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Wednesday, September 22, 2004

IMF Housing Report - Oh Shit

The IMF released a housing boom report that more or less says the world is okay, there is no risk of a property collapse except for countries including Australia, Ireland, Spain and the UK. According to the paper the way out is for an "early but gradual" tightening of monetary policy, ie rates go up. Although there is no real conclusion as to why this situation has occured, there is some devil in the detail. The housing affordability ratio in Australia has climbed from 100 in 1985 to 186 in 2003 (this is based on house prices against average disposable income). At the same time, the ownership percentage has dropped slightly, and the house price to rent ratio has more than doubled. My own take is that negative gearing and to a lesser extent the first time buyers grant are the culprits. Remember that biased industry body the REIA? In July the AFR wrote an article on this topic, inc which the Productivity Commission said:
But the Productivity Commission and RBA, in its submission to the inquiry, said capital gains tax and negative gearing had contributed to the excessive investment in rental housing.
The treasurer rejected the inquiries finding to the acclaim of Ms Ballard from the REIA (remember they are just estate agents, they want the highest commission possible this month):
The Treasurer's rejection of an inquiry into tax breaks for property investments was applauded by Real Estate Institute of Australia president Kareena Ballard, who said the sector needed stability, not the uncertainty created by a review of the personal tax regime.
Rather than giving investors certainty, negative gearing has increased the long term volatility of the market. When interest rates rise, highly geared investors will be the first to suffer. What these investors failed to comprehend is a basic accounting fact: Getting tax deductions from negative gearing means you are making a loss. If house prices slow and interest rates rise a bit, then in the long run you will probably make a loss. By taking on negative gearing, you are involving yourself in a very high risk activity, your are hoping (if you've thought this far, which you probably haven't) that your capital growth and rent will exceed all other expenses. Negative gearing has allowed idiots who have read "Risk everything, but pay less tax!" to completely fuck up the housing market. Without negative gearing people have to think a bit more about how to make a return on investment from day one.


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