In Sydney, Melbourne and Brisbane, property prices are at record high in terms of price and the number of years a person has to work to buy a home.
Never before have prices for homes and investment properties been so high, despite low interest rates, that people starting out in life, or as investors, have to save for up to ten years to get the deposit and then years more to save the stamp duty.
While many people despair of ever becoming a property owner as an investor or a home owner, others are looking to regional areas and other capital cities. Perth property prices are in a slow decline on a much lower price base and so, home ownership is more achievable in the West.
What then for people who want to negative gear in Sydney, Melbourne and Brisbane?
There is no logical answer or a quick fix as it is impossible to know whether prices will increase or decline.
There have been examples of price declines in Australia. Paul Keating and Labor caused mayhem and huge personal upheavals when the negative gearing laws were changed in 1993. In 1963, there was a government imposed "credit squeeze" where home values declined as loans were restricted.
Not wanting to make those mistakes again, the present government is doing nothing at the moment. The market forces are left to set the agenda. Get an idea of what is happening in the Melbourne area: Top 20 Melbourne Suburbs With Largest Development Pipeline
The government brings in 190,000 new people every year to keep up unsustainable demand for homes, food, cars and clothing. The downside of that is that people who have been here for a lifetime, have to wait longer in hospital waiting lists, compete for a rental property and put up with overcrowding.
On the property side, the government lets someone in China buy a unit or house in Australia and leave it empty. The effect of that is that there is a property that is not available for tenants or a local to use as a home.
The government allows States and Territories to keep Stamp Duty rates at percentages that were high when prices were lower meaning that with high prices they, make billions of Dollars each year just to process a title transfer.
Real estate agents love this property boom. They make commission on high figure sales and make vast amounts from rent roles as people who are priced out of the market, are forced to rent.
We asked the REIV for a comment on the present state of the property market. REIV President Joseph Walton, said,
"Key indicators of a bubble are oversupply and lack of demand – Melbourne’s property market shows no sign of either."
"Last year’s market was categorised by a lack of stock on market, particularly in spring, in turn driving competition and demand for available properties."
"Growth levels across Melbourne are not uniform – some parts are doing extremely well while other areas are stable or seeing smaller increases."
"House prices across metropolitan Melbourne increased 4.6 per cent over the year to December 31 – solid growth but not spectacular."
“Melbourne’s property market has recorded solid growth over the past year, driven by strong population growth and record low interest rates.”On the other hand, the latest census revealed that the average Australian is a married woman of 38, with a husband, mortgage and two children. That average Australian does not earn enough to pay off a one million Dollar mortgage in a lifetime. Similarly the average Australian has to work for years for a deposit.
The property market is in some ways like the economy of Australia. It is a giant ponzi scheme. Foreign buyers inflate the market, immigration is kept at huge numbers to create a new batch of consumers and the housing industry rolls on building not enough houses to accommodate everyone who wants to live in capital cities. When and if things change, there will be people missing out on a seat in the property game of musical chairs. A year ago, Liberal Immigration Minister Peter Dutton said that Labor's proposed property investment tax changes would bring the economy to "a shuddering halt" and "crash" the stock market. Read more
If negative gearing rules are changed, demand will drop as investors will be less inclined to pay hundreds of thousands of Dollars for a property returning around $400.00 weekly from rent, with outlays on rates, loans, agent's fees with maintenance eating into what ever is left. Negative gearing might be fine for some who choose to minimise tax from other income but it has limits. Too much loss and you can't pay.
If immigration stops there will be less demand for houses and the building industry will suffer.
If immigration stops State governments will miss out on billions of Dollars in Stamp Duty and so, services and infrastructure spending will decrease.
If foreigners are prevented from buying residential property, demand will fall and the property juggernaut will be impacted severely.
If interest rates rise, the impact will be severe. Existing owners will pay more to the bank from an already stretched income.
The government needs the property industry to keep rolling along to keep the economy ticking over.
Down the track if a change is made to interest rates, negative gearing, immigration numbers or overseas buying laws, existing property owners will be the ones to suffer.
Property market values could fall. Actual values, used to determine equity would be still lower than deflated market values.
Rental income will decline in terms of longer vacancy rates and lower returns.
People in the housing industry will be in fear of losing their jobs meaning that the leased tradie ute will have to go before pressure mounts on the ability of workers to service a huge property loan.
Ultimately, the cumulative damage will affect the banks. There will be people who surrender their properties in a distressed market where the loan, overdue interest and charges exceed the forced sale market value. They just walk away.
The government will suffer as an election is due in 2 years. Labor, historically hopeless at money management, will return to power on the back of blaming Malcolm Turnbull for the fiscal damage.
There are troubles ahead. The record high prices, low interest rates and ponzi scheme demand fueled by allowing overseas people to buy are unsustainable. If this was a weather forecast people would not put to sea and stay home.
We asked respected property industry leader, Jeff Grochowski from Accrue Real Estate, for his opinion.
"I agree with the position of the REIV. I do not foresee the situation where immigration will slow down and for that reason investors can look to continued rental demand"
"Buyers should select properties carefully. They should seek expert advice on the type of property that they buy. For instance, it is sensible to buy a three bedroom unit or apartment as these are better placed to be rented first."
"Not all streets are equal in Melbourne, Sydney or Brisbane. Buy for location."
Maybe things will stay as they are.
It could be that interest rates stay low.
The RBA will continue to allow debt to rise.
Banks could continue to lend to people who will default if interest rates rise or they lose one of their incomes.
Immigration could continue.
Wages could triple.
Foreigners could be allowed to continue to buy what they like.
Negative gearing laws could stay as they are.
Prices will keep rising.
We had the global financial crisis as a result of unsustainable growth and reckless investment choices in the USA. In Australia, too many people, businesses and politicians will be hurt in their own ways when the music stops.
What will happen if the government allows people to put some or all of their superannuation into an overheated property market? Instead of having some money set aside for the metaphorical rainy day, their future financial lifeboat might well be lost in the storm created by a burst of the property bubble.
