Australian Housing Affordability Discussion

[Foreigner]

I wonder if today's drop in official interest rate will encourage buyers.

This is lowest rate on record. Is it time to lock in rates?

 

[exceladdict]

I wonder if today's drop in official interest rate will encourage buyers.

This is lowest rate on record. Is it time to lock in rates?

A few articles around the place suggesting a follow up cut around September is likely.

Will have to wait to see how much actually gets passed on, considering bank funding costs are rising

 

[whatmeworry]

I wonder if today's drop in official interest rate will encourage buyers.

This is lowest rate on record. Is it time to lock in rates?

Couple of articles suggesting the changes to super and cut in interest rates and no changes to Negative Gearing will further heat the market.

 

[UP4014]

A few articles around the place suggesting a follow up cut around September is likely.

Will have to wait to see how much actually gets passed on, considering bank funding costs are rising

And how quickly it gets passed on.....

 

[Foreigner]

A few articles around the place suggesting a follow up cut around September is likely.

Will have to wait to see how much actually gets passed on, considering bank funding costs are rising

Of the BIG 4, Commbank, NAB, Westpac reported to have passed on 25 points in full.

 

[Moindardt]

Couple of articles suggesting the changes to super and cut in interest rates and no changes to Negative Gearing will further heat the market.

Reading about Shorten's plans to cut Negative Gearing reminded me a of conversation I had a little while ago with 2 different people who are both pretty high up with their respective banks. Both said pretty much exactly the same thing about the situation, the resulting affect of culling negative gearing and the comparisons to the subprime mortgage issues in the US.

The basics of it are that everyone recognises that negative gearing does inflate prices because more demand equals higher prices. However, removing it will have an exponentially greater affect. Initially it will drop prices by at least 30%, primarily because there is so much stock coming on at once rather than over a time period without the corresponding demand drivers. This will lead to a situation where two main things will happen, the maximum that will be able to be borrowed will drop from 95% to probably 70-75% which means demand will drop significantly, and secondly, the majority of first home owners that bought in the last 10 years will be in default because they will owe significantly more than their property is worth. This leads to the second stage of devaluation and credit dry up. The banks will have to start foreclosing on many properties which will put a scare into the market and decrease prices even further and the credit crunch will crash the economy. Unlike the USA, they can't just hand bank the keys and will be burdened with a debt they will never be able to pay.

Basically the end result is that as all banks in Australia have such high exposure, they would be effectively bankrupt, at least a quarter of the country would be personally bankrupt, the economy would be destroyed and would probably take 20+ years to recover. The funniest thing about it all, is the houses would be bought by people who did have cash, which is the rich people and foreign investors.

 

[exceladdict]

Reading about Shorten's plans to cut Negative Gearing reminded me a of conversation I had a little while ago with 2 different people who are both pretty high up with their respective banks. Both said pretty much exactly the same thing about the situation, the resulting affect of culling negative gearing and the comparisons to the subprime mortgage issues in the US.

The basics of it are that everyone recognises that negative gearing does inflate prices because more demand equals higher prices. However, removing it will have an exponentially greater affect. Initially it will drop prices by at least 30%, primarily because there is so much stock coming on at once rather than over a time period without the corresponding demand drivers. This will lead to a situation where two main things will happen, the maximum that will be able to be borrowed will drop from 95% to probably 70-75% which means demand will drop significantly, and secondly, the majority of first home owners that bought in the last 10 years will be in default because they will owe significantly more than their property is worth. This leads to the second stage of devaluation and credit dry up. The banks will have to start foreclosing on many properties which will put a scare into the market and decrease prices even further and the credit crunch will crash the economy. Unlike the USA, they can't just hand bank the keys and will be burdened with a debt they will never be able to pay.

Basically the end result is that as all banks in Australia have such high exposure, they would be effectively bankrupt, at least a quarter of the country would be personally bankrupt, the economy would be destroyed and would probably take 20+ years to recover. The funniest thing about it all, is the houses would be bought by people who did have cash, which is the rich people and foreign investors.

Is the exposure of banks to the housing market to marginal loans - excluding loans with LMI - significant enough to ruin them?

Not making a comment just don't know the numbers myself

 

[Moindardt]

Is the exposure of banks to the housing market to marginal loans - excluding loans with LMI - significant enough to ruin them?

