ABC News – Thursday 6 August, 2015
By Michale Janda
A senior Reserve Bank official has warned property investors to expect slower home price growth and occasional price falls, but does not expect them to flee the market en masse.
Testifying before the House of Representatives Economics Committee inquiry into home ownership, the RBA’s head of financial stability Luci Ellis warned that the spectacular growth many older investors experienced during the late 1990s and early 2000s was a one-off.
“Trend housing price growth is likely to be lower in the future than it was in the 15 years to 2005,” she told the committee members.
“It’s reasonable to expect that there’ll be, as there have been over the past decade, more periods in which prices are slightly falling.”
Some housing analysts are concerned that a period of falling, or even stagnating, prices could prompt many housing investors to sell their properties to either lock in gains or minimise losses.
However, Dr Ellis is confident that investors will not sell en masse unless there is a dramatic rise in unemployment, a significant increase in interest rates or some other economic factor that means that cannot meet their repayments.
“You’ll only get a firesale of property if you absolutely have to because you’ve defaulted,” she argued.
Dr Ellis said there are a number of demographic changes that account for a fall in the proportion of first home buyers and an increase in the age at which they are buying, such as later family formation.
In that context, and given the steep investor-driven price rises in some markets, Dr Ellis said that making it easier for first home buyers to borrow money would be a dangerous way to increase home ownership.
“While there has been much debate on this issue, from a financial stability point of view, it is helpful that there has been no push to improve the relative position of first home buyers by easing lending standards,” she told the federal parliamentarians.
“As recent experiences in other countries have shown, such a step would probably be counterproductive in the long run.”
Increased accessibility to home loans for lower income Americans has been widely blamed as a key contributor to the US financial crisis that was triggered by mass defaults of ‘sub-prime’ loans.
RBA rebuts key arguments against restricting negative gearing
While the Reserve Bank does not advocate giving first home buyers a leg up, the RBA is more supportive of reducing some of the tax incentives that encourage debt-fuelled investor demand.
The RBA officials declined to offer specific policy advice, but repeated earlier warnings that the combination of negative gearing and the 50 per cent capital gains tax discount was encouraging property investors to take on more debt and pay higher prices.
“We are not suggesting that negative gearing be looked at in isolation – we think that a holistic review of all the tax incentives to be engaged in leveraged asset accumulation are worthy of review,” Dr Ellis explained.
Despite repeated assertions from several key members of the Federal Government – including the Treasurer – that restricting negative gearing would push up rents, Dr Ellis said there is insufficient evidence to reach such a conclusion.
When negative gearing was restricted for two years in the 1980s rents surged in Sydney and Perth but were fairly flat, or even falling, in the other capital cities.
Dr Ellis told the committee that two years was not a sufficiently long period to gauge the long term effects of restricting negative gearing with any certainty.
While that means there is also insufficient evidence to conclude that rents would not rise, Dr Ellis said her best guess is that limiting negative gearing would cause property prices to fall and leave rents fairly steady.
“I think it’s fair to say that if there are fewer investors that house prices will be a bit lower, that will take some people out of rental and into owner-occupation, so it’ll kind of all balance out,” she responded.
The senior Reserve Bank official also rebutted claims by the Federal Government and property lobby groups that most people claiming negative gearing benefits are average income earners.
Several ministers, including the Treasurer and Finance Minister, earlier this year cited Tax Office data showing that the vast majority of negatively geared property investors earn less than $80,000 a year, figures also cited by the Housing Industry Association and Property Council.
Dr Ellis said other reliable survey data show that the people who have investment properties are “disproportionately” higher income earners, and the Tax Office data has serious limitations.
“The tax data is about taxable income, and there a number of people with very low taxable income who may have higher actual incomes,” she observed.
The Tax Office figures show many thousands of property investors claiming rental losses are earning nothing, or very low taxable incomes.
Dr Ellis concluded that many of them are likely to be self-funded retirees, whose superannuation income is not taxable.
Analysis by the ABC late last year also found that many may be foreign investors or the low-income spouse of a higher income earner.
It also found that many higher income earners may be showing up with lower taxable incomes because they use negative gearing to aggressively reduce their taxable incomes.