 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.
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