Not making a comment just don't know the numbers myself

In itself no, but the resulting economic chaos and credit crunch bring all the business debt into the equation as well. The housing market would cause them to be in breach of all the liquidity and debt/equity and assessable ratios which is what forces all the credit crunch in the first place. The economic chaos and business failures just put it all over the edge. ** Actually just looked up some figures before posting http://www.apra.gov.au/adi/Publications/Documents/MBS-March-2016.pdf Over 2/3 of bank liability is Household and over 40% of Household is Investment. WOW **

Just give a little example of a flow on affect. Don't know all the details and players so don't grill me too badly. One of my clients had a client in a large regional centre. They were a huge massively successful business with a stellar credit record that supplied everyone in the region, who just folded out of the blue along with most of the businesses in the area. Basically all of the failures came back to one local mine (the biggest employer in the area) which had folded overnight. The result was may contractors and suppliers were not getting their money, ever. All the ones that had the mine as a major client just shut their doors. This just had a domino affect and quickly reached up the chain to the supplier. They could handle the mine and a few contractors failing, but all the others ended up putting them into insolvency.

This is exactly what happened in the US with the subprime. Basically all Australian ones were able to "ignore" these breaches because we had the highest profitability in the world.

 

[JohnK]

Reading about Shorten's plans to cut Negative Gearing reminded me a of conversation I had a little while ago with 2 different people who are both pretty high up with their respective banks. Both said pretty much exactly the same thing about the situation, the resulting affect of culling negative gearing and the comparisons to the subprime mortgage issues in the US.

We need to learn from history. Someone tried to abolish negative gearing ~30 years ago. Not such a good idea and quickly reversed the decision.

Foreign investors are the biggest problems in our housing market not negative gearing. Remove that issue and the rest of the problems become insignificant.

 

[UP4014]

We need to learn from history. Someone tried to abolish negative gearing ~30 years ago. Not such a good idea and quickly reversed the decision.

Foreign investors are the biggest problems in our housing market not negative gearing. Remove that issue and the rest of the problems become insignificant.

Negative gearing is a problem and overheats the market usually only in specific locations though. Foreign investment is also a problem but it works to help negative geared investors.

You buy a property you need to negative gear to make it viable for you to come close to break even (breakeven isn't much of an investment is it) but combined with foreign invesment it pushes up prices faster therefore your negative geared property is worth more sooner and you can make money on capital gains rather than the invesment itself.

 

[travelislife]

Reading about Shorten's plans to cut Negative Gearing reminded me a of conversation I had a little while ago with 2 different people who are both pretty high up with their respective banks. Both said pretty much exactly the same thing about the situation, the resulting affect of culling negative gearing and the comparisons to the subprime mortgage issues in the US.

The basics of it are that everyone recognises that negative gearing does inflate prices because more demand equals higher prices. However, removing it will have an exponentially greater affect. Initially it will drop prices by at least 30%, primarily because there is so much stock coming on at once rather than over a time period without the corresponding demand drivers. This will lead to a situation where two main things will happen, the maximum that will be able to be borrowed will drop from 95% to probably 70-75% which means demand will drop significantly, and secondly, the majority of first home owners that bought in the last 10 years will be in default because they will owe significantly more than their property is worth. This leads to the second stage of devaluation and credit dry up. The banks will have to start foreclosing on many properties which will put a scare into the market and decrease prices even further and the credit crunch will crash the economy. Unlike the USA, they can't just hand bank the keys and will be burdened with a debt they will never be able to pay.

Basically the end result is that as all banks in Australia have such high exposure, they would be effectively bankrupt, at least a quarter of the country would be personally bankrupt, the economy would be destroyed and would probably take 20+ years to recover. The funniest thing about it all, is the houses would be bought by people who did have cash, which is the rich people and foreign investors.

So does the modelling seriously say that if changed today a large amount of stock would instantly hit the market? I thought labors proposal was to keep it on existing where people already own to avoid that?

 

[UP4014]

Reading about Shorten's plans to cut Negative Gearing reminded me a of conversation I had a little while ago with 2 different people who are both pretty high up with their respective banks. Both said pretty much exactly the same thing about the situation, the resulting affect of culling negative gearing and the comparisons to the subprime mortgage issues in the US.

