Is the well running dry for Leveraged Property Investment?

 

We’ve all heard of leveraged property investment, or ‘negative gearing’ as it is known in the UK and Australia. The government will reduce your tax bill for the interest payments and maintenance costs of your speculative play on land values. Due to high marginal tax rates, writing off 40, 50 or 100k in investment ‘losses’, while your property increases in value by 10% or more like clockwork sounds like a pretty good deal. Indeed it has been, especially for baby boomers and their parents who have seen the value of their initial purchases more than triple in some cases, and have allowed  them to use the ‘equity’ (read: more debt) to refinance larger or additional purchases.

Unfortunately, this was underpinned by a once-in-a-century credit boom, the vast majority of which found its way into consumer spending, including the existing stock of houses. This has done little to create more houses needed to actually house people, helped by restrictive land planning policy, and has sent the cost of buying through the proverbial roof. Our friends in Australia over at MacroBusiness have done a great job on covering this issue here and here.

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Since this is such an emotional topic, and vested interests have made any change political suicide, these rules don’t appear to be going away anytime soon. Young investors will have a hard time matching their parents’ gains, since prices have already risen so highly they are unlikely to repeat this performance.

However not all hope is lost for those wanting to cash in on this situation. Whilst the obvious thing to do is not participate in this hysteria of buying two-bedroom units for close to a million dollars, the flood of Chinese investment into housing in Australia, Canada and other developed economies despite seemingly ineffective ‘investment restrictions’ can make one feel as though the ‘housing ladder’ has been launched into space and that precious rung will only get further out of reach.

Rents have not kept up with the pace of price growth, and landlords are effectively subsidising their accommodation, once property tax, interest and maintenance has been taken into account. Fortunately, there are many property markets where entry prices are far lower and the potential for capital growth is significantly more promising. Emerging markets in Asia, the Caucus and Central America offer many of the same fundamentals as property in the west did 30 or 40 years ago, and are not inflated by large levels of mortgage market debt. In some cases, apartments and houses in desirable locations with strong rental demand can be had for under US50k.

TnT

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