Currently there’s a lot of uncertainty surrounding our property markets, much of it related to the outcome of the upcoming Federal election and concerns about how the Opposition’s housing tax policy will affect property.
So it’s understandable that some home buyers and investors are considering putting their purchase plans on hold until after the election.
But is that a smart strategy? Let’s look at this with a quick Q&A:
What are the proposed changes people are worried about?
If elected, Labor plans to stop negative gearing of established investment properties bought after July 1, 2017.
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They also intend to increase the capital gains tax payable on the sale of any investment property, both established and new and bought after July 1, 2017, from the current rate of 50% to 75% of any capital gains accrued when the property is sold.
What’s the thinking behind this?
The opposition says it intends to increase housing supply because it’s concerned about housing affordability.
On the other hand, a cynic might suggest the real objective is to raise additional tax revenue and save the federal budget around $32 billion over the next decade.
Will removing negative gearing really increase affordability?
I can’t see how, as affordability is affected by house prices and wages growth, which affects how much the banks will lend.
There is nothing in either of the major party’s policies that will likely improve wages growth or increase affordability.
So to make housing more affordable for first-time buyers Labor will have to either:
- Disenfranchise over 7 million current home owners and reduce the value of their homes to please a small group of aspiring first-time buyers; or
- Build more affordable properties. But these are likely to be in areas where first-time buyers don’t want to live – in the outer suburbs far away from all the amenities and action, or a motel style room in a high-rise monolith in the CBD.
Now don’t think me harsh. With six children and eight grandchildren, many still working their way into property, I understand the difficulty first home buyers have getting into the market.
I’m just saying that removing negative gearing isn’t the answer.
What will happen to property if Labor wins the election?
It’s likely we’ll see a mini-boom in established properties as investors bring forward demand and purchase before the new legislation takes effect in July 2017. This is likely to be followed by a lull as demand falls.
We’ve seen much the same occur when the end dates for stamp duty concessions or first home buyer grants were announced.
At the same time, the property development industry will ramp up supply. But if history repeats itself, and it most likely will, the effects will be:
- Developers will be overzealous and deliver too many new dwellings;
- Many investors will get burned as they buy new high-rise apartments in our CBDs or new house and land packages in the outer suburbs, naïvely believing these will make good investments. Unfortunately, many will suffer the same fate the majority of investors in these sub-submarkets have endured in the past, with no scarcity, low capital growth and lack of rental growth;
- Some disenchanted investors will try and sell up, but lose out as they will be selling “second hand” properties and finding the value of their properties have fallen significantly as now only owner occupiers, and not investors, will be interested in them; and
- Even worse, the young owner occupiers, who own the houses in the same new estate as investors, will find the value of their homes have been decimated by the lower prices achieved by the investors who sell up.
So what should a property investor do?
To make things clear, this is not meant to be a political monologue. These are just my thoughts based on investing through numerous tax changes over the years.
I was an active investor:
- In the 1980s when the removal of negative gearing caused a short term rise in rentals;
- In 1985 when the introduction of capital gains tax was going to decimate the property investment industry;
- In July 2000 when the introduction of GST was going to stifle the new home market because the tax didn’t apply to established properties; and
- Through various increases in stamp duty rates and multiple introductions and removals of first home buyer grants.
My recommendation is this is not a time to panic or make rash emotional decisions.
Instead it’s a time to learn from history and remember that while all of the above changes, which were supposedly going to seriously impact property’s performance while causing short term uncertainty, did little to halt the relentless rise in the value of well-located properties.
History has also shown investors who chase tax incentives (like negative gearing) or the next fad or hot spot tend to lose out. But those who remain focused on accruing quality capital city properties and then hold them for the long term tend to thrive.
The markets are creating a window of opportunity for those ready to take advantage of the upcoming lull and find their next home or investment property.
Isn’t it too late to get into this property cycle?
Sure we’re at a mature stretch of the property cycle, but it’s likely all the capital city property markets will end up higher at the end of the year they they are now, driven by slow but steady economic growth, mild wages growth, population growth, falling interest rates and rising consumer confidence after the election.
So if you have the means to buy your next home or investment property now could well be the right time to do it, rather than putting off the decision for a number of months till the dust settles, because the result of the upcoming election is unlikely to matter as much as the politicians would like us to think it will.
What’s your next step?
At this stage of the property cycle, where not all properties will increase in value strongly, correct property selection is critical – and so is independent advice.
Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.
Visitors to Metropole offices in Melbourne, Sydney or Brisbane can receive a free copy of Michael’s DVD program “Building Wealth through Property Investment in the new Economy”, valued at $49.