If the banking industry follows CBA-owned Bankwest and tightens the criteria for negatively-geared loans, it could lead to a major decline in dwelling prices in parts of Sydney and Melbourne, warns the economics writer Robert Gottliebsen.

To illustrate his point, Gottliebsen pointed to Vancouver, British Columbia. During the first half of 2016, the city’s housing market was in “overdrive”. However, this January, dwelling turnover was down 40%; moreover, the prices of stand-alone houses were down 6% and look set to fall much further.

Rather surprisingly, the “big fall” was in detached properties, where sales fell 57.6% from the level of January 2016. 

“If that happens in Australia, the bad debts of the banks will rise because of the enormous sums that have been loaned based on current high dwelling prices,” he said in an analysis that was published in The Australian.

Though Chinese capital has been helping drive both the apartment and housing markets in select areas of Sydney and Melbourne, the severe exit clamps placed on Chinese money and the jailing of corrupt officials has substantially reduced Chinese buying in the southeastern capitals.  

“Normally, when a major buyer is removed from a market, prices fall. But it has not happened because, given Canberra’s superannuation turmoil, Australians have decided to purchase negatively geared properties on a massive scale, because interest and running costs can be deducted against salaries. And that enthusiasm has been helped by higher rents,” Gottliebsen said.

When calculating its investment loan criteria, Bankwest said it would no longer take the lucrative tax benefits that come with negative gearing into account even though these benefits make investment dwellings affordable.

Despite the price booms that have taken place in Sydney and Melbourne, other capitals have not witnessed the same level of growth. Perth has been hit by a major decline in prices, which may have affected Bankwest’s book, leading to losses. These losses could be replicated across the country if there is a significant fall in prices.

The Reserve Bank is afraid that a massive increase in negatively-geared property loans would endanger the banks’ balance sheets, particularly since the ALP is still promising to limit negative gearing to new dwellings. This means that those properties being negatively geared at the moment would have to be sold to buyers who will not be able to negatively gear, which in turn would reduce prices.