Obtaining a loan of the same size at a lower rate makes rental yields more attractive to investors, while lower rates increase the borrowing capacity of homeowners to buy a larger home or outbid competitors. for the house they want.
Time and time again, the Australian property market has proven that lower interest rates are fuel for property prices. The current boom of the past six months is a prime example. Population growth has stalled since the COVID-19 pandemic, wages are stagnating and yet house prices are breaking new records. The main explanation is the drop in the Reserve Bank’s cash rate to 0.1 percent last November.
There are good reasons to set interest rates that have nothing to do with the housing market. The Reserve Bank cuts interest rates to stimulate jobs and spending and increase inflation, not to raise house prices. This is also happening in a global context of ultra-low interest rates.
Some people argue that lower interest rates make housing more affordable because they reduce repayments. There are now many home loan rates that start with a 2 and even a 1. However, Brendan Coates, director of the economic policy program at the Grattan Institute think tank, says the people who benefit the most from the lower rates are existing owners. As interest rates fall, their repayments have gotten cheaper, while the value of their property skyrockets.
For potential buyers who are still saving for a deposit, interest rate cuts make homeownership even more inaccessible. âIt widens the gap between the haves and have-nots,â Coates says.
Access to credit is also determined by the Australian Prudential Regulation Authority, which gives banks a set of rules to follow when granting a loan. APRA has the power to cushion the market in the short term, but Coates says the mechanism generally loses its effectiveness over time as banks find ways around it and non-bank lenders respond to unmet demand. .
2. Population growth
The main factor that increases demand in the long run is population growth, as this means more people need a place to live. Last year, the national population increased by 0.5 percent, mainly due to natural increase. From the turn of the millennium until the start of the pandemic in March 2020, it was increasing by 1.5-2% per year and Sydney and Melbourne took a big chunk of it. Usually, much of the population growth comes from immigration, which stopped last year.
National immigration policy is determined by many economic and social factors, not necessarily related to housing. Immigration has many benefits, from economic growth to greater cultural diversity. But there are also tradeoffs, such as increased demand for housing.
Peter Tulip, the chief economist of the Center for Independent Studies, studied the effect of immigration on house prices. He looked at the period from 2005 to 2018, during which immigration accelerated from an annual inflow of around 120,000 to almost 190,000 per year. He found that if this had not happened, the rents would be 9% lower and this would affect the purchase prices.
3. Planning controls
There is always a lag when supply catches up with demand and planning controls can make this worse by preventing supply from meeting that demand. In the context of Australian cities, this means restrictions on higher density.
Tulip believes the main cause of housing affordability is that developers are not allowed to build high-rise apartments in most areas. âThe main reason we have these planning restrictions is that local neighbors insist on preserving the character of the neighborhood and these arguments ignore the interest of those not involved in the decision – potential buyers,â says Tulip. âBut preserving the character of the neighborhood is actually worth very little to the amenities of the neighborhood. “
Tulip indicates apartment developments in areas of Sydney such as Forest Lodge near Glebe, Chatswood and Green Square. Despite community opposition, property prices have since risen in these areas, in line with neighboring suburbs where apartments have not been built. Tulip says this indicates the apartment buildings have not diminished amenities.
However, amenity concerns include the issue of green spaces, something that is even more valuable to apartment dwellers than backyard owners and has come to the fore since the pandemic. Previous analysis by The Sun-Herald revealed that the areas of Sydney City Center City Council bearing the brunt of the highest density are also those with the least open public space per existing resident. Many schools are also strained, with handheld devices taking up a lot of play space.
Hartigan agrees that more density is needed, but says mega-apartment developments could be counterproductive. âIt might actually exacerbate the problem with NIMBYism because people walk past them and think ‘oh my god I don’t want my suburb to become like this’,â he says. âDo we want to live in a city where we have 20 Hong Kong-style concentrated areas within cities and then a whole bunch of local government areas with 1,000-meter blocks, or do we want something more balanced? Hartigan says it would be fairer if there was medium density across the city rather than high density pockets and low density pockets.
4. Tax policy
Australian tax policies favor real estate investment over investment in other assets. Negative debt means that an investor can deduct investment losses from his income, making it tax-efficient. Technically, you can leverage stocks negatively, but it’s much more difficult. The logic is that it’s the same as generating a business loss – you only pay income tax. The counter-argument is that the losses are deliberate.
Negative debt goes hand in hand with capital gains tax (CGT). Usually investors would avoid a loss, but they make an exception because they are speculating on a capital gain in a few years. When they obtain this surplus value, they must pay the CGT on the surplus value. But for individuals who hold the asset for 12 months, the tax is cut in half. The rate is the same as the individual’s marginal tax rate, which means they can also plan the sale for a year with lower income.
Self-directed super funds can also buy negative goods and equipment, although the capital gains tax cut is less.
Many economists believe that tax policy should be reformed to be more neutral, to encourage investment in a wider range of assets in addition to real estate. However, the impact on house prices would be small. Grattan’s research suggests that if negative debt were abolished and the capital gains tax cut was reduced from 50 to 25 percent, house prices would be 2 percent lower. âThese tax breaks are only worth a few billion dollars a year against the backdrop of the $ 7 trillion housing market,â Coates said.
The problem with policies like first-time homebuyers subsidies is that they are likely to increase demand and therefore push prices up further.
5. Old age pension
While tax policy increases demand for housing as a financial asset, old age pension eligibility rules discourage homeowners from selling. The family home is not taken into account in the old age pension asset test, so a person in Dubbo with a $ 300,000 house is treated the same as a person in Balmain with a 3 million house. of dollars.
Renters also get the short straw as they are only entitled to $ 214,500 in additional assets to make up for not having a home, although they may receive rent assistance.
This encourages retirees to stay in their large homes and even expand or renovate if they need to cut down on their cash flow. âA huge motivation is to pass on heirlooms to their children,â says Coates.
This is perfectly rational and individuals are not to blame, but in an ideal world pension policy would be neutral and not penalize people for downsizing.
However, most experts believe that this would not have a huge effect on house prices, as retirees stay at home for other reasons as well, and not all retirees have access to the pension.
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