It has been a busy day on the news front today.
After reports of a First Home Buyers Strike and the claim that First Home Buyers have been priced out of the market, there was the announcement this morning that Prime Minister Julia Gillard will not only re-instate the first home buyers boost effective from midnight tonight, but also triple it. The new grants will give first time buyers $21,000 of free money on top of the current $7,000 to help starve of a housing crash in Australia. Then after lunch there was another announcement from the office of the Prime Minister. This time, effective the 1st of July 2011, negative gearing will be abolished to help create a fairer and more equitable housing market.
Today, is off course the first of April.
But on a more serious note, National Australia Bank’s chief financial officer Mark Joiner has said the Australian property market was fully valued and is likely to languish.
“I don’t think property can go up from here, It’s at the top of the range on affordability. It’s well out of line internationally.”
“Eventually people are going to realise that taking a 2 per cent pre-tax yield from renting a house that isn’t going up in value doesn’t make any sense, if you’re paying 7 or 8 per cent for the associated loan,”
His comments will come as a major blow to highly leveraged, negatively geared property investors. Negatively geared property investors fork out extra money each week to make up the shortfall between the rents obtained from their investment properties and interest payments on the loan. While the loss on the property each year reduces tax, they only help subsidise renters on the premise that they yield large capital gains at the end. Any notion, that house prices is fully valued and will no longer increase could make them head for the exit in droves. Worst still, if prices start falling, not only are they subsiding the renter, they are also taking a capital loss on the property – a shore way to loose your shirt.
Most countries don’t have negative gearing with the exception of Australia, New Zealand and Canada. While negative gearing helps speculators bid up housing on the upside, the consequences on the downside is unknown on the scale of our bubble.
» House investors to lose interest – The Herald Sun, 1st April 2011.