Prop­erty down­turn a ‘threat’, says RBA

The Weekend Australian - - FRONT PAGE - DAVID UREN

The prop­erty boom has lured hun­dreds of thou­sands of low­in­come Aus­tralians into neg­a­tively geared in­vest­ments that the Re­serve Bank fears could threaten fi­nan­cial sta­bil­ity in the event of a down­turn.

In a warn­ing that ris­ing house­hold debts are the big­gest do­mes­tic risk to the Aus­tralian econ­omy, the Re­serve Bank is con­duct­ing “stress tests” of the bank­ing sys­tem to see how it would cope with a se­vere re­ces­sion, in which house prices plunged by 40 per cent or more.

In its lat­est re­view of the fi­nan­cial sys­tem, the Re­serve Bank said the most vul­ner­a­ble group of bor­row­ers were those on low in­comes. Its anal­y­sis of tax records shows 11 per cent of peo­ple earn­ing less than $50,000 have an in­vest­ment prop­erty, and most of them are neg­a­tively geared.

“House­hold in­debt­ed­ness is high and, against a back­drop of low in­ter­est rates and weak in­come growth, debt lev­els rel­a­tive to in­come have con­tin­ued to edge higher,” the RBA said. House­hold debt re­cently touched a debt-to-in­come ra­tio of 194 per cent — one of the high­est in the world.

The bank says while some house­holds had taken ad­van­tage of low in­ter­est rates to ac­cel­er­ate their mort­gage re­pay­ments, oth­ers had taken on more debt.

“Higher in­ter­est rates, or falls in in­come, could see some highly in­debted house­holds strug­gle to ser­vice their debt and so cur­tail their spend­ing,” the bank says.

Although the ini­tial as­sess­ment from the RBA stress test is

that the high level of re­tained bank prof­its would pro­vide a buf­fer in the event of a down­turn, much would de­pend on how steep the fall in rev­enue was.

The RBA iden­ti­fies three groups that are par­tic­u­larly ex­posed: in­vestors aged over 60 who are still car­ry­ing mort­gage debts; peo­ple neg­a­tively gear­ing mul­ti­ple prop­er­ties; and those buy­ing prop­er­ties in in­ter­state mar­kets they don’t un­der­stand.

The bank es­ti­mates about two mil­lion peo­ple have in­vest­ment prop­er­ties, of whom 80 per cent have a mort­gage and 60 per cent are neg­a­tively geared.

“With many not earn­ing pos­i­tive in­come from their prop­erty, prospec­tive cap­i­tal gains are more likely the pri­mary ra­tio­nale for in­vest­ing,” it says.

The RBA has long called for re­form of prop­erty tax­a­tion, ar­gu­ing that neg­a­tive gear­ing and cap­i­tal-gains con­ces­sions could en­cour­age ex­ces­sive spec­u­la­tive in­vest­ment. The tax records show that 45 per cent of prop­erty in­vestors earn less than $37,000 while more than 75 per cent earn less than $87,000.

Although peo­ple on high in­comes in­cur the big­gest losses on their neg­a­tively geared in­vest­ments, the Re­serve Bank says that rel­a­tive to in­comes, the losses are great­est for those at the bot­tom end of the in­come scales.

“Lower-in­come tax­pay­ers may be more vul­ner­a­ble to in­creases in debt-re­pay­ment obli­ga­tions or re­duc­tions in in­come,” it says.

“They might also be more re­liant on ren­tal in­come to meet their re­pay­ments.”

Among com­mu­nity and per­sonal ser­vice work­ers, for ex­am­ple, about 10 per cent have an in­vest­ment prop­erty, of whom two-thirds are neg­a­tively geared. Their av­er­age in­come is only $31,790. Sim­i­lar shares of lowearn­ing labour­ers and sales work­ers have neg­a­tively geared in­vest­ment prop­er­ties.

The RBA says about 35 per cent of peo­ple in the low­est in­come bracket are aged over 60, of whom many are re­tired. Over the past decade, the share of prop­erty in­vestors aged over 60 has dou­bled to about 22 per cent. Of those with no in­come, sug­gest­ing they have re­tired, about 40 per cent still have a mort­gage.

The RBA’s anal­y­sis shows there has been rapid growth of peo­ple hold­ing mul­ti­ple prop­er­ties. The num­bers hold­ing five or more in­vest­ment prop­er­ties jumped by 7.5 per cent in 2014-15, the lat­est year for which tax records are avail­able. The tax data does not re­veal fur­ther in­for­ma­tion about the in­comes and char­ac­ter­is­tics of the mul­ti­ple prop­erty in­vestors, but the RBA says that they “likely con­trib­uted to higher risk”, given the strong growth in in­vestor credit dur­ing the boom and the riskier types of bor­row­ing, such as in­ter­est only loans, that have been pop­u­lar.

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