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Financial distress looms due to spike in negatively geared properties among Australia’s poorest: report

April 20, 2017

Financial distress looms due to spike in negatively geared properties among Australia’s poorest: report

Nassim Khadem, The Sydney Morning Herald, 18 April 2017

Australia’s poorest people are taking on negatively geared property investments, despite their inability to manage the risks, a new report from KPMG shows, putting them at severe risk of financial distress when interest rates begin to rise.

While the proportion of households facing economic hardship has remained static in recent years, the total number of very poor households has risen and reached almost half a million people.

Household incomes have grown, not because of rising wages and salaries, but rather due to higher investment income and government transfers, according to KPMG Economics’ report Financial Stress in Australian Households: the haves, the have-nots, the taxed-nots and the have-nothings.

The report found that the bottom 20 per cent of households recorded the highest rate of growth in investment income, at 8.5 per cent per annum, compared to an average of 2.3 per cent over the past decade for the other households.

Household incomes have grown, not because of rising wages and salaries, but rather due to higher investment income and government transfers, according to KPMG Economics’ report Financial Stress in Australian Households: the haves, the have-nots, the taxed-nots and the have-nothings.

The report found that the bottom 20 per cent of households recorded the highest rate of growth in investment income, at 8.5 per cent per annum, compared to an average of 2.3 per cent over the past decade for the other households.

This increase reflects a greater exposure to investment activities such as negatively geared property investment, putting people on lower incomes at risk of being unable to meet their mortgage repayments should interest rates rise.

Negative gearing under fire

According to the 2014-15 taxation statistics released by the Australian Taxation Office last week, 1.27 million people who negatively geared recorded a rental net loss, slightly down from 1.3 million claimed the year prior.

The number of Australians with a rental property has increased to just over 2.05 million, up from 1.98 million in 2012-13.

But the amount of losses claimed by Australians on mortgage interest payments and other items against their taxable income reduced in line with lower interest rates. In 2014-15, the net result from rentals was a loss of $3.6 billion, down from $5.7 billion in total loss in 2012-13.

While people across all income spectrums claimed losses, those on the highest incomes were the biggest beneficiaries in dollar terms.

The data also shows that the number of investors with one rental property has grown by 2.4 per cent over the two years to June 2015, but the number of investors with two or more rental properties has grown by nearly 34,000, or 6.2 per cent over the same period.

“It seems that once you’re hooked on the drug of investing in property, you want more and more,”  KPMG chief economist Brendan Rynne said.

“Any increase in our historically low interest rates would cause serious problems given the growth of outstanding residential loans over the past decade.”

Given housing costs are the largest single expenditure that households face, he said “fresh policies to target this issue are sorely needed”.

In recent weeks, there’s been a growing chorus of voices including the Australian Institute of Company Directors and the chair of the government’s financial system inquiry David Murray calling for policy changes to negative gearing and capital gains tax concessions.

Reserve Bank governor Philip Lowe has also said that one of the reasons investor loans and interest-only loans were climbing rapidly and contributing to higher house prices is due to “the taxation arrangements that apply to investment in residential property in Australia”.

But Treasurer Scott Morrison ruled out any changes to negative gearing in May’s federal budget.

About 460,000 households in ‘hardship’

The KPMG report examines Australian households over the past 20 years, drawing data from the Household Income and Labour Dynamics in Australia (HILDA) 2017 survey, and Australian Bureau of Statistics (ABS) Household Expenditure survey, which covers the years 1998-2010.

Around 10 to 15 per cent of households appear to be consistently unable to pay bills and debts as they fall due. These are the “have-nots” and they comprise nearly 1.4 million households.

Then there is the “have-nothings” – households who live with entrenched disadvantage – unable to afford heating and meals, need to pawn possessions or require assistance from welfare organisations. The report says they represent about 3 to 5 per cent of Australian society.

The “have-nothings” category now constitutes about 460,000 households. Since the turn of the century, 94,000 households joined the “have-nothings”.

Spending on non-essential items has also fallen, the report said. One-quarter of Australia’s households cannot afford annual holidays for one week a year away from home. One-fifth of households are unable to entertain themselves away from home once a fortnight. And 10 per cent of households cannot afford to have a special meal with their families or purchase new clothes.

Call to tighten welfare payments

KPMG warned against taxing the rich more. It suggests the Turnbull government instead tighten up welfare payments.

Policies to deliver welfare to the very poorest are less effective than to slightly better off recipients, the second-lowest 20 per cent of households.

“While overall, the social safety net appears to be working as intended, it is curious that the second-lowest category receives proportionately more in transfer payments than they pay in tax compared with the very poorest people,” Mr Rynne said.

“This suggests welfare payments might need better targeting.”

The report said over the past 35 years, transfers payments have risen from representing about 30 cents per dollar of tax revenue to now represent about 40 cents per dollar of tax revenue; an increase of 33 per cent.

Income from the top 40 per cent of Australian households is being redistributed to pay for the transfer benefits received by the bottom 60 per cent of Australian households.

The wealthiest households still receive a small amount of government support, most likely through some form on non-means-tested payments, such as the $7500 childcare rebate.

The report said targeting of transfer payments loosened in 2009 when the then Rudd government made payments to households under its $52.4 billion package designed in response to the GFC, but “was never tightened up sufficiently once the need for the stimulus subsided”.

“Once middle-class welfare is given, it is politically difficult to take it away,” the report said.