TheAustralian.com.au
AUSTRALIAN fund managers used the Wall Street swoon as a buying opportunity, but those expecting a big rebound will be disappointed.
Amid all the conspiracies around the Wall Street fall, including alleged financial terrorism, the wild trading in the US was a timely reminder that the global financial crisis is still with us and risk is real.
The Australian sharemarket has its own issues, which explains the 9 per cent fall since it hit a recent high of 5025 points on April 15.
Macquarie's Neale Goldston-Morris describes the Rudd super-profits tax as the factor plunging the Australian market into its worst sovereign risk crisis for more than three decades, and indeed the cost to the mining market is so far some $21 billion.
Wiser heads will see their way through the issue, because the concept of a resources rent tax is widely supported. It's just the fine details that are causing the angst.
When you change the rules midstream, uncertainty is maximised, but the superannuation levy means new money is pouring into the Australian stockmarket every day.
In fact, capital management is actually back on the agenda just a year after corporate Australia raised some $100bn in discounted equity.
The investment banks are doing the rounds testing interest in buybacks.
News Corporation chief Rupert Murdoch said this week that he was looking at capital management options.
The contrast is extraordinary between the wild swings in the US and the fear that led Australian companies to issue new stock at bargain basement prices.
The wild swings, of course, were made worse by algorithmic trading, which generates fast order flows searching through different markets for the best deal.
The end result is companies like Accenture falling from $US40 a share to a few cents in minutes.
This issue will be watched by the ASX when Chi-X begins a rival exchange in Australia.
Then there are exchange-traded funds, which proxy a wide range of physical stocks. That means any wild trading in the ETF can send the physical stocks lower.
Beyond this, corporate Australia is relatively lowly geared, with Macquarie figures showing net debt to equity has fallen to 30.5 per cent, or 20 per cent, below June 2008 levels. Goldman figures show interest cover will increase from 5.6 times to 8.3 times in the 2011 financial year.
The big banks have an estimated $15bn in surplus funds, but won't be handing any back soon because regulatory changes will require they hang on to more cash.
The wild Wall Street trading will underline the regulatory zeal.
Australian fund managers have been sitting on their hands amid the recent sell-off in stocks, in part because there was no reason to buy shares after they had acquired stock in last year's $100bn stock giveaway.
The giveaway was the discounted rights issues, which netted the likes of UBS some $60 million in underwriting fees alone.
The capital raisings also trashed earnings per share, which explains why UBS was told any buybacks would be limited when it did the rounds of corporate Australia recently.
It's a bit tough to buy back shares at $20 one year after issuing them at $10.
After $12.6bn worth of buybacks and special dividends in 2007 there were just $1.7bn worth last year, according to UBS figures.
The same investment banks that warned corporate Australia it needed to stock up on cash will be passing on concerns that cash levels are too high and need to be handed back to shareholders.
What's more, planned changed to off-market share buybacks will be considered an incentive for some to move earlier.
Just as the early signs of increased merger and acquisition activity are appearing, capital management activity will also slowly but surely re-emerge on the agenda.
The government has ignored Ken Henry's prescription for more affordable housing
EVERY time the Reserve Bank of Australia raises interest rates, Wayne Swan expresses his deepest sympathy for hard-pressed Australians with mortgages. For example, when they went up by another 0.25 percentage points this week, he said: "That's tough, that's difficult and unfortunate for many families and small businesses."
His concern is touching, to be sure. But it would sound more convincing if he did more to address booming house prices, which is one of the factors feeding into higher rates.
Of course, you'll never catch politicians criticising rising house prices. They would look too much like party poopers, given that higher prices are a cause for celebration for the 68 per cent of Australians who already own houses or are paying them off. Rather, they announce measures that pretend to do something about housing affordability, such as first-home buyers grants that feed directly into higher prices.
The Henry tax review thought it was better to get to the root of the problem. Its report says favourable tax and transfer provisions increase overall demand, particularly for owner-occupied housing. That is, exempting the family home from capital gains and land taxes means we tie up too much of the nation's income in housing compared with more productive areas and we drive up house prices.
But the report also acknowledges that no government is going to start taxing the family home. Rather, it suggests addressing the bias in investment housing towards negatively geared investment, which it describes as "a major distortion in the rental property market".
Another way of putting it is that it has become a national sport, or is that rort. The Australian Taxation Office says losses declared from negatively geared property grew by 35 per cent in 2007-08 to $8.6 billion. The losses, which are the differences between rental income and deductions, mainly interest payments, do not send too many property investors broke, otherwise 1.2 million Australians and rising wouldn't be plunging so eagerly into negative gearing.
