In the realm of real estate, comparisons between nations often spark curiosity and contemplation. Australians, in particular, find themselves pondering the contrast in property prices between their homeland and the United States. From tales of friends acquiring bargain homes in the sunbelt states to discussions within government circles about innovative solutions like ‘build-to-rent,’ the allure of American real estate resonates deeply.
A blog from Cardinal Finance broker Ninus Kanna (pictured above) sheds light on this discussion.
“They say comparison is the thief of joy,” Kanna said. “I reckon there’s good reason to believe that when comparing Aussie house prices with US ones. There are a few reasons, but there’s one underlying cause.”
At the heart of this comparative analysis lies a fundamental question: What exactly makes property cheaper across the Pacific?
The United States stands as a global beacon of advanced markets, having unparalleled sophistication in its financial landscape. Within this domain, the real estate sector shines, with a plethora of listed companies on the New York Stock Exchange. These companies include giants like Invitation Homes (INVH) and Equity Apartments (EQR), collectively managing tens of thousands of residential units.
Delving into the financial reports of INVH and EQR unveils intriguing insights into the dynamics of American real estate. Notably, the cost of developing properties emerges as surprisingly affordable, with INVH spending approximately US$380,000 per home and EQR marginally exceeding this figure for each apartment.
One of the most significant disparities between the Australian and American real estate landscapes lies in their respective lending structures. While Australians are accustomed to the notion of guarantors safeguarding mortgages, Americans navigate the terrain of “non-recourse” lending, where mortgages are solely secured by the property itself.
This crucial distinction becomes apparent during economic downturns, as witnessed in the aftermath of the Global Financial Crisis (GFC). In the US, borrowers facing negative equity have the option to relinquish their properties to lenders, absolving themselves of further liabilities. Such leniency, albeit detrimental to market stability, fosters a climate of more volatile property prices.
However, beyond lending intricacies, the crux of the matter lies in the underlying cost of land. Herein lies a tale of two taxing systems – stamp duty and property taxes.
In Australia, the burden of stamp duty looms large, representing a substantial upfront expense for property buyers. Conversely, Americans grapple with annual property taxes, which, while seemingly less burdensome, cumulatively contribute to the cost of ownership.
Kanna also looked into the net present value of taxes paid in both countries and highlighted the impact of property taxes on land values. Through this lens, it becomes evident that the seemingly lower property prices in the US are intricately tied to the higher taxation regime imposed on landowners.
As policymakers contemplate the prospect of transitioning from stamp duty to property taxes, a cautionary tale emerges. Kanna emphasized that such a shift may appear enticing, given its perceived benefits for homebuyers and developers, but the long-term ramifications on land values and borrowing capacity warrant careful consideration.
To view Kanna’s extended analysis on this topic, click here.
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