The Reserve Bank of Australia’s latest Financial Stability Review potentially marks a turning point in the RBA’s approach to managing house prices (Regulators are finally bringing balance back to the housing market, September 24). The property sector is clearly unbalanced and increasingly driven by speculation, but who are these investors?
The FSR contained a short but interesting article on the characteristics of Australian property investors and how they have changed over time. Utilising data from the Australian Tax Office and the Household Income and Labour Dynamics in Australia survey they were able to track changes to the market and its composition.
The tax treatment for property investment creates incentives for risky behaviour, at least compared with owner-occupiers. Investors, for example, “have stronger incentives than owner-occupiers to take out interest-only loans”.
Interest-only loans account for 64 per cent of new investment loans, compared with 31 per cent for owner-occupiers. The reason should be pretty clear: with interest expenses on investment properties tax deductible, an interest-only loan maximises that deduction. For owner-occupiers, the main reason for interest-only loans is simply to reduce the initial cost of the mortgage.
However, the data indicates that this doesn’t necessarily encourage investors to maximise the size of their loan. Investor loans tend to have a lower loan-to-valuation ratio, although loans with LVRs over 80 per cent still account for almost 30 per cent of new investor loans. This would be considered excessive in most other developed countries.
Property investment continues to rise in popularity among Australians, consistent with trends across many developing countries, reflecting its favourable tax treatment. The share of the population over the age of 15 years with an investment property has increased to around 10 per cent but is likely to have ticked up further during the recent investor boom. We are slowly but surely turning into a country of landlords and renters.
The share of investors taking out a loan has increased towards 80 per cent in recent years, which largely reflects the fact that the benefits of tax deductibility of interest payments increase with the size of the loan. As prices continued to rise, there are increasing incentives to leverage up and save some tax.
Investor activity is increasingly concentrated among older Australians. The data partly reflects the influence of baby boomers, who in 2003-04 were typically aged between 44 and 58 years but by 2011 were entirely contained within the two highest age groups.
Since 2011-12, the share of the population over 60 years old with an investment property would have increased further.
The age distribution creates an interesting dynamic. Older Australians are often asset-rich but cash-poor. Many will, at some point, look to downsize their home or sell off their investment properties. Unless they decide to reverse mortgage their property, they will need to accept whatever house price younger Australians can afford. It raises the question: have baby boomers made a big investment mistake?
Of particular interest is the sharp rise in leverage among older Australians. They are not only more likely to have an investment property but also more likely to take out a loan compared with 2003-04.
As a result of these dynamics, we have seen property investment rise at both the bottom and top of the income distribution. The rise at the bottom reflects retirees and certainly isn’t a tick in the favour of housing affordability; the rise at the top simply reflects the fact that property investment is increasingly popular among wealthy Australians.
We should also remember that property speculation is now at its highest level in history, a fact that is sometimes obscured when you look at population or income shares.
The important question that policymakers should be asking is whether increasing levels of property investment are desirable. Since investors increasingly shun new construction -- and the remaining investment amounts to speculation – I suspect the answer is no.
Typically investors simply bid up the price of property, collectively justifying their investment. The net result is that we spend an increasing share of our income on servicing debt rather than consumption or other, more productive, forms of investment.
The RBA notes that most investors are well-positioned to service their loans and yet clearly the pace of investor activity has them concerned. They have yet to commit to intervention but they have given their clearest signal yet that macroprudential policies are in Australia’s future. Given the sharp rise in speculative activity, this seems reasonable, but the disaggregated data provides a valuable insight into the various dynamics that are driving the national trend.