Investor opinion: an uneasy equilibrium
A survey of property investors in The Age today by Colemar Brunton shows sentiment delicately poised between those who see the market flat or falling and those anticipating further rises.
This is not the bursting of The Great Australian Property Bubble that Prosper and many other commentators like Jeremy Grantham and Steve Keen are warning of. But it does show many hands poised over the SELL button, ready to move.
It comes down to this. There are 1.3 million Australian taxpayers with negatively geared rental properties. Interest charges and costs are greater than the rent, so they regularly make up the difference from other sources. The cost of this is tax deductible.
Negative gearing only works where investors believe property prices will rise and they can later sell and realize a capital gain, or rents will rise strongly and overtake the investor’s costs. Hyman Minsky called this a Ponzi scheme.
The vast majority of investors in the survey (62 per cent) see flat prices ahead, stretching out for years.
If that is the prevailing opinion, canny investors will sell now. Why endure the pain of subsidising renters when prices are not rising?
“To predict a plateau, is by implication to predict a fall,” says Dr Gavin Putland of the Land Values Research Group.
If investors bale out, sellers will outnumber suddenly-cautious buyers, and drive down prices. Visualize a scenario where, like the US experience, a quarter of mortgaged homes are ‘underwater’ – worth less than the mortgages against them.
The Reserve Bank of Australia’s Luci Ellis is quite relaxed about this: “ Even if household balance sheets were to become overstretched to some extent, historical experience suggests that this, on its own, is unlikely to pose significant risk to Australia’s financial system.”
Her confidence is about the resilience of the financial system – the banks and financiers – not about households. Her ‘overstretched’ remark points to agony for vulnerable individuals.
Every property owner scheming and dreaming about the profits their home is making will be rudely woken by a bucket of ice cold water. Those with large mortgages are going to drown in debt.
I do not announce the turning of the tide, but turn it will.