David Bryant, chief executive officer of Australian Unity Investments, said that action is long overdue to address the current distortion in the system regarding investment housing and negative gearing.
Mr Bryant believes this is needed to address the concerns raised by the Reserve Bank of Australia (RBA) in regards to Australia’s elevated housing market.
“It is time to look at adjusting concessions on negative gearing as a means to address the RBA’s concerns with the housing market, rather than resorting to blunt instruments such as capital controls,” he said.
Mr Bryant said the Reserve Bank has recently indicated it is concerned about rising house prices in Australia, and that it has three potential ways of fixing the current problem, some of which will require Treasury and Government support.
“The first option, and to me one that is long overdue, is to look at adjusting existing distortions, the obvious one being negative gearing. This is a far better course than introducing new distortions.
“The Reserve Bank can seek to implement capital or lending controls but these are untested in Australia; whether they will work is unclear; and they could actually further distort the market as we don’t know what consequences will come.
“Raising interest rates is the third option. However the Reserve Bank is likely to want to see several rate increases come through in the US and UK before it makes any move locally, and central banks in these countries have indicated these are not likely to commence until March next year. Realistically, it’s going to be 12 months before the RBA can use interest rates as a tool to manage house prices.
“Higher rates are also a problematic solution as they are indiscriminate, affecting new home buyers and those on lower incomes more than investors. They would also lead to a stronger AUD, and given it is only in recent weeks that the currency has begun to support the RBA’s objective of re-balancing the economy away from the mining sector, a rate increase is not a viable option just yet.”
Mr Bryant said the statistics show that negative gearing is heavily used by investors, and that is likely having a significant impact on demand. The resulting price pressure cannot easily be rectified by an increase in supply as it can in other markets, and so other ways to alleviate that pressure must be considered.
“1.8 million Australians own investment properties and two thirds of these (1.2 million) record a loss against their rental income each year. And with 45 percent of home loans now going to investors – which is two and a half times the level of the early 1990s – that number is only going to increase.
“Of more concern, loans for investors used to be evenly split between existing houses and new construction, whereas now more than 90 percent is for existing homes. The economic benefit which negative gearing provided (through construction) has now largely fallen away. So given these changes, the question is whether negative gearing only makes sense for new construction.
“Residential property is also over-represented for many investors when their existing home is included in measuring the assets they have. Removing some negative gearing benefits will not only help settle the housing market, but may encourage investors to diversify into other asset classes and build more balanced portfolios,” Mr Bryant said.
Australian Unity Investments (AUI) is the funds management arm of financial services, health and retirement living services provider Australian Unity. AUI provides specialist mortgage, property, fixed interest and equity products to investors.
AUI’s investment approach is to use its established in-house expertise in property and mortgages while also forming joint ventures and strategic alliances with other specialist organisations.
For more information please contact:
David Bryant – Phone: 03 8682 4401
30 September 2014