU$5 million market capitalization, compared to the ASX’s AU$15 million—allowing smaller companies to go public sooner.

The Sydney Stock Exchange, on the other hand, targets investors from the Asia-Pacific region, and aims to bridge Asian and Australian capital markets. Its trading platform and customer services are available in English and Chinese, and it trades in both Australian dollars and renminbi.

Central bank

The Reserve Bank of Australia’s medium-term average inflation target is 2% to 3%. At its first two 2018 meetings (in February and March), the bank’s board left the interest rate at 1.5%, where it’s been since August 2016. Governor Phillip Lowe anticipates Australia’s GDP growth will increase to slightly above 3% through 2018 and 2019.

In a statement accompanying the March 6 decision, Lowe noted business conditions and public infrastructure investment have picked up, and he expected exports to increase after some weakness late last year. A “continuing source of uncertainty,” he added, was the outlook for household consumption as debt levels remain high and incomes are growing slowly.

He expects the unemployment rate to fall gradually, though wage growth remains low. Both CPI and underlying inflation are slightly below 2%, with the forecast for CPI to be slightly higher than 2% in 2018.

In his February note, Lowe noted a potential mismatch between available jobs and the workforce’s skills.

“So far, though, the response to that difficulty has not been to pay people more to ensure they stay, or poach them from elsewhere,” Assistant Governor Luci Ellis said at the Australian Business Economists’ Forecasting Conference in February. “Instead, we hear that firms are increasingly using other creative ways to attract and keep staff without paying across-the-board wage rises. These include everything from hiring bonuses, to offering extra hours, to increasing perks and workplace conditions.”

This is because companies think competition is so intense that they would lose significant business if they raised prices, Ellis said—a concern driven in part by foreign retailers entering the Australian market. However, Ellis predicts “paying more will eventually become part of firms’ response. […] Margins cannot be squeezed forever.”

Sara Tatelman is a Toronto-based financial writer.

Originally published in Advisor's Edge

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