Australia’s lowest-income households are turning to negative gearing in growing numbers, leading to warnings of significant financial stress amongst society’s poorest when interest rates eventually rise, warns a new report from KPMG.

Entitled Financial Stress in Australian Households, the report shows that the bottom 20% of Aussie households (measured by income) have recorded the highest rate of growth in income from investments over the decade to 2015 (8.2% per year). This is nearly four times faster than the remaining 80% of Aussie households.

KPMG said this rate of growth 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 by lowest-income households.

“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 said.

The report further noted that “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.”

KPMG analysed the incomes and spending patterns of Aussie households between 1995 and 2015, using income data from the Melbourne Institute and the Australian Bureau of Statistics.

The analysis found that household finances have changed significantly since 2005, with growth in household income being driven by government transfers (such as pension and welfare payments), as well as investment income, rather than by increases in salaries.

KPMG further noted that households are progressively increasing their debt levels at a faster rate than their disposable incomes. This includes households in the lowest 20% of income distribution, which is increasingly drawn to negative gearing to increase income streams.  

Collections: