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The impact of the election on the Property Market and Housing Finance

Highlights:

  • Labor's policy to remove negative gearing on investment purchases of pre-owned properties from 2020 has impacted property investor appetite and property prices.  See Chart 1.

  • Since the introduction of negative gearing, the share of investor ownership has more than doubled.  See Chart 2.

  • The reaction of the RBA will be important to counter the ‘wealth effect’ of falling property prices on consumer spending and the Australian economy.

  • The wholesale capital market (where lenders source their funds) is expecting the RBA to hold rates and possibly reduce rates over the next 3 years. This has resulted in lenders being able to offer 2-3 year fixed rates at close to variable rates.

  • The current market suggests a buying opportunity for owner occupiers which has not been seen since the GFC. See Chart 1.

Post:

With the lead into the federal election, we thought that it is important to provide you with some commentary on the impact on property market under a Labor elected government, in particular, the impact of abolishing negative gearing on investment purchases of pre-owned properties from 2020.


It can be observed from loan application data, that Labor's policies and lending restrictions have already impacted investor appetite. The share of investor loan application for purchases has reduced to 27% from a peak of 40% in 2015.


The current market suggests an opportunity for owner occupiers (in particular, first home buyers) who previously had been priced out of the market. The last time investor appetite reduced to this level was in 2009. See Chart 1.

From a historical perspective, negative gearing was introduced in 1985 by the then Labor government in an attempt to promote the building of new dwellings. Despite this, the investment benefits of negative gearing have been promoted across existing properties as well.  As a consequence, Labor considers that the cost of negative gearing on the federal budget now outweighs its social benefits.


Regardless if you agree with Labor, it is clear that investment ownership as a share of total ownership, has more than doubled since the introduction of negative gearing. See the Chart 2.

It will be interesting to see where property values will go from here. Labor's proposals have been structured so that negative gearing will still apply to property purchasers prior to 2020. As a result, existing investors will not become forced sellers.  However, there is a question mark whether there will be buyer support at current property prices going forward if Labor is elected.  It is possible that without negative gearing, property prices and rental yields will need to adjust to a level that attracts investors back into the market or persuades renters to buy.  Some commentators consider this has already occurred in property markets where rental yields have increased and investor loan applications are lower. See Chart 3 and Chart 4  


Chart 3 - Source: CoreLogic, ABS

Chart 4 - Source: CoreLogic, ABS

From a finance perspective and with the Royal Commission now behind us, it is expected that the banks will be under pressure to relax their credit policies to increase the amount of loans.


The RBA is also conscious of the impact of property values on the economy through the wealth effect. The wealth effect is the concept that consumers spend based upon how wealthy they feels, in particular, about the value of their property. Given property investment is significant (there are 1.3 million taxpayers with negative gearing), the RBA has recently changes its stance away from increasing rates over the near term.


The wholesale capital market (where lenders source their funds) is expecting the RBA to not  increase interest rates and possibly reduce interest rates over the next  3 years. As a result, lenders are now able to provide 2-3 year fixed rates at close to current variable interest rates.


This would seems like a favourable property market and financing environment for first home buyers and we wish you luck with your property hunting.

 

Disclaimer: This article is an observation of the credit market and other commentators views on the property market . This should not be construed as financial advice.