Instead, they make a profit from rising property prices with the help of another tax break, the 50 per cent discount on capital gains.
While negative gearing and concessional capital gains taxes are by no means the only factors, they are hard to ignore as contributors to Australia's extraordinary property boom.
If negatively geared investment went mainly into new housing, you could argue that it was helping keep down prices, as well as rents, by adding to supply. Instead, 90 per cent goes into existing houses, meaning it is competing with people buying their own homes.
Since the restoration of negative gearing in 1987, there has been an increase from 8 per cent to 40 per cent in the proportion of finance for existing homes that is taken by investors.
The Henry review says median house prices have risen from three times to five times average household earnings in the past two decades. Figures collated by Macquarie Bank's Rory Robertson show house prices rising by 40 per cent in the past five years, compared with a fall of almost 20 per cent in the US.
We wouldn't want to wish the subprime debacle in the US on us but that's only part of the story. While house prices in Australia have tripled since 1996, in the US they increased by 70 per cent.
Comparing house prices with incomes, Australia has 12 of the 20 least affordable urban areas in a Demographia survey covering the US, Britain, Canada, Ireland, Australia and New Zealand. Vancouver comes top with a home price to income ratio of 9.3, with Sydney second on 9.1, followed immediately by the Sunshine Coast and the Gold Coast. Melbourne is in seventh place, Adelaide 10th, Darwin 13th, Perth 19th and Hobart 20th.
The Henry review proposes a 40 per cent discount on net residential rental income for tax purposes, which means the discount also would apply to deductible expenses such as interest. So those declaring a loss from a rented property would receive a deduction from their tax bills 40 per cent smaller than at present. Those nominating a profit would see their tax on their property income fall by 40 per cent. The present 50 per cent discount for capital gains would be reduced to the same 40 per cent figure, meaning a little more tax would be paid on the proceeds of sales. Interest on bank savings, which attracts no tax deduction, also would benefit from the 40 per cent discount.
Putting it all together, borrowing to negatively gear would become less attractive and saving more attractive. According to the Henry report, this "would largely remove the current bias towards negatively geared investment in rental properties and shares and so reduce a major distortion in the rental property market".
There will be much debate on the precise merits of this proposal. It is a milder alternative than the practice in countries such as the US of limiting deductions to the income from the asset itself, rather than from the individual's total income: that is, no negative gearing at all. But it is the product of considered and logical thinking by an expert inquiry conducted for 18 months, one, by the way, commissioned by the government. So how did the government react to the birth of the inquiry's labours? Not at all like a proud parent: it disowned it quicker than you can take a baby to the orphanage. Ken Henry's 40 per cent discount idea was on the long list of proposals that the government announced on Sunday would not be implemented "at any stage".
Perhaps we should not be surprised in an election year, though Swan certainly sounded as though he meant "never ever". When Melbourne ABC radio 774 host Jon Faine put it to him that negative gearing had a distorting effect on the housing market and the tax system -- which is no more than what Henry says -- Swan responded: "Well, I've never accepted that view and I think it would be economically disastrous to do anything on negative gearing and, indeed, that's what the review says."
Well, not quite. Henry certainly wants to do something about it, although he does suggest other measure should be taken first to improve the supply of housing, including removing stamp duties on home sales and reforms to land tax, and a significant increase in rental assistance to low-income earners.
The government has buck-passed these proposals to the states or ignored them. Considering it is lower-income earners who suffer most from high housing prices and high rents, this does not look much like the actions of a Labor government. As Reserve Bank economist Tony Richards argued last year: "As a nation we are not really any richer when the price of housing rises but the more vulnerable tend to be hurt."
In theory, an increased supply of land and homes will solve all the problems of the housing market. In practice, it is not as simple as releasing more land. For one, developers have to be willing to use it, rather than waiting for its value to go up further or for interest rates to fall. As well, much of the activity in the housing market involves competing for a limited supply of existing properties in desirable locations.
There is another constraint: if governments were really successful at increasing the supply of land and housing, it might bring down prices. No politician would be caught dead taking responsibility for that. But with the International Monetary Fund warning of the risk of a housing bubble and Australia a world leader in household debt and unaffordable housing, perhaps rising interest rates or other economic stresses will find their own drastic solution to the problem sooner or later.
Gresham Partners has been appointed by Great Southern receiver McGrathNicol to conduct a scoping study on the best way to sell the land assets of the failed managed investment scheme operator. 
