Landowners in Australia appear willing to accept losses on their properties in the expectation they will make it up in capital price gains.
There are more than a million Australians whose mortgage repayments outweigh their rental income and they are betting on house price gains swallowing up these losses down the track.
The punt on rising house prices taken by investors is leaving Australian investors in record levels of debt and more vulnerable to interest rate rises or falling property prices.
Appearing in The Age, Australian real estate investor Maureen Pound said she rented out apartments in Melbourne and Brisbane and is losing money on them. She says it doesn’t concern her because she is putting her faith in profits from capital gain increases down the track.
“I might lose $30,000 on a property over 10 years, but the property has gone up $200,000,” she said.
There are differing opinions on whether the property price increase assumptions are realistic.
Statistics reveal that property investors as opposed to owner-occupiers accounted for 51 per cent of new mortgages in October which is a steep jump of 46 per cent from the previous year.
The RBA says debt has reached a high of 153 per cent of annual household disposable income in September.
The record low interest rates that have been steady for months have obviously been a stimulus to some of this investment.
Andrew Wilson from Sydney-based researcher Domain Group spoke to The Age.
“The key magnetic force for investors is capital growth,” he said.
“It’s no surprise that near-record numbers of investors have entered the market over the past 12 months.”
Australian Taxation Office figures show around 1.3 million Australians, which is two-thirds of all investors, claimed a loss on rental properties in the year ended June 30, 2012. This was a 7.5 per cent jump from two years prior.
The two-thirds of investors that lost money lost $13.8 billion, and the one-third that made a profit made $5.9 billion.
The Australian tax law of negative gearing provides tax relief to landlords who take a loss from their property investments, providing an incentive for people to buy property.
Maureen Pound said tax reasons were a factor in her decision to buy three investment properties over the past 11 years while she rented herself.
Ms Pound says her properties have doubled in value over the past 10 years and she expects them to keep rising.
“When the global financial crisis hit, all those people who’d invested in other ways lost significantly, and I was the one smiling at the end,” she said.
“I’ve got equity in my properties, so I feel pretty secure.”