J Diggle and Associates - helping you reach your financial goals
J Diggle and Associates (JDAS) commenced their financial planning business in April 2011. Bringing together over 25 years of experience in the financial services industry, JDAS seeks to provide real world financial planning solutions that meet your financial needs, put you on track to meet your financial goals and to demystify the jargon of wealth creation and risk management.
We will give you sound advice about savings discipline and diversification, along with specialist technical knowledge. Simply put, we are here to help you worry less about money and to free up your time to do the things you enjoy.
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J Diggle and Associates
Steamer Enterprises Pty Ltd trading as J Diggle and Associates
ABN 71 103 925 935
Australian Financial Services Licence No. 39254
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A note on the Australian housing market
20 February 2017
The financial and mainstream media commentators are focusing on the level of investment debt for housing, versus personal home ownership, noting this as a key driver for house price increases in the last 2 years. When we look beyond the short-term headlines, we notice a paradigm shift in lending by bankers that should be causing a concern.
Traditionally banks take deposits, pay an interest rate on those deposits, and then lend to individuals and companies at a higher interest rate. This week’s quarterly financial reporting by the banks has highlighted for ANZ at least, that the traditional 2% margin (known as the net interest margin) is under pressure. So, the basics of the purpose of banking are under pressure.
The Reserve Bank of Australia publishes significant amounts of data about financial institutions and their business activities. The chart below depicts the amount (in billions) of funds lent by Australia’s banks to home owners versus the amount to property investors since 1990.
Whilst home ownership borrowing has always been greater than that of investor borrowing for housing, what has significantly changed since 1990 is the ratio of lending to home owners versus lending to property investors. In 1990, the ratio was 16.26%; by December 2016, that ratio was 54.37%, having peaked at 65.35% in June 2015.
(Source: www.rba.gov.au, Table D5 BANK LENDING CLASSIFIED BY SECTOR)
The share of bank based lending business for property has risen since 1990 to become 17.52% to owner-occupiers (up from 9.61%); and 9.53% to housing investors (up from 0.03% in 1990). The sector of borrowers that has fallen the greatest during this period is Commercial lending secured by property – this is down from almost 24% to 14.41%.
Whilst banks argue that they are meeting customer demand that stems from low interest rates; they are also making the case for demand side reform in the shape of removing the 50% capital gains tax reduction if investment assets are held for more than 12 months. They are not isolating tax benefits as the only reform; and they appear to be in favour of yet another structural review of the economy. If capital gains taxes remain, but on the full gains and not the reduced gain, the banks argue that investors will be put off property investing, thus decreasing demand. Of course, the banks do not want to see the cost side benefit of tax deductibility of interest costs for investment to disappear – that would really cruel their current home lending business model. What the banks would like to see is a market where borrowing has financial benefits, and selling assets relies on a more longer term outlook i.e. investors needing to hold the assets longer to make the same after tax return that they can make now under the current CGT rules. The banks can see the benefits (profits to be had) from longer term holding of assets and thus longer term repayment of debt. From the table above, we can see just how important the home loan lending business has become to them.
The National Consumer Credit Protection Act introduced in 2009 forces lenders to confirm that any loan arrangement and the repayment of that loan is ‘not unsuitable’ for the client. This is a black and white assessment of income versus cost of loan; the value of the asset and the level of debt against that asset is no longer an essential base measurement of affordability.
BankWest, which is owned by the Commonwealth Bank, is no longer including the benefits of negative gearing in their cash flow estimates for loan assessments. In other words, the level of borrowing will be assessed on the investors’ ability to repay the loan and the income from the rental. There does not seem to be anything prudent about an assessment for affordability that partially relies on the tax deductability of the interest. Whilst all borrowing relies heavily on the ability of the borrower to earn the income to repay the debt, doubling down by including the tax deduction the borrower may receive adds to that risk. The banks need to address this flaw in their assessment of borrowers long before the government makes any move towards altering the capital gains tax rules. It would appear that again, the basics of banking are being lost.
When it comes to investing, the role of governments is to step in when markets fail. I don’t believe that it is negative gearing and tax deductability of the cost of owning an asset that is pushing the prices of houses up, and therefore it is not a government responsibility to ‘fix’ housing prices. I believe it is demand bought on by lenders using low interest rates and targeting the low hanging fruit of houses as security for borrowing. If banks refocussed on commercial lending with the same vigour they have focussed on home lending, we would see an increase in small businesses and farm productivity; a much better outcome for the economy as a whole.
 Source: Frost, James (2017); ‘ANZ Turns Heads with $2bn cash profit’; The Australian Financial Review, 18 – 19 January 2017, p20
 Source: Reserve Bank of Australia, D5 BANK LENDING CLASSIFIED BY SECTOR, http://rba.gov.au/statistics/tables/#interest-rates; Accessed 19 02 2017
 Banks Back Capital Gains Tax Review, Coorey, P. and Buffini, F. (2017), The Australian Financial review, 18-19 February 2017. P.4