Why do so few people negative gear stocks?

Wed, 15 Feb 2017  |  

This article first appeared on The Constant Investor website at this link: It is behind a paywall for subscribers only https://theconstantinvestor.com/stephen-koukoulas-overview-170114/#Whydosofewpeoplenegativegearstocks 

----------------------------------------------------

Why do so few people negative gear stocks?

In recent times, a lot of the focus of public policy has been on negative gearing and how the associated tax rules encourage ‘excessive’ investment in the housing market. This in turn, it is argued, pushes up house prices and freezes first home buyers out of the market. There is something in that argument which will no doubt carry on in 2017 and probably beyond.

What is often overlooked in the debate is the fact that negative gearing investment strategies also apply for shares, in the form of margin lending and related products. So why is it that the overwhelming focus of investors when they negative gear is dwellings and not shares?

Over the past decade or so, as property investment borrowing has boomed, margin lending for stocks has slumped.

According to data from the RBA, outstanding credit for investor housing stood at $562 billion in November 2016. This was up a staggering 319% from the level in December 2007 when it stood at $134 billion.

Margin lending for stocks, on the other hand, has crashed. In December 2007, margin lending stood at $41.6 billion which was 30 per cent of the level of borrowing for investment dwellings at that time. Fast forward to the latest RBA data for September 2016 and the level of margin lending is a staggeringly low $11.6 billion, down 72% from the peak. Borrowing (negative gearing) for stock market investing is equivalent to just 2% of the outstanding borrowing for property.

If the ratio of stock-to-dwelling lending had remained at 30 per cent (the level in 2007), margin lending would be close to $170 billion today rather than $11.6 billion and no doubt the share market would be markedly higher.

There are a couple of points to note when looking at these trends. Investors have collectively made the right decision. Since December 2007, Australian house prices have risen 49% while the ASX200 remains around 9% below the end 2007 peak. These figures do not take account of rent or dividends.

In other words, an investor who put $100 into housing at the end of 2007 would now have underlying capital of $149, while the stock investor would have just $91. This no doubt helps to explain the divergence in investor appetite for borrowing for housing relative to stocks. It has proven to be prudent to gear up into housing and stay away from the stock market.

There’s on old saying that every investor knows but does not always follow – “buy low, sell high”. It is important to emphasise that what follows is NOT investment advice – see your financial adviser before making any investment decisions.

But a cold hard look at stocks versus dwellings suggests that the price of stocks is low at least relative to the price of residential property. Perhaps it will stay that way for a few more years – there are certainly plenty of people still upbeat on housing based on strong underlying demand from demographic changes. Stocks, at the same time, remain vulnerable to a US pull-back and risks of US/China economic tensions as Donald Trump implements some of his policy agenda.

But in a scenario when investor appetite for dwellings as an investment destination tapers off, as the likely cooling in housing unfolds and investors use their leverage to get into shares, the ASX could and probably will outperform residential property in the years ahead.

comments powered by Disqus

THE LATEST FROM THE KOUK

Politics Panel: Australia's intergenerational gap

Fri, 25 May 2018

I was one of the panel members of this podcast which was on ABC Radio National. 25 minutes of interesting discussion.

At this link: https://www.abc.net.au/radionational/programs/breakfast/politics-panel-australias-intergenerational-gap/9798848 

Politics Panel: Australia's intergenerational gap

 With the federal budget handed down and the battle lines emerging for the next election, Australia's intergenerational gap is shaping up as a major political issue.

The Coalition is promising a host of sweeteners for retired voters while Labor is promising to pump more money into education and get housing prices down.
If you're a voter, there's a good chance your view of those promises will be informed by the year you were born.

Do we need to be worried about Australia's economic outlook?

Tue, 22 May 2018

This article first appeared on the Yahoo7 Finance web site at this link: https://au.finance.yahoo.com/news/need-worried-australias-economic-outlook-060611703.html 

----------------------------------------------------

Do we need to be worried about Australia's economic outlook?

The Reserve Bank of Australia reckons that the next move in official interest rates is more likely to be up than down. RBA Governor has said so in recent weeks as he talks up the prospects for the economy over the next year or two.

This is disconcerting news for everyone out there with a mortgage or a small business loan, especially in a climate where the business sector is doing it tough and when wages growth is floundering near record lows. The good news is that the RBA is likely to be wrong and the next move in interest rates could be down, such is the run of recent news on the economy. Failing an interest rate cut, the hard economic facts suggest that any interest rate rises are a long way into the future and if they do come, there will not be all that many.

At this point, it is important to bring together the issues that would need to unfold to see the RBA pull the lever to hike interest rates.  At the simplest level, the start of an interest rate hiking cycle would need to see annual GDP growth above 3.25 per cent, the unemployment rate falling to 5 per cent and less, wages growth lifting towards 3 per cent and more and underlying inflation increasing to 2.5 per cent.

This is where the RBA expectation for higher interest rates is on very thin ice.