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House price rises not sustainable, Fitch warns

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Recent house price rises are beneficial, but not sustainable, says international ratings agency Fitch.

Releasing its latest Australian mortgage performance report, the Dinkum Index, the agency said delinquency rates remained stable.

“Fitch expects arrears to remain stable over the remainder of 2014 due to low interest rates and the strong housing market.

“Australian house prices gained 10.1 per cent over the financial year, led by a 15.4 per cent year-on-year rise in Sydney.

“The strong property market benefited lenders’ mortgage insurance (LMI) claims as it reduced the likelihood of a principal shortfall on defaulted loans.”

In the second quarter of 2014, 34 claims were submitted to LMI, significantly lower than the 77 claims submitted in the first quarter.

The average submitted claim in was $46,878, well below the cumulative average LMI claim amount of $84,033.

In its commentary on mortgage performance Fitch says “rising house prices are beneficial to delinquencies and losses in the short-term, but sustained rapid rises could eventually have a negative effect on losses, especially for less seasoned loans with high loan-to-value ratios”.

“Fitch believes the current yearly rate of growth is unsustainable in the long term if not coupled with an increase in household income.

“The index showed 90+ days arrears rose 3 basis points (bp), while 30-59 days arrears were flat and 60-89 days arrears fell by 1bp. The increase in 90+ days arrears, despite a strong housing market, may be due to rising unemployment. Fitch expects the unemployment rate to be a key driver of 90+ days arrears in the current low interest rate environment.”

Fitch’s Dinkum RMBS Index tracks the arrears and performance of the mortgages underlying Australian residential mortgage-backed securities (RMBS).

A separate report released today by the Housing Industry Association says cutting back tax deductions for property investors would erode housing affordability, reduce housing supply and bump up rents.

The report, commissioned by the HIA, says reducing negative gearing would diminish the incentive to invest in housing and exacerbate current undersupply, pushing rents almost one per cent higher.

Negative gearing allows investors to fully deduct costs associated with a rental property against their income, reducing their tax liability.

It has long been criticised as a policy that hurts housing affordability and the 2010 Henry Tax Review recommended reducing the level of tax deductions available from negative gearing by 40 per cent.

But the report on Monday says discounting negative gearing would worsen housing supply issues.

“Under current housing policy settings, discounting residential negative gearing would lower Australian living standards by making the tax system less efficient,” the report says.

“The discount would add to the already high tax burden in the housing market, exacerbating the current undersupply of housing and, therefore, further reducing the efficiency of the housing market.

“Adding to the tax burden on rental properties reduces the incentive to invest in housing, and therefore reduces housing supply.

“This lower supply raises the cost of housing for both renters and owner occupiers.”

Abolishing stamp duty on property transfers, however, would improve housing affordability and living standards, by removing barriers to investing, the report said.

Stamp duty also discourages people from moving house even though it could better suit their needs, preventing the current stock of housing from being used efficiently, it said.

The report said an estimated $7 billion was paid in stamp duty on residential property conveyances in 2011/12, with $1.3 billion offset by negative gearing.
A residential negative gearing discount could only be beneficial if stamp duty was abolished, the report said.

“Rather than introducing a discount to residential negative gearing in isolation, other related recommendations of the Henry Tax Review, in particular replacing stamp duty on conveyances, would need to be implemented first if an economic efficiency improvement is to be achieved,” the report said.

 

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