A different viewpoint on negative gearing.


Australian property investors want house prices to drop, but also want negative gearing to stay. Oh the conundrum.

You may have recently read about a hedge fund manager and an economist (sounds like the beginning of a joke, although not, it certainly could be) posed as a gay couple in Sydney’s Western suburbs viewing houses and meeting mortgage brokers for research to determine if there’s a housing bubble. One could have probably done that in the comfort of their own office. But hey…a tax deductible trip to Western Sydney – why not.

Their conclusion (this is for real and not a joke): Australia (as represented by Western Sydney according to the two gentlemen) is in a property bubble (brilliant observation guys, we didn’t know that Australia’s property prices were inflated). Apparently we will see a 50% decline in house prices (although no time frame was given). Banks will cut their dividends entirely (yet again, no time frame was given). Bank stock prices will fall by 80% (you guessed it, no time frame given either).

The skeptic in me says these guys are crying out for a little more attention. Well, they’ve got it. Now what?

Let’s take a look at reality shall we?

Since the mid 1990’s and early 2000’s, we’ve seen a downward shift in consumer prices (inflation) and nominal interest rates. Since then, home ownership has declined, with the most obvious factor being a rise in house prices.

Notwithstanding the sharp rise in house prices and the higher levels of mortgages taken out to fund these purchases, repayments on housing loans are well below previous peaks (see below). Do we have an affordability issue?

Australia repayment housing loans
Source: RBA

One of the biggest demand drivers that continues to be overlooked by so many, is population growth (see below). Although natural increase in population growth has certainly been anything but stellar, net immigration (as we all know) has been significant.

Australian population growth
Source: RBA

Not only have we seen (and continue to see) our population grow, there is one visa category which has been going gangbusters. You guessed it, students. Australia’s easing of immigration rules have meant that it is now easier for students to become permanent residents following graduation. These people too need to live somewhere.

Australian immigration
Source: RBA

Now that we have established that there is a demand for Australian property, what are we doing about it? The flow of new construction (until late) has been very slow in responding to the needs and demands for housing.

We all know that Australia faces a particular challenge around the distribution of our population. We are highly urbanised and a large portion of our population is usually concentrated in a few large cities (unlike population density in comparable countries – this is why an apples-for-apples comparison with Australia is so difficult – but hey, we do it anyway).

We continue to remain sluggish in responding to demand. Not the latest data, but gee, you get the picture. Mind the gap.

Australia population growth
Source: CoreLogic

Vacancy rates continue to remain low and we continue to have a cumulative under supply of 200,000 dwellings since 2001! What do you think will happen to prices when you have a supply issue? It’s basic economics.

To put things into perspective, here (below) are real house prices since 1926. I am not ignoring the fact that property prices are inflated. Both relative to short and long term trends (see below).

 Australia house prices
Source: AMP Capital

Before we jump to such conclusions, let’s think about the underlying issues and address these. Anything else is a complete waste of time and money.

The market will sort itself out. It always does. In the meantime, think longer-term. Think about unlocking more land. Think about accessibility and infrastructure. Think about creating satellite cities.

Unfortunately, the removal of negative gearing will not solve our real problem. Supply.