Negative gearing - how does it really affect the market for home buyers and renters?
It’s always interesting to see the outrage provoked in the real estate industry by housing affordability reports – whether they come from the Annual Demographica survey or publications in magazines such as “The Economist” which analyse the relationship between house prices and rental income.
If nothing else, it’s the poll opposite reaction to that provoked when median increases in capital city values are released. Such data is immediately celebrated along with an inaccurate assumption that the increase has produced an equivalent dollar by dollar rise in individual ‘house prices.’ There is rarely clarification as to what the figures actually mean.
The former publications somewhat agree with the suggestion that Australian housing is either ‘unsustainably’ over priced – or to express it in more general terms – ‘unaffordable.’
Sensationalist headlines they may be, but no matter how exaggerated you perceive the claims, the crunch remains that we ‘need’ as a community to provide housing for a growing population of low income earners – and therefore affordability and supply are understandably ‘red hot’ topics of concern.
In response, Australian property agents and economists dig out graphs along with various ABS and RBA statistics to ‘prove’ when ‘compared’ to other ‘comparable’ international markets we’re not so bad after-all – no bubble fear here!
“Australia is now broadly in line with other comparable countries, having risen relative to other countries since 1980 when it was at the lower end..”
...state the RBA in their latest study of house price to income ratios. And I’m sure many have grown tired of being ‘lectured’ on the many ‘viable’ reasons ‘why’ we’ve seen prices and subsequently household debt increase. Reasons such as the inflation of duel income households, ease of lending, lower borrowing rates, wage and population growth to name but a few.
These ‘comparable countries’ include the UK, New Zealand, Denmark, the Netherlands, Canada etc.–and whilst it may be contextually ‘useful’ to find some kind of affordability barometer on an international scale, I fail to see why it should result in the ‘swept under the carpet’ conclusion that this makes our own levels of inner suburban ‘un-affordability’ somehow ‘OK?’ - A conclusion based in part on the principle that consistent demand from a dominant buyer demographic, and a relatively stable job terrain, foreshadow the implication that we’re not in line for a ‘crash’ any time soon.
Or - to put it another way - if the sky’s not falling in, forget sustainability, we can throw a few home buyer grants at the bottom end of the market as a temporary ‘bandaid,’ waft a dismissive hand in the direction of some outer suburban nether land, and carry on ad infinitum with our ‘it’s all right Jack’ ‘prop up the market’ housing policies.
Furthermore, it’s hardly complementary to compare ourselves to international terrains which - having been through somewhat harder lessons than our own - are also battling to induce first home buyers out from underneath their ‘rental’ blankets. They may look similar - but shamefully so!
As readers will be all too aware – one of the major problems with which Australia has to grapple, is our need to be centrally located in and around the major capital cities. For this reason, we’ve effectively, sentenced large swathes of home buyers into the equivalently priced markets of London and Paris and the comparison isn’t pretty.
In UK for example, despite the relative ‘crash’ in ‘country wide’ prices, prime real estate in London has continued to outperform fuelled in large on the attraction it holds for foreign investors. There are no restrictions on foreign ownership in the UK which has of course helped fuel an investor induced ‘rush to market’ into what many perceive to be a ‘safe haven’ to buffer against other more volatile assets.
Over 50 per cent of property acquisitions around the ‘average’ London house price are sold to overseas buyers – and whilst foreign investment is freely permissible, I have no doubt this will remain the case.
A similar occurrence has happened in New York. It too is deemed a relative ‘safe haven’ for investors – hence why we’re now seeing 35sqm apartments for sale to combat the ‘housing crisis’ in a country renowned for its love of big houses.
Singapore, Hong Kong, China, Canada are all suffering inflated property prices in urban centres, once again fuelled by the investment sector. Singapore for instance, has imposed temporary limitations on the number of properties investors are permitted to acquire and moved to increase taxes on ‘speculative’ sales. However, the measures are deemed temporary and therefore hardly sustainable over the long term.
New Zealand faces similar issues - it’s now been suggested that by 2040, only approximately 30 per cent of NZ households will be able to afford a house over $400,000. A worrying statistic.
All in all, few will counter that first home buyers in the all the above markets are living on Struggle Street with the ‘outcry’ from this sector coming in loud and clear through various media outlets and social forums. However, for an industry focused on profits, the first home buyer sector isn’t all that important.
Oh yes, you’ll hear the arguments about the need for first home buyers to provide a ‘leg up’ for the second home buyer market – in other words, activity at the bottom of the ‘property tree’ aids the off shoots at the top.
However growth isn’t waning at the bottom of our real estate tree – it’s by all respects flourishing! This is because established ‘affordable’ property in the most desired urban capital city estates is a ‘hotbed’ of investor demand.
Investors make up roughly 35 per cent of the active buying market in Australia however they are not doing much to aid the supply of affordable accommodation - 92 per cent of them purchase into the established market and is it any wonder? They’ve been buoyed on by a ‘boom’ decade of ‘nominal’ median price growth, indicating 10 per cent ‘plus’ per annum capital gains for this type of accommodation.
Neither are they soaking up ‘luxury’ properties - an investment trend in some of our ‘comparable country’ markets. Most local investors have their focus primarily on property most suited to the first home buyer demographic – the low maintenance, easy to rent ‘affordable’ inner suburban apartment market with prices ranging from $300,000 upwards.
Australia-wide, 58 per cent of apartments are owned by investors. Break this down to a state-by-state capital city level and the investor-owned percentage of inner-city apartments is closer to 70 per cent and in some areas exceeds even this.
Back in 2003 the RBA recognised the problem and advocated a moderation of demand in the property market amongst investors, by way of (prepare to take cover) tightening current negative gearing rules.
Figures from the ATO and RBA highlight the scale of demand - around 2 million Australians claim deductions for net rent, and around one-quarter of all household credit is there for the purpose of holding an investment property. Over 1.1 million investors are negatively geared, and growing numbers are taking advantage of changes in policy that allow investment property to be purchased as part of a self-managed super fund. There is a whole sales industry built to cater solely for demand resulting from this sector.
Investors play an important role in all housing markets, they are needed and should be valued - however, at present; our models of investment – whether it is negative gearing, land banking, or borrowing to purchase in a self-managed super fund – are solely reliant on capital growth and therefore demand is overwhelmingly concentrated on a reducing pool of established property. Hence why vacancy rates remain at historical lows.
Furthermore, don’t be fooled by the idea that any of the above assists in providing our rental sector with ‘affordable’ accommodation. Taxation benefits or interest rate drops are not passed across and we remain comparable in ‘yield’ terms to our international counterparts who don’t facilitate such generous gearing rules.
If the intention is to increase the provision of affordable opportunities for the first home buying sector, as well as increasing the vacancy rate for renters, we can only do so by increasing the supply of well facilitated ‘quality’ real estate and reducing the ‘heat’ surrounding our city based established real estate market.
Unfortunately, it can only be done through Government policy and seeing as we’re in an election year, the subject rightfully deserves attention.
In short, it makes no sense to encourage investment if it doesn’t achieve
A) An improvement in housing affordability and supply
B) An increase in vacancy rates
C) A substantial boost to new housing and consequently infrastructure in ‘growth’ suburbs - and
D) Lower rents for the most venerable in our society
Current policy has failed to do this, are any of our politicians prepared to rock the boat and consider major reforms which could do so?