Cutting through the Anti Negative Gearing Hype

I don’t know about you but it seems like I can’t read a paper or watch the news without coming across some exaggerated huff and puff piece on how negative gearing is affecting property prices. I realise Property Values are a hot topic in Australia and any mention receives instant attention but all the articles and segments I’ve come across have a similar feel to them;

 “Negative Gearing is ruining the property market”,
“Negative Gearing is an unjust tax rort that favours the rich”,
“Negative Gearing is the reason why first home buyers can’t enter the market” and on it goes.
 

Still a great scene.

https://www.youtube.com/watch?v=FORtwA2lsjM   

I find it annoying. It’s prompted me to have my say or as Jules from Pulp Fiction would say allow me to retort. This issue is near to me because I believe it is a viable strategy and have recommended it numerous times over my career. I practise what I preach. I certainly don’t think it’s the main reason property prices have escalated as much as they have……and I just hate sensationalist hype. I fear this it will be a little long so for the reader’s benefit I will break it up into bite size pieces.

The topics include;

· Why I think prices are at an all-time high,(it’s not brain surgery and you won’t need an economic degree to follow it),

· Some other factors that I think have affected house prices,

   A deconstruction of a popular panellist’s anti negative gearing tirade, (also known as Tearing Aly a New One),

·  Some statistics and figures about those dastardly Negative Gearers,

·  Why we should applaud these rational investors and who else benefits from negative gearing.  

Who Am I to Blow against the Wind? 

I don’t claim to be a property guru but I have spent almost 15 years advising normal mums and dads on all things financial including property and negative gearing. During that time I have followed the market watching it rise, fall and move sideways. I’ve read so much commentary and conflicting opinions that I have lost track of how many “housing bubble’ articles I have read. I have also learnt to be very skeptical of what I am reading and hearing because most of it half-baked tripe at best. 

I’ve seen everyone from treasurers to economists (Better Call Saul for a negative Gearing quote)) to fund managers comment on negative gearing. But it is the ever expanding “opinionatti”, better known for their for views on smoking in the public places or breast feeding at airport lounges, suddenly piping up and explaining how negative gearing is going to end the world as we know it that has irked me. 

I find it annoying that the media can unload a torrent of populist crap, perpetuate half-truths and disregard blatant and obvious information at their disposal yet not be held accountable.

But what annoys me the most about this debate is that the ‘opinionatti’ and those who should know better, those that make a living out of the dissecting the economy seem to disregard the most obvious, the most basic, the most compelling reason why property prices have gone up so ridiculously in recent years ……………Interest Rates.

Interest Rates Are Driving Prices

Yes.

Gasp, shock, horror!

Interest rates have had the major bearing on property prices. Sounds too simple to believe doesn’t it.  There are other reasons and I will touch on them later but by far the driving factor in property price increase has been our exceptionally low interest rate environment.

 

 

I don’t think you need a degree from Harvard University to work out the major affect the cost of money has had on property prices. Interest rates haven’t been this low since the early 1960’s. I dare say this is when the great Australian dream of owning a property became the “Great Australian Dream”.    

Interest Rates throughout the 1980’s and into the mid 1990’s were mostly above 10%, peaking at 17% after the 1987 crash.  They started coming down in 1996 and have been sub 10% ever since. A quick google will show this is when Australia’s property Bull Run started. An unrelated coincidence ….I don’t think so.

Interest rates are low, crazily low.

Right here right now if you are paying more than 5.25% in interest costs you need to speak to a mortgage broker. (Or call me, I’ll gladly help)

Many fixed and variable rates are sub 5% and some honeymoon rates start with a 3. For those that lived through interest rates of +10% rates this is a god send.

Why wouldn’t they invest into property? 

To quote our Treasurer “I say to the Australian people directly, now is the time to borrow and invest whether you’re a household or small business, now is the time to have a go to borrow some money and to invest. Invest in the things that help to create jobs.” 

As obvious as interest rate effects are I barely hear a mention of them when property prices and especially negative gearing is discussed.

Hello. Llearned scribes do you think the cost of money might have something to do with appeal of negative gearing and property investment as a whole.  There is no doubt that if interest rates were at 9.5% investors would have greater reservations about entering the market. A $350,000 loan at 5% with a monthly interest only cost of $1458 is a lot more palatable than the corresponding loan at 9.5% and $2771 per month.  My client conversations were not as panicked when rates were higher

(RBA interest rate figures found here www.loansense.com.au/historical-rates.html).

 

Other Factor Affecting Property Prices  

For those who want to read less here is the following in bullet points: ·

      Irrational Love of all things property

     Reduced personal Income Taxes

     Increased Income led to feeling of Wealth

    Fear of missing the boat

     A greater appetite for Debt.

Cut it anyway you like Australians have an almost irrational love of property. In fact if you had to describe Australians based on our television viewing habits you would say all we did is cook gourmet meals and renovate houses.

But how did property values reach levels where they are commonly quoted as being among the most expensive in the world. What other factors were at play that helped fuel our property prices.  Let’s back it up just a little.

Coming off more than a decade of unbroken economic growth the early naughties were prosperous period for Australia.  Times were good, the Olympics were in town and the GFC was a long way off. The government was flush with cash thanks to the GST and mining boom.  Instead of putting that cash into infrastructure they decided it was time to give back to the people and decrease personal income tax rates.  (Bracket creep may have had something to do with it as well.) In 2001 the top tax rate was 47% and it kicked in once you were earning $60,000. By 2006-07 it was $150,000 and 45%. 

(https://www.ato.gov.au/Rates/Individual-income-tax-for-prior-years/)

People were earning more and felt like they had more cash in their pocket. With more cash in the pocket the propensity is to spend more and what do Australians like to spend their money on. You guessed it the Great Australian Dream again.   People were flocking to auctions and bidding up a storm.

When sitting with clients during this time the sentiment was if I don’t get into the property market now I won’t be able to afford it later. 

Enter the GFC in 2007/2008 and suddenly people are nervous. World Share markets took a battering and shares were on the nose as it was the first time people saw their superannuation funds go down.  Property prices took a breather but early 2009 saw several substantial interest rates decreases. 1% at a time. Interest rates tumbled by 3% in the first 6 months of 2009, this kick started the property market again.

On top lower interest rates, greater disposable income, a dodgy share market and the perceived safety of bricks and mortar our appetite for finance and debt increased greatly over the last 15 years.  Years ago if you told somebody you were going to borrow $200,000 others would have said you were mad, now you would be lucky to have that little debt.  

According to ABS statistics the average mortgage has gone up from approximately $90,000 in the mid 90’s to $150,000 in 2001 and $300,000 in 2013. This year national mortgage broker, AFG, stated that their average mortgage size was $443,000, up $40,000 from last year.    

Combine all of these factors and it is hardly surprising property prices rose so dramatically during the last 20 years.  Other factors such as Foreign Investment are also influencing property prices.

How can anyone with a straight face say that negative gearing simply is the main cause of property price growth and that by simply removing it is going to get house prices back in line.  Ridiculous.   

Stay tuned for the next installment where I strike down upon a popular panelists anti negative gearing tirade with great vengeance and furious anger and real life examples. Or as I call it Tearing Aly a New One.  Sorry could resist the pulp fiction thing again.  

Thank you for reading.

Andrew Bonnici is an adviser at Endgame Advice.

Comments, suggestions and criticisms can be emailed to andrew@endgameadvice.com

www.endgameadvice.com