Aussie Landlords Swallow Losses to Bet on Price Gains

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Australian real estate investor Maureen Pound said losing money on three rental apartments she owns in Melbourne and Brisbane doesn’t concern her. She’s putting her faith in future profits from rising property values.

“I might lose A$30,000 ($24,285) on a property over 10 years, but the property has gone up A$200,000,” said Pound, a 46-year-old business management consultant who lives in Melbourne.

Pound is one of more than a million Australian landlords who must cover the difference between their mortgage payments and rental income. Their bet on the continued ascent of housing prices is fueling record levels of debt and leaving investors more vulnerable to an increase in interest rates or a downturn in property values.

“The question is, is the price appreciation assumption realistic,” said Martin North, a Sydney-based principal at researcher Digital Finance Analytics. “My opinion is no.”

Investors accounted for a record 51 percent of new mortgages in October, up from 46 percent a year earlier, according to the latest figures from the Australian Bureau of Statistics. Debt reached a high of 153 percent of annual household disposable income in September, according to the Reserve Bank of Australia.

The central bank warned in September that the rise in the number of Australians buying homes to rent could be “a sign of speculative excess.”

Record-High Prices

Landlords are purchasing more property as home prices climb to record highs in major Australian cities. Last year they rose 7.9 percent and doubled in the decade to 2011, according to CoreLogic Inc.

The increases have been driven in part by Australia’s 2.5 percent benchmark cash rate, a low maintained by the RBA to stimulate the Australian economy. That has allowed mortgage lenders to drop their average benchmark variable rate to 5.95 percent, the lowest since 2009.

“The key magnetic force for investors is capital growth,” said Andrew Wilson, senior economist for Sydney-based researcher Domain Group. “It’s no surprise that near-record numbers of investors have entered the market over the past 12 months.”

As landlords increase their property holdings, the number of first-time buyers who can afford a home is dwindling. They accounted for a low of 11.6 percent of all home loans in October, according to the statistics bureau. Australia has the world’s most overvalued housing market on a price-to-income basis after Belgium, according to the International Monetary Fund.

Rental Losses

Across Australia’s state and territory capitals, rents rose 1.8 percent in 2014, the slowest pace in more than a decade, according to CoreLogic. The median advertised rent was unchanged over the last quarter, remaining at A$430 a week for houses, and A$410 for apartments, it said.

About 1.3 million Australians, or two-thirds of all investors, claimed losses on rental properties in the year ended June 30, 2012, a 7.5 percent increase from two years earlier, according to the latest data from the Australian Taxation Office. They lost about A$13.8 billion. The one-third of property investors who had gains brought in A$5.9 billion in fiscal 2012.

Australia’s tax rules provide landlords relief from their losses, giving them an incentive to buy property. Investors can claim deductions against other earnings if rental property costs, including interest payments, exceed income.

“The tax treatment of investor housing, in particular, tends to encourage leveraged and speculative investment,” according to a government-commissioned report released last month. It said housing is a potential source of risk for the financial system and economy, and recommended the government consider rule changes in a tax review due later this year.

Lending Limits

The Australian Prudential Regulation Authority urged banks in December to limit lending growth for rental properties to 10 percent a year. That level of growth was reached last year on Nov. 30, according to an RBA report released Dec. 31.

Pound said tax benefits are one reason she has bought three investment properties over the past 11 years while remaining a renter herself. Her combined monthly rental income of A$5,525 is below her mortgage costs of A$5,600, even without factoring in insurance and other levies. Pound said she recoups some of her losses through tax deductions.

The landlord said her properties have doubled in value over the past 10 years. She expects those gains to continue.

“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,” Pound said. “I’ve got the equity in my properties, so I feel pretty secure.”