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The Power of Property


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Most landlords are already losing money on their investment, which may explain the hesitance to cut rents for struggling tenants, experts say. Landlords who own a negatively geared property âââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ where the rental income is not enough to cover the associated costs of owning the property, such as home loan repayments âââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ have to personally make up the shortfall.


At tax time, the amount that landlord has lost is deducted from their income tax bill, often delivering them a windfall by way of tax return.


Since the shutdown of non-essential industries and the restriction of movement due to the coronavirus outbreak, a potential rental crisis has emerged.


Renters, more likely to be on lower incomes and employed in the industries first hit by the shutdowns such as hospitality, the arts and tourism, became concerned about how theyâââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’¢Ã¢Ã¢â€š¬Ã…¾Ãƒâ€šÃ‚¢d pay rent, and landlords became concerned about how theyâââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’¢Ã¢Ã¢â€š¬Ã…¾Ãƒâ€šÃ‚¢d manage repayments, interest and insurance without rents coming in.


Australian Tax Office data from 2016-17 shows 58 per cent of investment properties are negatively geared.

OK, we know that. But isn't there a lot of pain everywhere?
But experts argue landlords who negatively gear are usually richer and are in a better position to take the financial hit.


Because these arrangements could usually be intentional, these landlords should be prepared to take a hit on their rental income, Domain economist Trent Wiltshire said.


âââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“People that negatively gear properties are not using the rental income as an income support as such,âââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’‚ he said. âââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“Mostly these people have deliberately set up their arrangements so they can reduce the amount of income tax paid. Landlords who negatively gear are typically high-income earners; they probably have higher savings so they should be able to deal with the rent reduction, but thatâââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’¢Ã¢Ã¢â€š¬Ã…¾Ãƒâ€šÃ‚¢s on average, not everyoneâââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’¢Ã¢Ã¢â€š¬Ã…¾Ãƒâ€šÃ‚¢s like that.âââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’‚ÂÂ

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One of the interesting features of the housing market at present is the shift in those who are bearing the brunt of the debt.


Those who already enjoy a perch in the housing market have taken advantage of the sharp decline in interest rates to pay down their mortgages faster. And that means their outstanding debt is being whittled back faster.


At the National Australia Bank, for instance, a staggering 36 per cent of home loan customers are more than two years ahead in their repayments, up from 32 per cent a year ago.


As NAB boss Ross McEwan tells AFR Weekend, the average size of the bank's new home loans has increased by $12,000 in the six months to March 2021 compared to a year ago, rising from an average $389,000 to $401,000. But because customers are paying off their home loans at such a rapid clip, the actual balance sheet growth of the banks hasn't been that strong.


Westpac's chief executive, Peter King, agrees. He pointed out that "the average size of home loans has not increased significantly over the last 12 months. What is more, he notes that 72 per cent of Westpac borrowers are ahead on their repayments.


But, of course, new entrants to the property market haven't been able to take advantage of falling interest rates to get ahead in their payments. And they haven't had time to reduce their loan size through principal repayments.


As a result, their outstanding debts tend to be higher. For instance, the average size of home loans that Westpac wrote in the six months to March 2021 was $367,000. In contrast, the average size of the loans on its books at the end of March was $284,000.

We are lumbering new entrants into the housing market with an ever higher level of debt relative to income. And while it may look affordable because of low interest rates, they are going to be lumbered with that debt for much longer than previous generations were. Possibly even into retirement for many.

Higher levels of debt mean that they are more vulnerable if something were to go wrong ... for instance, if interest rates were to rise significantly ... in the years ahead.


— Shane Oliver, AMP Capital's chief economist

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