Debating change for investment properties
The current rules around investment property are under the microscope as markets continue to run hot in some Australian capitals, while the proportion of loans going to investors remains high. We take a look at some of the points under debate.
Currently, if rent fails to cover the expenses of an investment property, the landlord can effectively split the shortfall with the tax man, leading to debate on the merits of negative gearing.
Chief Economist at the Bank of America Merrill Lynch, Saul Eslake, is among those who argue this distorts the market, and has called for negative gearing to be grandfathered out of existence, with existing investors able to continue with it but no new investors getting on board.
However, the Housing Industry Association argues against cuts to negative gearing, saying they would drive up rents and worsen housing supply shortages.
Aussie Home Loans chief John Symond also argues the unintended consequences of taking away negative gearing could be “quite horrific”, but that there could be a case for tweaking the rules by putting a ceiling in place or restricting it to certain borrowers.
The ideas floated for restricting negative gearing include restricting it to newly-built properties.
Interest rates vs other measures
The Reserve Bank can use official interest rates to stimulate or dampen property prices, however such decisions can have significant consequences in other parts of the economy.
“Macroprudential controls” is a fancy term for regulations designed to take some heat out of the property market – and there is debate about whether Australia should be following overseas examples in using them.
In the UK, lenders have recently been required to “stress test” every borrower’s ability to afford repayments if interest rates were to rise three per cent in five years. They have also faced new limits on the proportion of loans where borrowers are allowed to access large loans relative to their incomes.
In New Zealand, limitations have been put on “loan valuation ratios” or what proportion of the value/purchase price can be lent.
However, there are also some concerns that macroprudential controls may not just affect investors but other buyers too.
Superannuation changes mooted
When it comes to first homebuyers, one of the options being discussed is allowing them to tap their superannuation for a loan for a deposit.