6 reasons negative gearing may not be a great investment idea
Are you thinking of buying a property that will cost you some money to hold every year, which is popularly used and prom...
Many people recognise Australia as one of the most expensive places to live in and it’s undeniably getting harder for a lot of its residents to settle down and get by every day, especially as wages fail to increase at the same rate as inflation.
Properties prices are consistently going up and the prices of goods also continue to swell exponentially—all while the average Australian’s wage remains, more or less, at the same level.
“Right now, Aussies are paying way over the odds and there's power poverty and people really struggling,” according to Smart Property Investment’s Phil Tarrant.
Momentum Media’s Aleks Vickovich agreed and said: “I totally understand [that] people are feeling a lot of hate. If you go back to before Paul Caine inflated the dollar, property was cheap in this city.”
“The views [aren’t] any different, the harbour front ... looked as good as it does now, and they were a third of the [current] price,” he added.
Aleks believes that in order to address this issue, the government must push for a reform on the tax regime—a move that could increase wages significantly. Education is also one of the simplest but most effective ways to help avoid the different struggles brought by unequal distribution of power. Sadly, it’s either not taught well or not taught at all in most schools.
Aleks said: “Unless you have some sort of exposure to the business world or to investment personally, I don't think you quite understand how these things work, so there's no doubt people are struggling.”
“I think there's things we could do in the economy to increase those wages naturally,” he added.
Fortunately for borrowers who are paying off their mortgage, money could still be considered cheap, according to Momentum Media’s James Mitchell.
However, problems may arise following several banks’ decision to hike interest-only rates a few times in order to meet the requirements set by the Australian Prudential Regulation Authority (APRA). Property owners and investors alike have recently faced several changes in APRA regulations, which are implemented changes in order to slow down interest-only lending.
According to James: “I think what's interesting to look at now is that, obviously, the majors are sort of reducing PNI a little bit, upping rates for interest-only and trying to rebalance their [mortgage] books. That's basically what they're trying to do [because] they've got too much exposure.”
“Basically, you've got a bank like Westpac, for example, and they've got however many mortgages on their books for however many Australians. 50% of all the mortgages Westpac hold are interest-only—that's probably too big an exposure.
“So, they want to rebalance that and make sure that there's more Australians paying down principal because it's a better thing to do,” he explained further.
The average Australian borrower has most likely shifted his mindset in order to adjust to these new regulations, so as a result, the banks are also moving to tweak their operations.
James said: “They're trying to change customer behaviour in terms of paying down debt rather than just using this interest-only because property keeps on rising, which I think is quite dangerous when the market starts to flatten.”
“The profitability of the Australian Banking Model is being challenged and it's going to look very different in the future to how it has over the last 20 years. It's just not going to be sustainable,” he concluded.
Tune in to Aleks Vickovich and James Mitchell’s episode on The Smart Property Investment Show to know more about the how rising interest rates are affecting the market and where they expect to see rates in the future.