No one wants to see a boom and bust cycle in the housing market. It is obviously a difficult balancing maintaining gradual positive growth while limiting speculation, encouraging First-Home-Buyers and affordable rentals. Unfortunately, this is just one of the many juggling balls the government has in that air at the moment and it looks like our present pollies are pretty bad at juggling.
Excessively low interest rates plus tax concessions make it too tempting for people wanting to park money somewhere safe. Investors currently make up 50% of buyers in Sydney and Melbourne. Sydney auction clearance rates still hover around the 80% throughout February and early March. This is an indication the market is to remain strong well into 2017. Prices in Sydney have increased 5% since January 1st and a scorching 19% for the full year. Is this sustainable?
The Australian Prudential Regulation Authority thinks not and has just written to all the banks asking them to tighten their lending practices on interest-free loans. It follows a warning by treasurer Scott Morrison that lenders need to crack down on high-risk loans. But many analysts are saying these measures will make very little difference. Pressure is increasing on the federal government to revisit Negative Gearing and many believe that shortly they will have no choice. Just this week, the governor of the Reserve Bank made the unprecedented step of suggesting the government do something.
It is understandable that some in the housing and finance industry are nervous about fiddling with the levers of the one industry that is chugging along nicely. However the social unrest of excessive rents, a whole generation locked out of home ownership and lopsided investment options make the option of doing nothing ill advised.
The UK is interesting as in a similar situation to us. They also have a have two distinct markets. The north is struggling while the south, especially in and around London, knows no constraints to housing prices just like in Oz. Here we have Sydney and Melbourne booming while most of the regions are struggling.
The Cameron Tory government introduced a reduction in their tax system which is similar to Australia’s negative gearing. Investors can now only deduct a property’s expenses to a minimum of 20% from the maximum of 45%. They also doubled the stamp duty on second investment properties. These actions have been successful and reduced the growth in UK house prices from a high of 9.3% in June 2016 to 6.9% at the end of the year. There was no blood in the streets – especially gratifying since they also had to contend with Brexit at close to the same time.
I firmly believe it is the right thing for the government to be proactive in this space. Allowing negative gearing only for newly constructed property is appropriate and possibly reducing the Capital Gains Tax discount. Currently they are just fiddling around the edges.
Local Northern Rivers owners should not be too concerned about a price drop here. Our speculative investor market is minimal and I mainly deal with lifestyle tree changers and Sea Changes. As far as I can see, the demand from people looking for a small piece of paradise like ours goes on and on. Changes to the CGT or negative gearing will have very little impact to us.