Canberra
The property boom has lured hundreds of thousands of low-income Australians into negatively geared investments that the Reserve Bank fears could threaten financial stability in the event of a downturn.
In a warning that rising household debts are the biggest domestic risk to the Australian economy, the Reserve Bank is conducting “stress tests” of the banking system to see how it would cope with a severe recession, in which house prices plunged by 40 per cent or more.
In its latest review of the financial system, the Reserve Bank said the most vulnerable group of borrowers were those on low incomes. Its analysis of tax records shows 11 per cent of people earning less than $50,000 have an investment property, and most of them are negatively geared.
“Household indebtedness is high and, against a backdrop of low interest rates and weak income growth, debt levels relative to income have continued to edge higher,” the RBA said. Household debt recently touched a debt-to-income ratio of 194 per cent — one of the highest in the world.
The bank says while some households had taken advantage of low interest rates to accelerate their mortgage repayments, others had taken on more debt.
“Higher interest rates, or falls in income, could see some highly indebted households struggle to service their debt and so curtail their spending,” the bank says.
Although the initial assessment from the RBA stress test is that the high level of retained bank profits would provide a buffer in the event of a downturn, much would depend on how steep the fall in revenue was.
The RBA identifies three groups that are particularly exposed: investors aged over 60 who are still carrying mortgage debts; people negatively gearing multiple properties; and those buying properties in interstate markets they don’t understand.
The bank estimates about two million people have investment properties, of whom 80 per cent have a mortgage and 60 per cent are negatively geared.
“With many not earning positive income from their property, prospective capital gains are more likely the primary rationale for investing,” it says.
The RBA has long called for reform of property taxation, arguing that negative gearing and capital-gains concessions could encourage excessive speculative investment. The tax records show that 45 per cent of property investors earn less than $37,000 while more than 75 per cent earn less than $87,000.
Although people on high incomes incur the biggest losses on their negatively geared investments, the Reserve Bank says that relative to incomes, the losses are greatest for those at the bottom end of the income scales.
“Lower-income taxpayers may be more vulnerable to increases in debt-repayment obligations or reductions in income,” it says.
“They might also be more reliant on rental income to meet their repayments.”
Among community and personal service workers, for example, about 10 per cent have an investment property, of whom two-thirds are negatively geared. Their average income is only $31,790. Similar shares of low-earning labourers and sales workers have negatively geared investment properties.
The RBA says about 35 per cent of people in the lowest income bracket are aged over 60, of whom many are retired. Over the past decade, the share of property investors aged over 60 has doubled to about 22 per cent. Of those with no income, suggesting they have retired, about 40 per cent still have a mortgage.
The RBA’s analysis shows there has been rapid growth of people holding multiple properties. The numbers holding five or more investment properties jumped by 7.5 per cent in 2014-15, the latest year for which tax records are available. The tax data does not reveal further information about the incomes and characteristics of the multiple property investors, but the RBA says that they “likely contributed to higher risk”, given the strong growth in investor credit during the boom and the riskier types of borrowing, such as interest only loans, that have been popular.
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