So, we turned our back for a second and just like that we find ourselves hurled helplessly into yet another Australian election campaign. As always, there are a multitude of things to pay attention to that affect each of us differently. However, almost every Australian has some form of investment in real estate, whether they own a property or not, so we’re all affected by any change of policy affecting property or its taxation. Even if you’re renting and think you’ll be unaffected by any changes, think again. Most tenants would have Superannuation and many of those funds would have substantial investments in property trusts. In fact, the biggest impact of change will most likely be felt by tenants. A change of Government on the 18th May could therefore bring significant and lasting change to the Australian property landscape, affecting all Australians.
Negative gearing has become somewhat of an institution in this country, allowing many buyers to get into the investment property market, offsetting any financial loss against their personal income and receiving a concession on the capital gains tax applicable to their property when they sell. To recap the basic principles of negative gearing: by making sure net rental income is lower than the interest repayments required to finance their loan, buyers are able to deduct the loss from their taxable income, therefore reducing their overall tax obligation. Negative gearing and the capital gains tax (CGT) discount also make a cute couple, who will sadly part ways if the proposed changes come into effect, as of January 1st 2020.
What are the proposed changes?
In a nutshell, if there is a change in government, the proposed changes mean that negative gearing will no longer be available to all residential property investors (going forward)– it will only be available to those buying a new apartment or building a new house. Those currently negative gearing will be allowed to continue to do so, but they will be unable to sell their negatively geared property to another investor when they sell – so their crucial secondary market will be eliminated if there’s a change of government.
The application of a grandfather clause does apply to these changes, however. The proposed changes will only apply to property purchases made after January 1st 2020; existing investors will retain their negative gearing status and their eligibility for the 50% CGT discount. This on the one hand offers some security, but it also effectively locks people into their current investment arrangement. If negative gearing has been a particularly useful strategy for them to manage their investment portfolio in tax effective ways, then the fundamental structure of their plans, by design, will only exist in the past. Any future plans they may have had will no longer be relevant. They are stuck in limbo deciding whether to move forward or stay put, as well as having to consider the wider implications of capital gains tax costs on future properties they may invest in.
How will this impact on the property market?
Of course, everyone has their opinion, but consensus across economists, property experts and finance experts seems to be that it will aggravate house price falls in an already troubled market. Our belief is that if this proposed change in policy is implemented, during the most significant housing downturn since the GFC, house prices will fall and rents will inevitably rise. This being the case, it could be expected that existing investors may try to jump ship before January 1st to avoid being saddled with a property that’s declining in value, and will decline further still if the proposed changes are implemented.
If you’re selling a new property the changes may work in your favour, however those who buy those new properties, then join the ranks of ‘everybody else’ – becoming owners of 2nd hand properties, offering none of the tax advantages enjoyed by millions of Australians previously. The end result may be a flooded market and, with so many properties for sale, prices will be pushed down and there will be fewer rental properties to go around for tenants. With renters relying on investors to buy houses for them to live in, and investors deciding to invest their money in options other than property, rent rises are inevitable. These changes are not new by the way – negative gearing was abolished previously in the mid 1980s. The direct tangible impact of it was that rents went up an average of 22% nationally. The hindsight commentary on this is often that other factors were in play but the proof is in the pudding; the government of the time abolished the policy in just three years, quietly acknowledging it had not delivered the savings expected and had failed the average Australian residential property investor.
So, what happens next?
The most concerning aspect of all of this, is that property has been the preferred investment choice of the average Australian family for decades. If the incentives to invest in the market are no longer there, then the property market becomes a far less enticing proposition. After all, you’ll still be able to negative gear any investment made in the share market for example. Increased rents and less spending in the economy as a result of the ‘wealth effect’ could result in a hike in unemployment and suddenly the robust years of our economy could be a thing of the past.
All Australians need to understand what these changes are and how they will make an impact. The key priority for investors is to understand whether property is in fact the best place for money to be invested. Without a significant return on property assets, it doesn’t make sense to continue to invest in this way into the future. However, it may be well worth sitting on what you have and waiting to see if things stabilise. This can be an anxiety inducing prospect for many, but as always, speak to your trusted financial advisor and work out the best thing for you to do now.