As everyone knows, the secret of gearing is to invest in an
asset that provides a higher after-tax return than your total
costs, which obviously includes loan interest.
While the composition of the total return is not absolutely
critical, the risks are clearly reduced when the income from
your investment covers the interest bill. Where this does
not occur, you have a negatively geared investment which must
generate a capital gain at some point to make the whole exercise
worthwhile.
According to the official ABS figures, Australian property prices
have risen every year since 1980 so the risks involved with
negative gearing have really only been a theoretical danger.
But the world is changing.
As the chart below illustrates, house prices have been growing
faster than average wages since the late 1980s. It might not
look like much but if current trends persist for the next one
hundred years, only people earning 22 times average weekly earnings
will be able to afford a house.
That's obviously not going to happen. No amount of financial
innovation, or loan options or second jobs can paper over a
gap that large. So it's not a question of if house prices will
fall but when.
(Get the full story in Market Notes.
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