The basics of it are that everyone recognises that negative gearing does inflate prices because more demand equals higher prices. However, removing it will have an exponentially greater affect. Initially it will drop prices by at least 30%, primarily because there is so much stock coming on at once rather than over a time period without the corresponding demand drivers. This will lead to a situation where two main things will happen, the maximum that will be able to be borrowed will drop from 95% to probably 70-75% which means demand will drop significantly, and secondly, the majority of first home owners that bought in the last 10 years will be in default because they will owe significantly more than their property is worth. This leads to the second stage of devaluation and credit dry up. The banks will have to start foreclosing on many properties which will put a scare into the market and decrease prices even further and the credit crunch will crash the economy. Unlike the USA, they can't just hand bank the keys and will be burdened with a debt they will never be able to pay.

Basically the end result is that as all banks in Australia have such high exposure, they would be effectively bankrupt, at least a quarter of the country would be personally bankrupt, the economy would be destroyed and would probably take 20+ years to recover. The funniest thing about it all, is the houses would be bought by people who did have cash, which is the rich people and foreign investors.

Shortens plan wasn't to dump negative gearing completely, so the rest of your post is pretty much hyperbole. Infact it could be said that new people would come into the market who cannnot at present as prices reached their mark holding property values at just a couple of % below where they are now.

 

[Moindardt]

Shortens plan wasn't to dump negative gearing completely, so the rest of your post is pretty much hyperbole. Infact it could be said that new people would come into the market who cannnot at present as prices reached their mark holding property values at just a couple of % below where they are now.

Maybe you should go back and read what I wrote. It reminded me of conversations I had had and were about removing negative gearing. If you read many of the comments earlier in the year, they are all calling for the abolition of Negative Gearing as per the McKell Institute report. It was comments like "the poor subsidising the rich" which was hilarious because the poor pay nothing and the rich subsidise their lifestyle. I also see that there are a number of comments still flying around that they are saying it for election purpose and then will scrap it if they win. I particularly laughed when SMH printed this, "The $2.4Billion a year currently spend on negative gearing is an unjustifiable use of precious taxpayers money in today's climate". It's not taxpayers money, it's the person who worked hard and earned it's money. They are just reducing the ridiculous amount they will pay to a government to piss up against a wall.

New people will not come into the market en masse because they would have already. Even on a million dollar home, you a talking about a couple of thousand dollars less at best. If that's what stopped you, you weren't too serious in the first place. Most "professional" investors don't win at auction unless there is a bargain. Auctions are emotional events designed to drive the price up and investing is all about not being emotional. They will normally be the first in with a lowball offer but pay more if they play has development potential. I was talking with a client recently about his new property and he undercut's the market rate by at least 10% with a cash unconditional contract even more if it's been sitting on the market for a while. A good investor knows that you make the money when you buy it as you can't control what the market will be doing when you sell it.

To head off another one of the points that will be raised, Keating removed and re-introduced it because of the prospect of spiralling rent costs. Labor cronies constantly say that there was no rent spiral however the timeframe, combined with things such as interest rates (16% I think) and booming property prices might have had something to do with it (remember it coming up in Economics subjects a few times but don't remember details). I just remember it being like the discussion of whether the Y2K bug was really there because nothing happened... did nothing happen because something was done about it or would it have not happened anyway??

Personally I am against negative gearing, not because proper investor's abuse it, but people with generally white collar jobs, around $100k, use it to reduce their tax, make stupid investment choices, will make emotional buys and think that's the way they will get rich. Most people I know will be capitalising the interest because its a short term capital investment for development (via company or trust etc) or its positively geared.

 

[JohnK]

Personally I am against negative gearing, not because proper investor's abuse it, but people with generally white collar jobs, around $100k, use it to reduce their tax, make stupid investment choices, will make emotional buys and think that's the way they will get rich. Most people I know will be capitalising the interest because its a short term capital investment for development (via company or trust etc) or its positively geared.

I really don't understand the negative gearing argument.

The government has done quite well out of me. I risked $175,000 of my own hard earned cash to buy a property. Ok I didn't pay cash but I got a 100% + borrowing costs loan. The risk is all mine. The government then got tax off me at my 48.5% tax rate for the rent I earned on this property. When I sell this property for $475,000 the government will get another ~$70,000 from me as capital gain tax.

