July 20, 2015 by Dymphna 8 Comments

RBA dishes out some inconvenient truths


Behind the sound-bites, there’s some real wisdom in the RBA latest statements. Awkward, inconvenient wisdom.

Negative gearing tends to be one of those bandwagon topics. And now the bandwagon is calling for it to be scrapped.

And the cheerleaders of that bandwagon we’re given a boost when the RBA came out and said they thought there should be a review of negative gearing. It was a big boost to their credibility.

“RBA says negative gearing is making our children sick!”

But it’s not quite that simple. And for the people who like to blame negative gearing for our so-called bubble, the RBA dropped a few inconvenient truths.

The first point is that the RBA wasn’t as clear-cut as people make out. The RBA tries to be as deliberately boring as possible, and it’s not about to go stumbling into an emotive topic like this with their pants down.

And so at most, the RBA thought it was time for a review of negative gearing. But they were at pains to point out that negative gearing can’t be considered in isolation. And looking at negative gearing without also having a squiz at capital gains tax concessions was a waste of time.

But did they say they thought it should go? Or that it was a causing this ‘bubble’ of ours? Nothing as sexy as that.

And it had a few interesting points to make about our sweet bubble.

The first is that for everyone who thinks there’s a bubble, Sydney prices are Exhibit A.

But the RBA points out that Sydney prices have always run at a premium to the rest of the country.

And interestingly, right now, that premium is below it’s long-run average.

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And so a lot of the heat we’ve seen in Sydney in recent years has really been nothing more than catch up for several soft years around the GFC. We always talk of Sydney ‘leading the country’ but the truth of it is, they’re playing catch up.

And it’s this catch up that helps explain the recent surge in Sydney prices. Not the bubble.

The RBA also point out that while house prices have risen, and taken total mortgages with them, lower interest rates mean that the cost of servicing those mortgages has fallen. In fact, the cost of loan servicing as a percentage of household income has actually improved.

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Again, it’s hard to argue that there’s a bubble when the cost of servicing a mortgage has fallen and is likely to fall further.

The RBA do point out that the average deposit size has increased substantially, and this is probably the key barrier to young buyers.

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That said, the deposit sizes (relative to income) haven’t done much in recent times, so if it’s a bubble now, then we’ve been a bubble for ten years or more. It doesn’t make much sense to talk about ‘generational’ bubbles.

But still, I see how hard it is to raise a deposit, as much as for investors as for owner-occupiers. It’s why we’ve developed and refined a number of no-money-down strategies…

So anyway, if you think negative gearing is the great evil of our age, go nuts. Don’t let a few facts get in the way.

(Not that I’m really hear to defend negative gearing. I definitely don’t recommend it as a strategy to individual students. All I’m saying is that the impact it has on the housing market isn’t all that clear.)

Anyway, Abbott and Hockey have said that reforming to negative gearing is a non-starter, so was there anything else in the RBA’s submission to the Inquiry into Housing Ownership?

Some pretty sensible things really, including having a good hard look at stamp duties. (But the states are hooked on those, so that’s probably a non-starter as well).

The RBA’s also talking sense on supply and planning, suggesting that Australia should consider:

  • Streamlining the planning and approvals process, including by applying code assessment to a greater range of development applications
  • Improving the coordination of processes between state government agencies and local councils
  • Having central authorities assess and approve large projects and coordinate different government agencies, where appropriate
  • Provide greater certainty on final developer charges to fund necessary infrastructure
  • Encourage greater up-front discussion between planning authorities and the community to diminish the impact of community opposition on the approval of new developments, and to provide greater certainty to developers

Compared to the hornet’s nest the RBA kicked up with their comments on negative gearing, this will all be music to Abbott and Hockey’s ears. Because it’s got nothing to do with them. It’s a state responsibility.

(Sometimes I think inquiries are just a way for governments to justify doing nothing.)

And finally, the RBA has these words of wisdom for those people looking for a magic bullet:

While it is undeniable that more younger households would be able to purchase a home if housing prices were significantly lower relative to their incomes, there are no examples internationally of large falls in nominal housing prices that have occurred other than through significant reduction in capacity to pay (e.g. recession and high unemployment).

There is no mechanism to get a large and sustained level shift down in prices while a substantial fraction of the population can – safely and sustainably – service the obligations involved in paying the higher price.

Everyone complains about over-population, but no one wants to leave. Everyone complains about how expensive houses are, but no one really wants to see them fall.

Even the people who say they do. The medicine required is too bitter to swallow.

And that is another inconvenient truth.

What do you think? Is it time for negative gearing to go?

Anyone with experience in no-money-down deals have any advice for aspiring buyers?