These will be the riskiest investments if the proposed tax changed go ahead

Off-the-plan units top the list of the most perilous property investments, and the risks will rise dramatically if changes to negative gearing and capital gains tax go ahead.Buying Off The Plan

While there are already major risks associated with this type of investment due to a number of factors, including oversupply, the introduction of the reforms if Labor win this year’s federal election will compound them.

The ALP proposes to limit negative gearing to new houses only and reduce the discount on capital gains tax from the current 50 per cent to 25 per cent … and the likelihood of them winning is high.

A number of markets across Australia are already experiencing weakness and the introduction of these reforms will hit them hard.

Should the ALP policy be implemented there will be reduced demand to purchase rental properties due to the creation of primary and secondary markets, and this will cause new dwelling prices to decline in many regions.

The second owner won’t receive the same tax benefits of depreciation etc as the primary owner when they buy a property.

They will not be able to claim negative gearing against their wages and the capital gains tax discount will be cut in half.

Therefore, the vendor will have to drop the value of the property because the benefits to the buyer are lower, and it is therefore not as attractive to potential buyers.

So, when a market is already weak, for example off-the-plan units in an over-supplied area, as we see in capital cities around the country, this will contribute further to the price reductions.

Inner City Brisbane is a good example.

An example of this is inner-city Brisbane where weakness in the market had led to lower valuations, rising defaults on settlements, major discounting, falling rents and ‘over-the-top’ incentives to get buyers across the line.

Brisbane Inner City Units November

 

Brisbane City, Fortitude Valley and South Brisbane were all named in the Top 10 of the RiskWise 2018 list of the 100 Worst Off-The-Plan Suburbs in Australia, as were Zetland and Epping in Sydney and Southbank in Melbourne where oversupply of units is a huge issue.

In South Australia, the highest risk area for units was Adelaide CBD (postcode 5000), where oversupply was extreme and, according to CoreLogic, had delivered -2.9 per cent capital growth in the past 12 months.

In Perth they delivered -6.5 per cent capital growth.

The Perth – Inner area has the highest rate of unit oversupply in Western Australia with 4362 units in the pipeline (a 11.1 per cent increase to the current stock), while the Greater Perth area has 12,687 units in the pipeline which is a 6 per cent increase to the current stock.

Oversupply is an issue

The widespread oversupply issue was universally acknowledged by banks which had ‘blacklists’ for postcodes suffering potential unit saturation.Brisbane Off The Plan Apartment Buyers Lose Up To 36 Percent 2

In addition, he said lenders were scrutinising loan applications much more vigorously and either required a much higher deposit as security or were turning down the application entirely.

It must also be remembered that rental units and owner-occupier units are not fully substitute products.

The dwelling types and needs of owner-occupiers are often greatly different from the dwelling types and needs of renters.

Units that are used by owner-occupiers are larger than units that are typically used as rental properties and, more importantly, the price per square metre of rental properties is higher than the price per square metre of owner-occupied properties, especially in Sydney and Melbourne.

This means that, overall, rental units in Sydney and Melbourne are significantly less affordable than units that are owner-occupied.

The Bottom Line.

All this added up suggests that if the proposed changes to negative gearing and capital gains tax take place it is likely to put off-the-plan units at their highest risk ever and this includes equity risk, cashflow risk and settlement risk.

1-percent
Unless there was phenomenal capital growth, the value of off-the-plan property in many regions was likely to be reduced and it would become significantly harder for investors to enjoy capital growth, at least in the foreseeable future.

And if you consider that many of the prices for off-the-plan units include a significant commission to the marketer, between 5-6 per cent of the value of the property and sometimes even more, and with the current risks to settle the property … all of these things together make purchasing off-the-plan units in many regions in Australia extremely high risk.

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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


'These will be the riskiest investments if the proposed tax changed go ahead' have 3 comments

  1. Avatar

    January 25, 2019 Andrew Huang

    Mr. Yardney,

    I must begin by saying that I have a huge respect for your columns and teaching and I learn much from yourself.
    However, when I do not agree, I thought it would not be impertinent for me to express what is my opinion. Correct me if I am wrong.

    What do we class as investors?

    Are they people who purchase properties for long term holdings while serving tenants who help pay for the purchase over the period of long term investment, and taking advantage of negative gearing and depreciation?

    My understanding is that as an investor, if I want to continue to enjoy negative gearing, I will have no choice but to purchase new off the plan properties.

    This in addition to continuing to enjoy depreciation on which existing properties will enjoy much less deductions for taxes.

    Since existing properties are not going to enjoy negative gearing in the proposed changes, how will they be more attractive to investors except that perhaps, with buy ugly and sell cheap (flips), property “traders” can enjoy profits but will also attract taxes after flipping the properties but that is not the recommended investor strategy in my books.

    With reference to INVESTORS, if negative gearing is only going to be available for new “off the plan properties”, how will investors be able to benefit from purchasing existing properties which will not have negative gearing advantages while at the same time will be similarly affected by capital gains tax.

    Yes, investors will perhaps be affected by current perceptions that off the plan properties are “overpriced” because of the fact that sales agents are paid high commissions. The difference is between the commissions they are paid and the regular commissions paid to estate agents and auctioneers plus other related marketing costs for sales of existing properties. Is the difference normally that large? I beg to differ.

    Developers normally especially seasoned ones, enjoy economies of scale in purchase of land and development costs which the individual owners do not enjoy. For example, if I am to purchase an older property and start to improve / “redevelop” it (functionally as well as aesthetically) after which I sell the property, my costs in terms of labour and materials are not going to be as competitively priced as for a developer (assuming similar quality outcome). If I am to properly improve the old house down and build new functional utilities e.g. additional toilets, my overall development costs are certainly going to be higher than for a seasoned developer. Therefore, my hypothesis is that the savings that a seasoned developer passes to the purchaser more than offset the redevelopment costs of the vendor of existing properties.

    Some might argue that we have to account for the profits of the developer. Yes, however, we also have to account for the profits of the individual vendor of the property we are buying.

    Investors are there for the long haul and will all do their calculations. To use one brush with the logic of this article and say, that “ALL off the plan properties” are going to be the least attractive based on the logic of this article is something I cannot agree with. There are some advantages with off the plan properties such as newer and better designs, modern amenities, several years guarantee on many items and more. Good agents do their due diligence on the developers prior to offering off the plan properties. Whether off the plan or existing properties, the sincerity and honesty of the vendor’s agent is not decided by the type of property sold. Ultimately, “buyers’ beware”!

    One may argue that negative gearing is “dying” with the new ALP proposed policies. I beg to differ, it will continue, and only “Off the Plan investors” will continue to enjoy its benefits.

    Thank you.

    Reply

    • Michael Yardney

      January 26, 2019 Michael Yardney

      Thanks for your long detailed comment. This blog was written by Doron Peleg from Riskwise – not me. But I fully agree with his sentiment.The vast majority of off the plan investors have lost out over the last decade and will continue to do so

      Reply

      • Avatar

        January 29, 2019 Andrew Huang

        Mr Yardney,

        Thanks for your reply, however, it is irrelevant to ALP’s proposed removal of negative gearing as far as the last decade is concerned.

        Reply


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