Yesterday, I commented on the RBA rate hike on Tuesday. I am not complementary. In the past two days, more data has been released since the decision, further suggesting that the RBA erred. It also shows that part of the housing problem that everyone is concerned about is not due to easy monetary policy (which is the prevailing slogan), but due to flawed tax policy. As a result, we saw housing loan demand fall last month and building approvals plummeted, suggesting that the housing market, especially owner-occupiers, is in decline. Furthermore, retail sales growth was only 1.6%, while mainstream economists pointed to rapid growth in the 12-month period (9.4% in March-March), but they ignored the fact that the observation in March 2022 showed that decreased from the previous month. Yesterday’s RBA statement made no mention of housing at all, even though its decision had already pushed up mortgage rates in an already falling market. All they seem to want to do is wreak havoc on low-income workers through lower real incomes and rising unemployment and underemployment. There are some fiscal options that should be taken now, but policymakers seem to be turning a blind eye to them.
home loan
The latest home loan data released on Wednesday (May 4, 2022) – Loan Indicator – For March 2022, indicate:
The “commitment value of new loans” for housing rose 1.6%, personal loans fell 0.4%, commercial construction rose 23.6%, and commercial property purchases fell 16.8%.
The latter two components are very volatile.
Looking at housing commitments, we found that:
– Owner-occupier dwellings rose 0.9% to $21.6b, down 2.2% from a year ago.
– Investor housing rose 2.9% to an all-time high of $11.7b.
The data also shows that the annual growth rate of loan commitments (March 2021 to March 2022) is:
1. Housing 11.1%.
2. Self-occupied -2.2%.
3. Investment speculation 48.4%.
As a result, over the last year, the owner-occupier housing market has shrunk, while those borrowing money to speculate in real estate have soared.
The question then is whether rate manipulation is the appropriate tool to change this behavior.
In Australia, our tax system favours speculative investment in housing (especially built houses and apartments), which diverts savings from investment in productive capital formation.
Speculators invest at a cash loss (the rental income is less than the cost of operating the property), earning huge tax breaks, and then profit from capital gains.
This is a stupid policy that favors wealthy people, many of whom own many investment properties.
This is based on the rationale for improving the supply of rental accommodation.
Of course, this has to be seen in the context of significant cuts in investment in social housing by the federal and state governments – we are currently short of around 450,000 dwelling units in this sector due to the government’s failure to invest in the pursuit of fiscal surpluses.
As a result, the rental market is getting squeezed (vacancy rates are now very low across the country), and the government is trying to cover their tracks by claiming that incentives to investors will allow private rental housing to grow.
Banks that make a fortune on investment loans applaud.
Those who profited from flipping properties applauded.
We all aspire to have more than the property we live in.
The problem is that the data shows that while these housing speculators make huge profits (through tax cuts), the rental market is actually worse – rents are higher than they would otherwise be.
Tax policy – negative gearing – allows investors to write off losses with other sources of income (interest costs less rental income).
Claims that this will depress rents because if investors charge high rents, they won’t be able to take advantage of tax breaks.
There is no evidence that this claim is true.
In fact, it’s clear that investors are trying to squeeze as much rent out of the market as possible, and then, if that hurts the tax advantage, they’ll just take out more loans and acquire more properties.
Another way of saying it is that housing supply has increased due to tax breaks.
A more accurate observation is that more landlords come into the picture.
Data from the Australian Taxation Office – Snapshot – Table 4 – Displayed between 1999-2000 and 2018-19 (latest year available):
1. There was a 106.6% increase in the number of people reporting overall net rental losses (and thus claiming a tax cut).
2. The number of people reporting overall net rent neutral or profitable increased by 73.2%.
3. The number of people reporting rental income increased by 91.4%.
The chart below shows the evolution of those claimed losses.
In addition, as shown in the chart below, several property holdings claiming net rental losses have increased.
As a result, the number of people claiming 6 or more homes for net rental loss increased from 2,193 to 11,226. Over time, the distribution is shifting towards owning multiple rather than a single investment rental property.
People who were already wealthier not only increased their speculative investments and received larger income tax breaks, but also accumulated more wealth over time by taking advantage of this tax break.
If this is to increase the supply of new properties (to alleviate shortages and increase rental availability), then these investors will primarily invest in new construction rather than buying and profiting from the rotation of existing inventory.
The above-mentioned figures released yesterday clearly show this.
Table 13 – Break down the data into loans to purchase new dwellings and loans to purchase existing dwellings
This data is from July 2019, but you can get earlier data from previous series – here – From October 1975 to November 2018.
The graph below shows investment housing (in $A000) and total investment in new residential construction from July 1991 to November 2018 (top graph) and July 2019 to March 2022 (bottom graph). housing value.
I made two charts because there is an irreconcilable break in the series.
But the trends within each are clearly the same.
The share of total investment spending fell from the highs of the 1920s to less than 10% by the end of 2018. By December 2021, it was only 8.8%.
Growth in speculative housing spending for existing rental buildings has greatly outpaced investment in new rental housing.
The point is, this doesn’t really expand the housing supply, it just replaces the stock of housing that owner-occupiers bought (at a lower price) and turns it into rental housing.
This has not broadened the rental market as it has increased supply and demand, and in Australia’s case, younger cohorts who are locked out of the owner-occupier market due to rising prices have been particularly penalized, in part because these investors are racing to buy existing housing stock.
The crux of it all is that while low interest rates have been blamed on a surge in housing market prices and higher rates are needed to ease the pressure, the reality is that investment speculation dominated demand in the last period, which was largely driven by the federal government. Driven by the absurd tax structure that rewards this unproductive transfer of national savings.
The owner-occupier segment of the housing market has been declining over the past 12 months, so using rate hikes to kill that segment appears to be closing the door when the horses are already running wild.
Removing tax breaks for housing speculation and building more social housing would be a more productive way to deal with the housing crisis.
In fact, speculators have accumulated so much wealth that they will be able to absorb rising interest rates, and it is unclear whether their demand for existing housing will be adversely affected in any way.
But for owner-occupiers and those trying to enter the market as first-home buyers, the hike will be punitive given the high entry costs and low wage growth.
I didn’t see anything from the RBA researchers dealing with this issue, and it wasn’t mentioned in the media statement on Tuesday after they pushed rates higher.
Residential Approval
To further support my claim that the housing market has cooled, the ABS- Australian Building Certification – Shows a significant drop in approvals over the past month and year.
Data for March 2022 shows:
| category | Monthly change (%) | Annual change (%) |
| Total number of approved residential units | -18.5 | -35.6 |
| private sector housing | -3.0 | -32.2 |
| Private residences, excluding houses | -29.9 | -41.0 |
So construction (housing) is also contracting sharply before interest rates rise.
It raised the question of exactly what the RBA was trying to slow down on Tuesday’s rate decision.
All the talk is about housing.
But that’s already falling, and rate hikes won’t really kill the unproductive investment part of that market.
We conclude that the RBA believes the economy as a whole is growing too fast, so they want to hurt spending across the board, resulting in lost income and an increase in mass unemployment and underemployment.
As I pointed out yesterday, how they think this will stop the coronavirus outbreak, get ships moving faster, trucks moving cargo faster, challenging OPEC oil bosses and convincing Mr Putin to withdraw and be peaceful is another matter.
in conclusion
So Tuesday’s rate hike will only hurt low-income workers and their families.
Fiscal policy changes are needed to quell the massive speculative demand for housing and increase the supply of affordable housing to low-income workers.
Given the inflation situation, monetary policy is currently powerless.
Governments can combat inflationary pressures by, for example, making all public transport free, thereby encouraging a shift away from private cars.
If the world made this simple change, workers would be better off and the environment would return to the level of emissions reductions we saw when cars were off the road in the early days of the pandemic, andgreedy OPEC producers will be forced to lower oil prices due to shrinking profits.
Enough for today!
(c) Copyright 2022 William Mitchell. all rights reserved.
