Most Australians are not housing investors but those who are tend to be 35 years or older and from households where annual income exceeds $100,000.
Most investment is in residential apartments, accounting for around two-thirds of available stock, with nearly two-thirds of investors with outstanding housing debt currently negatively geared.
These were the facts laid out by the Reserve Bank of Australia to the parliamentary inquiry into home ownership in June. The analysis casts doubt on the idea that tinkering with the tax treatment of Australian residential property would unfairly impact “mum and dad” investors.
With tax reform is at the centre of the political agenda and Labor proposing limiting negative gearing to new houses only, federal Treasurer Scott Morrison has indicated a reluctance to change the negative gearing regime if reform was to deny working Australians the opportunity it currently provides.
— Scott Morrison (@ScottMorrisonMP) February 14, 2016
Naturally, this has sparked some discussion of who exactly benefits from negative gearing.
Below are four charts from the RBA that evaluate the key findings of the parliamentary submission.
Australian property investors tend to be older
The RBA suggests that the likelihood to own an investment property increases with age, as demonstrated in the chart below. Close to 85% of all property investors were found to be above 35 years of age, with the vast majority coming from the 45-54 and 55-65 year age brackets.
Aside from the 65+ age bracket, most investments were financed through leverage.
Percentage of Australian property investors by household income
As was the case with age, the RBA noted that housing investment tended to increase as household incomes rose.
The chart below tracks the percentage of housing investors by income bracket, comparing the rates of 2003/04 to 2012/13. As it clearly demonstrates, as household income increases, so too does the prevalence of housing investment.
“While the incidence of property investment fell between 2003/04 and 2012/13 for most income levels, it increased for those with very low incomes and those with very high incomes,” noted the RBA. “For investors with very low incomes, individuals aged 60 years or older comprised a larger share in 2012/13 than in 2003/04, as an increasing number of baby boomers owning investment properties entered retirement.”
The RBA suggests this was due to retirees being more capable of servicing any investment property debt than their younger low-income counterparts given they were likely to have non-taxable sources of income, such as drawdowns from superannuation funds.
The richest 40% of Australians carry 80% of the investor housing debt
As for the share of outstanding housing investor debt, most was held by higher income Australian households.
The top two quintiles by household income held more than 80% of outstanding housing investment debt.
The RBA noted that these investors appeared well placed to service their debt, typically using less than 25% of their annual income to service their total property debt. The bank also noted that around half were ahead of schedule on all their mortgage repayments.
Percentage of Australia’s population who are housing investors
According to analysis conducted by the RBA, using data from the Australian Tax Office, around 10% of Australia’s population aged 15 years and older were property investors in the 2012/13 financial year, up from around 7% at the start of the 1990s.
“Over the same period, the share of these investments that were geared – where the investor claimed interest deductions – increased steadily before levelling off at a little over 80%, said the RBA. “The share of investors that declared a net rental loss, taking advantage of the tax benefits of negative gearing, was just under two-thirds in 2012/13, having increased from around half in the late 1990s.”
While the Turnbull government hasn’t announced a policy yet towards the use of negative gearing in Australia’s residential property market, treasurer Scott Morrison has signalled he’s willing to review “excessive” use of the regime, especially by wealthier investors.
Last week federal opposition leader Bill Shorten pledged to “put the great Australian dream back within reach for the middle and working class”, stating that if Labor were to win this years federal election it would only allow negative gearing to be applied to newly-constructed homes.
The policy announcement, scheduled to come into effect on July 1 next year should Labor take office, would grandfather the existing tax treatment for investment properties purchased before July next year.
Clearly, negative gearing is mainly used by wealthier and older Australians. But that is to be expected: with more income, they are able to carry more risk and borrow up and then service debt. But it isn’t the exclusive domain of these demographics, either.