Australian politicians at loggerheads over real estate market

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The Australian real estate market has been thrust into the political arena once again with shadow treasurer Chris Bowen highlighting some very serious issues. There is a growing concern that the property market is adding further risk to the Australian economy and any property market collapse would be more detrimental to those towards the lower end of the income scale than those towards the top. Even though the Australian real estate market has been a political football for many years, many of the issues which Chris Bowen discusses make perfect sense.

Concessions and negative gearing

Many people will be is surprised to learn that so-called “negative gearing” is fairly commonplace in Australia despite the obvious risks. This is a situation where an investor lends money from the bank in the knowledge that short to medium term gross income from the acquired property will not cover management and finance costs. While there is obviously an emphasis on income in the longer term there is also a possibility of remortgaging at a higher level in the future thereby effectively stripping out the negative gearing effect.

It is also rather ironic to learn that Australia has a tax concessions system for the real estate market which is even more generous than that in the UK. This comes at a time when the UK government continues to increase additional costs and taxation for property investors suggesting that they “had it good” in years gone by. A recent Australian poll suggested that there is support for curbing negative gearing and also reducing capital gains tax concessions for investors in real estate.

Another area which is causing significant concern is the proposed use of superannuation funds for a house deposit. This is to all intents and purposes using pension fund money to cover deposit requirements at a time when the real estate market is being squeezed higher. This is something that the UK government has refused to even consider when asked the question because quite literally the massive flow of funds into the UK property market would push prices to levels which were disconnected from the economy and almost impossible to maintain going forward.

Recent property price rises

When you bear in mind the average property in Australia increased by 12.9% over the last 12 months, with Sydney grabbing the headlines with an impressive 20% increase in real estate prices, there is certainly underlying demand. The idea that the government should step in again to control lending and try to reduce demand for property makes sense from a public point of view but does nothing to support the free-market policy which has been in place for many years.

There is no doubt hotspots such as Sydney continue to attract demand from investors and workers in the region. While we have seen more interest in the suburbs as prices continue to rise, there is still strong demand in these areas as well. Experts and politicians have openly discussed their concerns about the Australian real estate market in the short to medium term and the fact prices cannot continue rising at the current rate.

We can only hope that something is done before the market reaches a critical point after which anything could happen.

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