Not a bad little earner for the public coffers? And all they did was allow me some deductions when I was paying it off and a 50% concession on the capital gain at time of sale.

I can assure you I was not going to risk paying off $175,000 over 20 years without being allowed to deduct all expenses on the loan and I definitely wasn't going to risk it if I had to pay marginal tax rate on 100% capital gain. No way.

What I could have done is spent my money everywhere and anywhere and then expected the government to take care of me in retirement. Isn't this what the bludgers do?

The problem is foreign investment. Stop that now and our future generations have a chance.

 

[eastwest101]

Shortens plan wasn't to dump negative gearing completely, so the rest of your post is pretty much hyperbole. Infact it could be said that new people would come into the market who cannnot at present as prices reached their mark holding property values at just a couple of % below where they are now.

If the current Labor policy is to disallow negative gearing on existing houses, but allow it on new construction housing (with a sunset clause to continue to allow negative gearing on existing negitavely geared housing) then the sunset clause will be brand new distortion on the property market. It will mean that investors whom have neg geared properties will hang onto them because of the tax advantages and younger people whom may have wanted to invest in property can't use negative gearing unless its in outer new build suburbs or in riskier inner city new apartment construction. When you step back and look from afar, the proposed "sunset clause" will actually increase intergenerational inequality not solve it.

Comments about the GFC originating in the US real estate bubble pre 2007 are informative because they tell us that govenment decisions around tax policy and planning may result in unforseen distortions to a market, remember what were the policy decisions that lead to Fannie May and Freddie Mac? In Australia, with the property market, the government collects revenue and distorts investment decisions at the buying stage (Stamp Duty), in the ownership stage (Land Taxes often raised as a possibility), for investors (Negative Gearing), for home owner occupiers (wage earners taxed before they pay for housing either as rent or a mortgage) and when the property is sold or disposed of (Capital Gains Tax for some but not others) which itself triggers buying stage stamp duty and taxation. Stamp duties are the worst taxes as they discourage buying, downsizing of houses to more realistic size for older australians, and impede labour force mobility within Australia on a town to town or state-to-state migration level. Then there is the whole issue of the different reasons people invest in residential housing which interacts with the complex progressive income taxation system and social security systems in Australia.

Expensive real estate prices can be addressed by other methods such as additional supply (through decreasing planning and construction costs and getting red tape out of the way) but assuming a market thats open to people from other contries also brings in the additional complication of being connected to other property markets around the world.

Intergenerational and demographic change and ageing will also play a part and it remains interesting to see if the pattern of generations "raising the drawbridge up after them" continues or not.

 

[UP4014]

If the current Labor policy is to disallow negative gearing on existing houses, but allow it on new construction housing (with a sunset clause to continue to allow negative gearing on existing negitavely geared housing) then the sunset clause will be brand new distortion on the property market. It will mean that investors whom have neg geared properties will hang onto them because of the tax advantages and younger people whom may have wanted to invest in property can't use negative gearing unless its in outer new build suburbs or in riskier inner city new apartment construction. When you step back and look from afar, the proposed "sunset clause" will actually increase intergenerational inequality not solve it.

Comments about the GFC originating in the US real estate bubble pre 2007 are informative because they tell us that govenment decisions around tax policy and planning may result in unforseen distortions to a market, .........

snipped

.

There are moving distortions all the time, in housing, in super and in (heaven forbid) air transport imposed by government.

 

[whatmeworry]

Changes to negative gearing are needed because it just doesn't distort the market but it enables people with higher incomes to effectively write off tax losses which sometimes in turn leads to leave the home empty or face paying more tax. So effectively the government is missing out on tax for property speculators.

 

[Moindardt]

I really don't understand the negative gearing argument.

The government has done quite well out of me. I risked $175,000 of my own hard earned cash to buy a property. Ok I didn't pay cash but I got a 100% + borrowing costs loan. The risk is all mine. The government then got tax off me at my 48.5% tax rate for the rent I earned on this property. When I sell this property for $475,000 the government will get another ~$70,000 from me as capital gain tax.

