Look to Vancouver’s property woes as negative gearing starts to slow

Negatively geared investors helped our property market ride out the Chinese capital exodus but the party could be over.

In the first half 2016, Vancouver’s housing market was in “overdrive” But last month, January, residential property sales fell by around 40 per cent. (Picture: istock)

When it comes to residential property prices — be careful what you wish for.

If the banking industry follows the Commonwealth Bank-owned Bankwest and tightens the criteria for negatively geared loans, we will see a fall in dwelling prices in parts of Sydney and Melbourne.

Indeed, if you want to know what might happen, my suggestion is that bankers visit Vancouver, where dwelling turnover is down 40 per cent and prices of stand-alone houses are down 6 per cent and look set to fall much further.

If that happens in Australia, the bad debts of the banks will rise because of the enormous sums that have been loaned based on current high dwelling prices.

As I have been pointing out in previous commentaries, Chinese money has helped drive both the apartment and housing markets in select areas of Sydney and Melbourne.

The severe clamps recently placed on money exiting China and the jailing of officials for corruption has substantially reduced Chinese buying, although some Chinese are getting money out through perilous ways to fund their off-the-plan settlements.

Normally, when a major buyer is removed from a market, prices fall. But it has not happened because, given Canberra’s superannuation turmoil, Australians have decided to purchase negatively geared properties on a massive scale, because interest and running costs can be deducted against salaries. And that enthusiasm has been helped by higher rents.

This is particularly evident in Sydney, though it is also taking place in Melbourne. However, in Melbourne a glut in one- and two-bedroom apartments near the city funded by Chinese off-the-plan deposits has blunted the increase in prices.

In calculating their investor loan criteria, Bankwest say they will no longer take the lucrative tax benefits that come with negative gearing into account. Of course, it is exactly these benefits that make investment dwellings affordable.

The boom in dwelling prices has not taken place in capitals other than Sydney and Melbourne.

In Perth there has been a fall in prices, which may have affected Bankwest’s book causing losses — losses that will be repeated around the country if there is a significant fall in prices.

The Reserve Bank is fearful that a massive increase in negatively geared property loans will endanger bank balance sheets, particularly as the ALP is still promising to limit negative gearing to new dwellings which means that those properties being negatively geared at the moment will have to be sold to buyers who will not be able to negatively gear, thus reducing prices.

Remember that the housing price problem was caused by a combination of banks hosing low interest loan money at the market, the Chinese buying and the curbs in supply imposed by local councils and state governments looking to drive up prices to increase their revenue.

In Vancouver, the locals have multiplied the effect of the curbs on Chinese taking money out if the country by imposing a 15 per cent tax on foreign home buyers — a tax that is not being imposed by other Canadian provinces.

In the first half 2016, Vancouver’s housing market was in “overdrive” But last month, January, residential property sales fell by around 40 per cent.

Surprisingly, the big fall was in detached properties where sales fell an incredible 57.6 per cent from the level of January 2016.

The benchmark price for detached properties was $1,474,800, which represents a 6.6 per cent decline over the last six months and a 0.6 per cent decrease compared to December 2016.

Sales of apartment properties fell 24.7 per cent but the benchmark price of an apartment property at $512,300 actually rose fractionally.

Paradoxically in Australia, banks have been fearful of lending on apartments but have gone gangbusters on cottages. If Vancouver is a guide they may have got the market around the wrong way.

In Sydney, the salaries of professionals in many areas have simply not been rising. They therefore have no hope of buying a residential dwelling that is large enough to raise a family unless their parents help. So they are renting or renting and buying a property as an investment.

We are looking at a massive social change. Bankwest’s move will not reverse the trend but if other banks followed then it’s back to just renting.

And remember that the reason the Chinese are restricting their money leaving the country is that they are trying to prop up their currency. If it falls sharply, the Chinese will make large profits from their overseas purchases. The government might require/entice them to bring the money home to China.