• 24/07/2024

Are baby boomers overheating the property market?

The New Daily – Mar 19, 2015

By Johanna Leggatt


Baby boomer landlords have been blamed for squeezing younger buyers out of the market. We test this claim.

Negative gearing: it’s a complicated and bizarre-sounding name for a relatively simple idea.

If you own an investment property, and the cost of the mortgage interest and maintenance exceeds the income you receive through rent, you can claim tax back on the difference.

This is a huge incentive for would-be landlords to buy an investment property, and critics believe it is pushing demand up and squeezing young homebuyers out of the market.

One such critic is Bank of America Merrill Lynch chief economist, Saul Eslake. Last September, he caused a stir by calling for an end to negative gearing in Australia, reigniting an issue that has long been divisive among property pundits.

“In my view it (negative gearing) is serving to push up the price of the existing dwelling stock to the disadvantage particularly of younger people, who would like to become home owners, and previous generations who would have been home owners by now already,” Mr Eslake said.

According to the Reserve Bank’s Financial Stability Review late last year, investor home loan approvals accounted for almost 40 per cent of the total value of approvals, the highest it has been for 10 years. Meanwhile, first home buyers represent an ever-dwindling share of the market – as of last November they made up just 12.3 per cent.

Furthermore, ratings agency Moody has claimed that negative gearing has pushed up property prices by nine per cent, and so concerned is Treasurer Joe Hockey by housing affordability he floated the idea recently of young people drawing on their super to buy property in a bid to compete with investors at auctions.

So it seems that superannuated baby boomers, drawn to property investment by the generous tax benefits of a negatively geared property, are to blame.

Case closed? Well, according to experts spoken to by The New Daily, it is a little more complicated than that.

Retirement strategy

Mortgage advisor and author of Escape the Rental Trap, Tim Boyle, argues while negative gearing plays “a role” in steep property prices, its effects are often “exaggerated”.

“It is a bit like the argument that foreigners are making our markets more expensive, it is very hard to quantify,” Mr Boyle says.

“A lot of these claims are anecdotal.”

Mr Boyle believes baby boomers are playing a role in preventing first home buyers from entering the market but not through negative gearing.

“They are attracted to property investment because they need to boost their retirement savings,” he says.

“They may not have much of a mortgage on their property but the average super balance is only about $100,000 so they have to find an income stream and renting out a property, which will grow in value, is a retirement strategy.”

Rather than scrapping negative gearing, Mr Boyle says the real way to help first home buyers is to give them interest rate discounts.

“Ever since the first home buyers’ grants were wound back, first home buyers have left the market,” Mr Boyle says.

“It may be time to introduce a subsidy for first home buyers, where they receive a discount interest rate for the first five years of their mortgage.”

Excuses, excuses

Empower Wealth Property Investment’s Ben Kingsley is frustrated by the calls to end negative gearing and sees no link between the tax leverage and steep property prices.

“What so many uneducated commentators who are calling for the removal of negative gearing don’t understand is that a property is only negatively geared for a portion of its life as an investment,” he says.

“Those who invest in property for a longer period are in fact paying income tax on the rental income they receive.

“Just like any business starting out, you might not run at a profit to start with, but when you do become profitable over time, the government earns tax income from the ongoing rent received.”

Social service

Property expert Peter Koulizos agrees, and argues that the positive side of negative gearing is often overlooked.

“A lot of these investors are actually supplying homes for people who cannot afford to buy homes,” says Mr Koulizos.

“There is a huge waiting list for public housing and what the government tends to do is to give low-income earners money as welfare assistance and they then rent privately.

“So there is a social service aspect to property investment, even if that is not likely to be the reason the investor bought the property to begin with.”


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