Not a bad little earner for the public coffers? And all they did was allow me some deductions when I was paying it off and a 50% concession on the capital gain at time of sale.

I can assure you I was not going to risk paying off $175,000 over 20 years without being allowed to deduct all expenses on the loan and I definitely wasn't going to risk it if I had to pay marginal tax rate on 100% capital gain. No way.

What I would have done is spent my money everywhere and anywhere and then expected the government to take care of me in retirement. Isn't this what the bludgers do?

The problem is foreign investment. Stop that now and our future generations have a chance.

Johnk, you are the perfect example of why negative gearing should exist. People who are willing to do their homework and use it as a true investment tool don't inflate the market. I am pretty sure you got a good deal on that property given your return. My point is about the idiots who make the bad choices and pay too much for them. I just feel this enables idiots and goes against everything our system does. Nowhere else do we enable idiots.

 

[CaptJCool]

I think there are two issues here;

1. State Govt heavily invested in construction of public housing til around 1980-85. Then they "exited" that to reduce their expenditure by rent to buy schemed (imagine the upkeep on old stock) and began self-fund public housing because they demolished public houses on big quarter acre blocks and subdivided and sold to use the money to build the next lot. Better still, the commonwealth Govt picked up the slack by granting private indiv the right to negative gear so the cost is out of state govt budgets and now in the fed (chickens coming home to roost now with the gaping hole of public funds for hospitals, schools and medicare

2. GFC was inflated pricing on holiday home locations and property spruikers and false facts on loan applications. Homes became an economic profit-maker rather than a place to live. Just like all the "old ducks" living in home purchased 60 years, there is no cash nor tax until the asset is sold and it crystallises the profit and liability. House prices are inflated because 2 income households (especially with no kids and no HECS) can afford to offer more, whether savings of a deposit or borrowings. (And we know the hatred for reverse mortgages; my god it took 30 years to pay it off, why the f... Would I want to be beholden to the bank ever again ??????)

3. The deregulation of the housing sector. Developers didn't exist before the late 60s. The govt did the majority of housing developments and look they don't have e thirst to "maximise profits". Real estate agents used to be like the old family doctor. Compassionate and caring. Now they like the profits too much, and they love the endless buying and selling; mortgage brokers were bank employees but outsourced in the late 90s and they love the endless re-financing with the banks lust for profits but with less borrowers how would they lend money so they love the endless investor loans -and the 4 pillar policy - too big to fail - and interest rates are irrelevant to them they are borders to take a clip of the transaction. The loss offloaded onto self-funded retirees for which then Howard gave a 60th birthday ever after tax holiday. what followed was ridiculous price uplifts. I would like to see some key de-regulation events lined up against the decades as this tells a story.

So now my kids have asked me to shell out for a home each. I told them. I'll shell out for a room each but not a house. If you want a house each, grab the Monopoly game out of the cupboard. There's a green one there for everyone

 

[dajop]

I can assure you I was not going to risk paying off $175,000 over 20 years without being allowed to deduct all expenses on the loan and I definitely wasn't going to risk it if I had to pay marginal tax rate on 100% capital gain. No way.

Your post indicates the fundamental communication problem that any politican, spokeperson or other commentator has in talking about abolishing negative gearing - and that's that I am not sure people understand what negative gearing actually is. I think many think plans to abolish it means that you won't be able to deduct interest/rates etc expenses at all - which is not the case.

Firstly, you made the comment "government then got tax off me at my 48.5% tax rate for the rent I earned on this property." Anyone who was negatively geared would be paying NO tax on the rent earnt on the property. Zero, nothing. And furthermore you would be able to claim any losses you made (ie if your interest bill + rates + maintenance > rent) from your other sources of taxable income (in most case wage or salary).

Secondly you make the comment "I can assure you I was not going to risk paying off $175,000 over 20 years without being allowed to deduct all expenses on the loan " Even without negative gearing, you can still deduct the expenses from the rent you earn, and if they exceed the rent, you will be making a loss on the property. The difference if negative gearing is abolished, is that you wouldn't be able to claim a deduction for this loss from your other sources of income.

Can't help but think a measured gradual retreat from negative gearing could be helpful in the long term. But the timeframes involved to a "measured" retreat would be way too long for the political cycle.