This article was first published by JAMES KIRBY | The Australia |
Australian investors are concentrating their risks ever deeper in the housing market according to new data this week with almost one in 10 existing home loans now interest-only.
The surge in property exposure comes as the concentration of power among the big four banks becomes ever greater with the Commonwealth Bank and its subsidiaries now controlling one in five home loans across Australia.
The Melbourne Institute’s annual Household, Income and Labour Dynamics in Australia survey, which collected new data on home lending and home ownership, challenges many of our investment assumptions about what the financial landscape may look like in the future.
The survey author, Professor Roger Wilkins, has been widely quoted for his forecast that the majority of Australians will not own their homes in the near future.
For investors the survey shows us for the first time a full picture of what our neighbours might be doing in the residential property market and crucially how they are financing their ambitions.
The report also indicates foreign investors are dominating the boom in residential property investment. For investors the report offers two serious puzzles which at first glance stands in contrast to the consensus forming on the residential market among economists and stockbrokers.
1. The report indicates that only 48 per cent of the investment properties in Australia are negatively geared.
This is in serious contrast to the figures of about 62 per cent from the Australian Taxation Office.
Professor Wilkins, from the University of Melbourne, says “the gap is puzzling, it may have to do with specific tax matters such as the treatment of depreciation and other items”.
However, the gap is so significant it could also be suggested that investors do their best to maximise the amount of negative gearing to get the best possible tax deductions from property.
2. The report suggests that the percentage of people in Australia who are active in the residential property market over the past eight years has barely changed from 5.6 per cent in 2006 to 5.7 per cent in 2014.
At first glance this flat line for the number of Australians who are active in the residential investment market is hard to fathom.
However, the report, which is now running for more than a decade, takes its sample from 20,000 Australian residents — by definition it does not include overseas investors. The flat numbers suggest the growth within the investment property market is predominantly fuelled by overseas buyers.
Interest-only home loans surge
According to the survey 8.8 per cent of home loans are interest only.
The figure, which has not been released previously by HILDA, suggests that even homeowners — as opposed to investors — are hoping to ride a rising residential property market to make money.
To put it another away, one in 10 homeowners have no intention of paying back their mortgage.
What’s more, the group is growing fast — some months ago a separate report showed the proportion of new home loans being written by the banks interest-only was 40 per cent.
HILDA also revealed the interest-only brigade were taking bigger bets: interest-only loans account for a much higher 12.8 per cent of outstanding funds loans — a clear sign that they are buying dearer houses.
At its worst this may mean that homeowners are choosing to maximise their deposits rather than seeking to pay off principal.
Until very recently it has been largely assumed that the dangers within the property market relating to interest-only home loans related to investors.
Fixed-rate mortgages rise to one in three
Two decades ago fixed-rate home loans were rare in the market with only a minority of buyers choosing to access the facility, which is most popular over a three-year time frame. However, with ever lower interest rates investors and consumers have clearly taken more confidence in their ability to repay in the future with a very large 17.9 per cent holding fixed-rate loans. The figure offers an insight into the endless question of whether investors should fix or not — almost one in five home buyers now fix their rates.
Moreover, a significant 12.4 per cent of home buyers use a combination of fixed and variable — indicating a cumulative 30 per cent of all home buyers have a fixed component in their home loans. This is a major find for the survey. Although banks are slow to suggest the combination solution for getting a property loan a significant number of people now use the facility to have a bet both ways on the future direction of interest rates.
Another pointed outcome from the new data is that fixed mortgage holders are missing out on the opportunity to get ahead on their mortgages — a trade-off which has only become apparent in recent years as interest rates have fallen to levels expected by very few observers. About 55 per cent of borrowers are ahead on payments choosing not to reduce their mortgage payments despite successive drops in the minimum amount the bank may ask them to repay each month.
Four surprises from HILDA
1. One in 10 homeowners now have interest-free loans.
In taking this financing option, which has traditionally been associated with investors rather than owner-occupiers, the banks have unleashed another force pushing up house prices. The HILDA survey had not previously surveyed real estate finance patterns in Australia.
2. One in three mortgages are now either fixed-rate or a combination.
The popularity of combination or “split” loans (part-fixed and part variable) is now 12.4 per cent. Residential property investors who are not offered a “split option” by banks or mortgage brokers should demand why such a choice has not been offered. It offers investors an each-way bet on interest rates.
3. The proportion of Australian residents with investment property is not changing.
The percentage of resident Australians active in the investment property market has remained unchanged for the past eight years. In 2006, the figure was 5.6 per cent. Now it is 5.7 per cent. The flatline figure clearly indicates that the investment property boom has been driven heavily by overseas buyers.
4. Negative gearing may be less popular than we think.
If you are negatively geared, you should know that the Australian tax office figures suggest that 62 per cent of investment properties are negatively geared, but the HILDA survey suggests the figure is only 48 per cent.