Lately, there has been expressions of anguish about the sky-high prices being achieved for residential property and the woes for younger Australians who cannot see how they will ever be able to join the ranks of home owners without funding from the Bank of Mum and Dad. BOMAD is now reported to be the ninth largest mortgage lender.
Recently, a review of the predictions of 38 economists and leading experts reported that the consensus view is that prices in Sydney and across Australia will rise by more than 8% in 2022. After a rise of 24% in Sydney this year, how can this be? Surely, we must be due for a crash, or at least a flat year. Well, I agree with the experts and here’s why.
The Reserve Bank hasn’t touched its only lever – interest rates. Consistent RBA commentary indicates that it is welded in place until at least 2023. They are clearly concerned and would prefer that some heat was released from the real estate market. However, it’s not their role. Their job is to manage the entire economy, important things such as inflation, employment, debt etc.
In October, one relatively minor adjustment was the mortgage serviceability test. It’s been tightened by the lending regulator APRA, so banks are now required to assess an applicants’ capacity to withstand a 3 percentage points increase of the interest rate (up from 2.5). There seems no willingness to look at tightening other measures such as the Loan-to-Valuation (LTV) ratio and the Debt-to-Income ratio (DTI), although APRA did emphasise their cautionary concerns to the Banks.
So, if there is any mechanism that is to be used to moderate prices, it has to come from the multiple choices that are available to the Federal Government.
- Negative gearing (requiring losses be offset against future profits, rather than current income)
- Capital Gains Tax (the current generous 50% discount could be adjusted or alternatively removed and indexed against inflation (CPI), as it was back in 1999).
- Depreciation (although its generosity was reduced several years ago, any residential investor would be mad to not have a depreciation schedule today)
- Capital Gains Tax on the primary place of residence
- Supporting the State Governments to replace their Property Transfer Duty (Stamp Duty) with a Land Tax or Property Value Tax on all real property. Though, watch this space on Stamp Duty in NSW where a ‘too little – too late’ strategy will probably deliver a half-baked solution (compared to the one in the ACT) in the next few years.
Of course, these possibilities are locked in a darkened room somewhere and none of them will see the light of day before the next election and probably the one following in 2025. There may never be an appetite for fundamental change. There will always be more property owners than First Home Buyers and everybody remembers what happened to the Labour Opposition in 2019 when they proposed changes to Capital Gains, Negative Gearing, Dividend Imputation and Franking Credits. The Baby Boomers and Gen X didn’t respond well to the idea of taxing Capital & Wealth more and Salaries & Income less.
As with the definition of insanity, why would we expect a different result if we keep doing the same thing? All the settings have favoured real estate as the popular investment choice for the Australian people, so prices have risen and will continue to do so. The huge demand has been encouraged by this, but recently strongly facilitated by a confluence of factors. Number one is the historically unprecedented low interest rates. Added to this is FOMO, some irrational exuberance, lack of other investment choices, hungry banks and an increased appreciation for the family home due to COVID lockdowns.
Many parents are anxious for their children and fear that for their prospects for ever owning their own home, except via BOMAD or an eventual inheritance. The Federal Government looks on, seemingly helpless, and responds with the age-old – SUPPLY! It’s very convenient, as this effectively shifts the blame to State Governments and Local Councils.
“If only there was more residential property, then supply and demand would fix property affordability.” Except lately, it isn’t true. The population actually declined through this latest meteoric rise plus, as new building developments completed, supply increased as well. Supply and demand principals certainly drive rental values and rents have been falling across the major cities (while rising in many regional areas). The Reserve Bank recently pointed out that Supply is not responsible for the current boom in house prices.
When interest rates rise, as they must, there will be the trigger for prices to moderate and perhaps decline in 2023 or 2024. In the meantime, the evidence says they will rise.
The RBA made an excellent submission to the Inquiry into Housing Affordability and Supply in Australia in September that you may find interesting. They begin with a nod to Maslow’s Hierarchy of Needs with the sentence “Shelter is a fundamental need”. Wise words.
By Wayne Marriott, Principal