Don’t blame negative gearing for all price growth

In “A collapse in house prices won't necessarily be so bad”, Jessica Irvine opines for The Sydney Morning Herald | Fairfax:

And yet, chances are, things will get back to normal at some stage. And when they do, we will still live under a tax system that encourages excessive investment into property and supersized price gains. We could, of course, take this opportunity to fix that broken housing tax system. To reduce concessions for negative gearing and capital gains on housing. To abolish stamp duty in favour of a broad-based land tax.

I don’t like stamp duty but I don’t agree that our tax system is totally broken. It’s easy to blame property price growth on negative gearing but it isn’t quite so simple. There are many countries around the world that see price growth in their large cities and they don’t have a negative gearing system quite like ours. Furthermore, there isn’t price growth everywhere in Australia. Just take a look at regional towns - sometimes they don’t see price growth for decades.

So where is there consistent growth? Our state capitals. People conglomerate to the capitals for many reasons including access to work. The simple reason that properties there go up in price is that they are in high demand. With our population growth, and people still moving to cities, it’s no wonder that with high demand and limited supply, prices move up. Building costs also continue to march up, aggravating prices further.

Apartments and houses don’t fund themselves. Property investors have to take the risk and the burden of owning a property. On the other hand, many people simply prefer to rent rather than own. Without investors that can afford to provide the capital and take the risk, there wouldn’t be places to rent!

Having been a tenant for many years, a home owner and then a property investor - I can see each side of the story. Yes it’s definitely possible to make money on property (I have also lost money on property) but at the end of the day, whether you win or lose, owning property is work (think bills, maintenance, keeping on top of repairs, dealing with tenants and agents etc). It’s a risk with no guarantee of success, and often means having to make sacrifices in order to be able to invest in the first place. It seems only fair that to those who take the burden, a fair reward ensues.

We’ve already had to rethink so many aspects of how we live during this crisis. Let's add housing, and the provision of safe, secure and affordable homes, to the list. If the crisis proves anything, it’s that we are more capable of change – of inventing new ways of doing things – than we know.

And there really is no place like home.

I can definitely agree with this - I have kids and I worry about how they will be able to afford a home too, as my parents did before me. I feel certain I’ll need to help them, just as they helped me. In any case, I agree that we should always ask whether the tax system and duties we’ve put in place still makes sense today and to find new ways of making home ownership possible for the next generation.

This pandemic has taught us that office workers can still get work done without actually going into the office. It has taught us that we can all be more self sufficient and cope well enough with online deliveries instead of needing to have all types of shops at hand. And perhaps enough employers will learn that remote working is viable for many of their employees and that with fast internet available to all, we don’t all need to congregate in large offices within large cities.

RBA May 2020 - Rates kept on hold at 0.25%

Lucy Dean reports for Yahoo Finance AU with “RBA makes May interest rate decision”:

The Reserve Bank of Australia (RBA) has kept rates on hold at its record low of 0.25 per cent as Australia continues to battle with coronavirus’ impact on the economy. 

It was only to be expected even though we are locked down in a pandemic where the unemployment rates are skyrocketing.

“The cash rate is as low as it's going to go, and the next move in rates will be up but it's at least three years away, probably more,” AMP Capital chief economist Shane Oliver told the Finder cash rate survey.

“Based on the experience of other countries, there is no value in taking rates negative. So any further easing in monetary policy will have to come from quantitative easing. In the meantime the coronavirus related shutdown will cause a big hit to growth that will take years to fully recover from.”

Sobering thoughts.

RBA April 2020 - Maintains interest rates at 0.25%

In “RBA announces April cash rate” on Australian Broker, Madison Utley reports:

Australia's official cash rate has been left unchanged at its current record low of 0.25%, as was largely expected. 

It was very unlikely to get another cut so soon especially after the RBA signalled last week that it wasn’t going to cut rates anymore.

RBA rules out negative interest rates but how about zero?

Charbel Kadib reports “Negative interest rates out of the question: RBA” for Mortgage Business:

… the central bank ruled out further cuts to the cash rate as a means to curbing the economic impact of the outbreak.

“Members also agreed that the cash rate was now at its effective lower bound,” the RBA stated.

“Members had no appetite for negative interest rates in Australia.”

Interesting that they didn’t specifically mention a zero interest rate though they do seem to consider that the cash rate is at its effective lower bound. To get to negative rates, the RBA would need to cut by 0.5% whereas they typically cut 0.25% at a time. However, they’re definitely implying that there won’t be any more cuts.

RBA cuts rates to a record low of 0.25%

Business reporter Nassim Khadem reports for ABC News with “RBA slashes interest rates to 0.25pc in emergency cut amid coronavirus pandemic”.

The Reserve Bank has cut interest rates to a record low 0.25 per cent and announced extraordinary measures to help prevent a coronavirus-driven recession.

The RBA will buy Australian government bonds as part of its first-ever quantitative easing program, and provide a three-year funding facility to provide cheap loans for Australian banks.

Wow -the RBA announced the lowest rate Australians have ever seen in a special meeting (they normally meet at the beginning of the month to make an interest rate decision).

Reserve Bank governor Philip Lowe said the bank would hold the cash rate at 0.25 per cent "until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2-3 per cent target band".

Dr Lowe said the cash rate could be at this level for some years as it was expecting significant job losses.