There has been much public discussion about the Labor Party’s election promise for a dramatic overhaul of negative gearing laws in Australia.
Only time will tell who will win the upcoming election.
Regardless, negative gearing is now fiercely in the public spectrum and is open-slather for debate.
This is a good thing.
So what are some possible outcomes should Labor be elected and their (albeit flawed) negative gearing policy come to fruition, come Jul 1st, 2017 (the date when the policy will commence)?
Right now it seems unlikely that the Liberal government will tinker too much with negative gearing in their policy creation pre, or post, success in the election (for now, anyway!).
However, there has been enough public spotlight thrown on the issue though that public pressure could force the Liberals’ hand in future policy decisioning.
If the Libs did get in, however, one can’t envisage much adjustment to existing negative gearing policies.
If they did; they’d have to ensure all investment-classes (property and otherwise) are addressed accordingly, in any broad-brush negative gearing policy/taxation law changes.
But, let’s go with the idea that Labor get in and introduce their “grandfathered approach” to negative gearing overhaul, which would come into effect Jul 1st 2017 (as currently proposed).
In this scenario, my humble opinion for the majority of investors is that we may see some or indeed several of the following possible consequences that I’d conjured up in my mind (though of course there could be way more!).
So what might the investors do?
Established houses on land go berserk:
Established houses (not established apartments) could see another buying surge resulting in more astronomical values-growth, but only for the FY16-17 year.
Basically, would-be investors will buy-up the most capital-growth-likely property assets (I.e. established houses on largest-possible blocks of land in best locations).
They’ll fight and squabble and bid these up substantially to secure and close a settlement on a property before that key date of Jun 30 2017.
That way, these houses will have the CGT exemption for the lifetime of that buyer’s ownership and won’t be affected by the upcoming changes for the duration of the purchaser’s ownership of these houses.
Severe implications for apartments – Both new and existing:
As a result, at least for the 12 months ahead, newly launching “new builds” (of which there is already a glut/swell of oversupply coming to some Australian markets right around that 2017 time), might face weakened value-growth initially.
Banks who pre-approved loans during the lofty ‘bidding up’ times of 2014-15 (when people were buying these things off the plan before even a brick was laid) might produce a final valuation significantly lower than what the off-the-plan purchase value was, meaning that those who bought who don’t have cash buffers to meet the gap, might be forced to sell for a loss.
In a couple of oversupplied markets (perhaps inner Brisbane and Melbourne CBD areas) this could lead to a fire-sale of properties.
However, we must remember that this oversupply ‘dump’ would occur right around the time when the Government will start saying:
“Oh, hey, look over here… the only properties that now qualify for negative gearing allowances happen to be brand new builds!
And oh… how about that, wouldn’t you know it folks; there’s now plenty to choose from, and at great low, low prices! Buy, buy, buy!”
Labor’s negative gearing proposal, despite several (and significant) flaws, isn’t entirely built out of naïveté.
Labor knows that the oversupply of new units is coming and that this could create big economic problems for Australia; so in a way, their negative gearing ‘solution’ (at least for the ‘property’ asset class) is as much a soft landing for oversupplied units as it is to drive more tax revenue to the government’s coffers.
So do existing/established units and apartments become the losers?
One loser in this scenario therefore, would be ‘existing apartments’.
Why? Because they:
- a) Will face fierce competition from newly emerging, prettier stock
- b) Won’t be entitled to any negative gearing benefits, and
- c) Wilt due to houses on land producing far greater capital growth value compared to any kind of units (new or existing)
So would-be investors would likely look at existing apartments and think: there’s no incentive here to buy this stock.
Perhaps existing apartments go down in value a bit, and the home buyers jump in to save the day?
Oh, but that’ll only be another problem.
Because all those home buyers who are scooping up cheap existing apartments, will now be owner-occupying.
But wait, that means that these folks who are now owners, will have moved out of their rental places where they were living, whilst saving their deposits for said ‘now affordable’ existing-apartment homes.
This means that those shiny new apartments that investors are now rushing in to buy (because of their tax allowance/incentive) will be bidding these up again, perhaps starting to overpay (perhaps, but who knows, maybe not?).
But they’ll be doing so at the risk of facing higher vacancy rates, due to less renters in the market who’ve moved into owner-occupied properties now.
Could negative gearing be a catalyst for better property investment decisioning by aspiring investors?
The above point is a bit dramatic but at minimum, hopefully this change will lead to people making smarter property investing decisions.
The biggest question investors (hopefully!) might start asking themselves should be:
“How much do tax benefits matter in my investment strategy? And, what life-cycle stage am I at in relation to my income tax, anyway?”
I.e. Successful Australians (career-wise, anyway) typically pay the most annual income tax in their early 30’s to late 40’s.
This is their career-peak and they are hopefully earning the most they’ll ever earn.
They are in the prime of their careers.
Accordingly, they’ll be shelling out a lot in income tax.
So if you are an investor who starts buying at say 45, you have to ask yourself “How much benefit would I have, tax-wise, to negative gearing, for my long-term ownership of this property?”.
Perhaps a smarter strategy is to buy a house-on-land without any tax benefits, as someone in this life-cycle stage may be better off making much higher gains and paying a bit more tax on it, than having muted gains on a new apartment, that allow for a bit of negative gearing whilst holding it.
What good are negative gearing benefits if you are either transitioning out of full-time work (and thus higher tax brackets), or if there is little capital growth in the property over time?
Your net position with minimal CG and a bit of a tax helping-hand whilst holding over many years, may not be worth an investors’ time!
It might also expose the ‘value’ of negative gearing in amongst your overall strategy (or lack, thereof)
This also should illuminate the ‘value’ of negative gearing tax incentives in relation to income earners.
Both Liberal and Labor parties have quoted (and misquoted) stats on what kind of income-earners hold ‘how much’ of the investment properties in Australia.
The only reliable data is ABS data and even then, it can be sliced and diced so many ways to put forward any number of points regarding the composition of the property-investing Australian populace.
Regardless of the numbers though (lets leave it to the pollies to squabble back and forth on that); hopefully any negative gearing policy changes that may take place will cause would-be and existing investors to re-consider the future strategies based on their:
- a) Current income level
- b) Time between now and when they intend to leave the workforce or reduce their workload/salary-based income, and
- c) Their overall investment strategy and the desired outcomes they may have
A spotlight on cash-buyers who don’t even take mortgages to begin with?
Sadly, as a separate issue but related indirectly to negative gearing and affordability for investors more generally; there is an ever increasing volume of non-transparent funds flowing into Australian residential property.
International cash buyers – bringing in both legal and illegal/criminally-sourced funds is on the rise in many western countries.
Stay tuned for an upcoming content piece on this.
I’ll be detailing this phenomenon with reference to several sources and links to documentaries worth your time to watch on this problematic area of property).
With investors (possibly) bowing out from buying “established houses-on-land” property type – a type that we know that the international property investors already go gaga for – we could see a further influx of cashed up buyers.
This should be a concern as everyday home buyers and ‘average Joe’ investors get increasing gazumped out of desired property types and locations as a result of more cash buyers entering the market.