Report: Australia’s poorest take on property investments despite inability to handle risk

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australia property
A construction tower appears over waterfront property on Sydney Harbour in Australia, December 13, 2016. Reuters/Jason Reed

A new report indicates that the poorest people in Australia are taking on negatively geared property investments even though they are unable to handle the risks. As a result, they are forced to deal with severe risk of financial distress as interests rates rise.

The report shows that the bottom 20 percent of households recorded the highest rate of growth in investment income at 8.5 percent per annum compared to an average of 2.3 percent over the past decade for the other households. The data reflects a greater exposure to investment activities like negatively geared property investment that puts people with lower incomes at risk of not being able to handle their mortgage repayments if interest rates go higher. At least 10 to 15 percent of households seemed unable to pay bills and debts before the due date.

The findings of KPMG Economics' report titled “Financial Stress in Australian Households: the haves, the have-nots, the taxed-nots and the have-nothings” also show that proportion of households that face economic hardship was static in the recent year, but the total number of very poor households had surged and reached nearly half a million.  Higher investments income and government transfers have caused household incomes to grow, not due to rising wages and salaries.

KPMG chief economist Brendan Rynne pointed that there is a tendency for one to be hooked on the drug of investing in property.  But a rise in the interest rates, he said, would result to serious problems provided the rise of outstanding residential loans over the past decade, adding that fresh policies are needed to target the issue. Housing cost is the largest single expenditure that every household deals with.

Australian Institute of Company Directors is calling for policy changes to negative gearing as well as capital gains tax concessions. The chair of the government's financial system inquiry, David Murray, is also looking into possible changes.

Reserve Bank Governor Philip Lowe has explained that the taxation arrangements that apply to investment in residential property in Australia was among the reasons why investor loans and interest-only loans were rising and resulting to higher house prices. Treasurer Scott Morrison, however, ruled out any changes to negative gearing in May's federal budget, Sydney Morning Herald noted.

The KPMG report has drawn data from the Household Income and Labour Dynamics in Australia (HILDA) 2017 survey and Australian Bureau of Statistics (ABS) Household Expenditure survey. It examines households in the country over the past two decades.

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