Property in Australia, we like to say, is a national sport.
Owning your own property is the Australian dream. Increasingly, it’s doing that, then having a second house that makes you some money.
We have a strong immigration program which maintains demand, and a patchwork approach to development approvals across governments which means houses are in short supply and therefore command high prices.
A supplemental part of the demand for housing is our policy setting of negative gearing, which allows you to write off the costs of having an investment property against tax.
Negative gearing has served the country well by growing wealth and encouraging people to invest rather than sitting on their money.
But world banking regulators are twitchy about rules which, in an era of ever-increasing globalisation, encourage people to invest in property as an income stream, when customers in other countries are unable to do this and when banks – like Australia’s – have significant exposures to other parts of the global banking system.
As the Irish experience showed – and some of my friends in my home country were severely burned in this – people owning multiple properties in one country can backfire spectacularly when demand for housing drops or economic circumstances change.
Business Insider’s Greg McKenna has written in detail today about new rules being proposed by the Bank of International Settlements, which tries to set the ground rules by which all banks transact.
The BIS has a new consultation document out titled: “Revisions to the Standardised Approach for credit risk”. One of its proposals is that when a banker assesses you for a loan and looks at what you earn, the bank needs to consider that:
total income must be net of taxes and prudently calculated, including a conservative assessment of the borrower’s stable income and without providing any recognition to rental income derived from the property collateral.
If the Australian banking regulator APRA was to subscribe to this it has the potential – just the potential – to end negative gearing.
As of November APRA stats for banks (and only those institutions that are called banks, so no building societies or credit unions) show there’s more than $450 billion in investment loans for housing and $851 billion in loans for owner occupation.
The stakes here are staggering. And the BIS has 12 words which could – just could! – change everything.
Greg McKenna’s full post is here. And submissions – by the way – to the BIS proposals are due at the end of March.