House price inflation will decelerate next year, as wage and income weakness continues to hold back economic growth says economist Saul Eslake.
Bank of America Merrill Lynch Australian economist says the current slowdown in house price will persist into 2015, despite record-low lending rates.
According to the
Australian Financial Review, the current decelerated inflation could eventually curb construction activity, and trap the negatively geared property investors counting on capital gains to upgrade to owner-occupiers.
“It is our view that national median dwelling-price growth will decrease markedly in 2015,” Mr Eslake said.
“This is as household income growth and sentiment remain soft, the unemployment rate rises, affordability deteriorates and the stimulatory impact of low interest rates fades.”
Mr Eslake said the slowdown would bring house price inflation more into line with income growth and mortgage rates, calculated at between 3.5 per and 4 per cent.
Australian Prudential Regulatory Authority’s (APRA) macro-prudential measures added downside risk to this calculation, Mr Eslake.
“The Reserve Bank of Australia for one has been extolling the role that increases in house prices have been playing in supporting both consumer spending and residential construction,” he said.
“If house price growth decelerates and perhaps even declines in real terms this could weigh on consumption and dwelling investment into 2015,” he said.
Official data confirms that real wages were declining, business and consumer sentiment remain subdued despite improving operating conditions and growth.
According to Australian Bureau of Statistics’ housing finance series, the value of investor loan approvals in September were greater than the value of loans to owner-occupiers.
Investor finance approvals have risen 68 per cent since the RBA starting cutting the cash rate in 2009.
Mr Eslake said this trend was driving a build-up of risks in the housing market, aided by the widespread use of negative gearing, which allows investors to offset interest costs against tax.
“The latest data from the Australian Tax Office for 2011-12 suggests that 19 per cent, or around one in five, Australian taxpayers is a landlord,” said Mr Eslake.
“And of this, around 13 per cent of these taxpayers are taking advantage of negative gearing,” he said.
This meant that 68 per cent of landlords declare an income loss on their property investments.
“Therefore these landlords are relying on capital gains to offset income losses,” said Mr Eslake.
“This is a strategy subsidised by the government, but it may not be a good one if dwelling prices don’t rise,” he said.