Australia’s lowest-income households are turning to negative gearing in increasing numbers, leading to warnings of significant financial stress among the poorest when interest rates rise.
A new report from KPMG shows the bottom 20% of Australian households (measured by income) have recorded the highest rate of growth in income from investments over the decade to 2015, at 8.2% per year – nearly four times faster than the remaining 80% of households.
It says this reflects a greater exposure to investment activities, such as negatively-geared property investment, confirmed by the “substantial increase” in the value of second mortgage payments being undertaken within this low-income group.
It found households are responding to anaemic wages growth and record-low interest rates by seeking alternative sources of income.
“While understandable that the poorest in our society are seeking to diversify and increase their incomes by other means, this income group is least able to take on the financial risk associated with geared investment activity,” the report warns.
“The top 20% of households is the only cohort to have a greater relative exposure to investment income than the bottom 20%, but it has the highest levels of salaries and wages from which to buffer any downturn in investment returns if that were to occur.”
The KPMG report, called Financial Stress in Australian Households: the haves, the have-nots, the taxed-nots and the have-nothings, was released on Tuesday.
It has analysed the incomes and spending patterns of Australian households between 1995 and 2015, using income data from the Melbourne Institute and Australian Bureau of Statistics.
It shows household finances have changed dramatically since 2005, with growth in household income being driven by government transfers (pension and welfare payments) and investment income, not by increases in wages and salaries.
It also shows households have been progressively increasing their debt levels, and doing so at rates faster than the growth they have achieved in their disposable incomes.
This includes households in the lowest 20% of the income distribution, which have found negative gearing increasingly attractive.
The report has considered household income on a pre-tax basis (gross income terms) before tax adjustments can be used to shift higher-income households into lower-income brackets.
Brendan Rynne, KPMG Australia’s chief economist, said ten years ago 1% of households in the lowest-income quintile had taken second mortgages and were receiving investment income, but that has doubled to 2%.
“It may not sound like much but it means there’s been an increase in absolute numbers of more than 20,000 households since 2006, from roughly 16,000 to 38,000,” he said.
“It’s our presumption that those second mortgages are being applied to negatively geared properties because you’re also getting investment income associated with that.”
The report says: “One possible explanation for this finding is the fact that there is a fixation in Australia about growing wealth through investing in property.”
“This attitude is reinforced in television shows we watch and the newspaper and magazine articles we read.
“It should not be surprising that the poorest in our society, who are exposed to these messages and who see others growing their wealth through investing in negatively-geared property, also want to participate in this investment activity.”
The governor of the Reserve Bank warned in February it was difficult to ignore the risk of rising household indebtedness in Australia, saying record-high household debt levels have started to affect spending.
Rynne said it was concerning that households across the financial spectrum had been progressively increasing their debt levels.
“Any increase in our historically low interest rates would cause serious problems given the growth of outstanding residential loans over the past decade,” he warned.
“This could come from increases in wholesale funding overseas rather than via a Reserve Bank rate hike.
“But it is clear from our analysis that if the [property] bubble does burst it will not just be the better-off who will be directly affected, the poor will be too.”
The report says while household financial stress and economic hardship has not gotten worse in Australia in a relative sense, it has not gotten any better.
It says there appears to be about 3-5% of households in Australia that have entrenched disadvantage, and despite “the goodwill of government agencies and NGOs” to lift these people out of poverty, they consistently live in “extreme economic hardship.”
Given the population growth, since 2000 an extra 94,000 households have been added to the bottom 5% of Australia’s society, the report says.
