Election Looming and the proposed death of negative gearing

Election Looming and the proposed death of negative gearing.

Are you thinking of buying an investment property when Labor implements its negative gearing tax changes? Will negatively geared investment properties still be good to invest in and what impact will buying one have on your hip-pocket?

If Labor win the upcoming election and abolish negative gearing, then here are some of the things that you should be considering before you buy a negatively geared property.

Now… I’m regularly asked questions about this very topic and the answer is more complex than most people realise. The reason is that everyone’s economic and family circumstances are very different and therefore a whole lot of buyer specific circumstance should be considered before deciding what type of investment property is suitable for you.

Given that you will need to hold your investment property for 7-10 years to achieve the required capital growth that makes investing in property worthwhile, it is imperative that you choose the right type of property that suits your own personal strategy. You should use a mentor to help you develop this strategy.

For example, if you are close to retirement, you’d be mad to be buying a negatively geared property, because if you did, the property costs will exceed the rent received from the property and you will end up chewing a hole in your weekly pension or retirement nest egg to pay for the losses.

Likewise, if you are working and not close to retirement but haven’t got enough spare cash each week from your day job to cover the income shortfall from your negatively geared property, then you will have to sacrifice other discretionary spending in order to support that property.

When caught in this situation, most people will sacrifice their lifestyle and end up living off baked beans, while waiting for the property to grow in value. Not an ideal scenario as many who find themselves in this situation, get sick of living off baked beans, decide to sell the investment property, (sometimes at a loss) and walk away from the experience.

Having a personal strategy that takes into consideration your circumstances will mean that you will more than likely have a reasonable lifestyle during your investment journey.

With your Investment Strategy in hand, your next step will be to identify where to find the type of property that suits your particular strategy. I have developed a simple, comprehensive process for doing this which I teach to my clients.

One of the key elements that needs to be considered when identifying where to buy, is to look at trend changes in property values. CoreLogic have recently published the following charts which indicate which areas have grown and which areas have dropped in value. They have presented this information in two charts. The first chart shows the percentage of change in property values and the second one the dollar change in property values, both by state and region.

So how do you use this information to choose where to invest? Before we get into this, there are a couple of other current issues that need to be considered when choosing where to buy.

Government Changes to Negative Gearing Tax Laws

The first and major issue is the investment property policies that Labor are proposing if they get into power after the forthcoming election on 18th May 2019.

Unless you have been living under a rock, you have probably heard about Labor’s intentions to introduce changes to negative gearing, capital gains and Trust taxation laws. The impact of Labor’s changes will mean that you will only be allowed to claim negative gearing benefits on new properties and not second-hand properties.

For example, under these changes, if you buy a negatively geared property and it is still negatively geared when you want to sell it, then under Labors’ proposed changes, it will be highly unlikely that another investor will want to buy your property because they won’t be able to claim negative gearing losses against any other income that they may have, due to the property being second-hand. So the only people who will want to buy your second-hand, negatively geared property, will be owner occupiers.

This is not good news for the property market because it will scare investors off from buying negatively geared property.

Changes to Property Values

The next issue to consider are property values and the different markets.

Let’s examine CoreLogic’s data in detail and how to determine where to buy.

National dwelling values have fallen by -7.4% from their October 2017 peak through to the end of March 2019. While this figure is often quoted, it is also important to understand the context in terms of how much that actually is in dollar terms.

Based the median dwelling value at the time of the market peak, a -7.4% fall in national dwelling values translates approximately into a $40,590 decline in dwelling values.

Looking at falls across the combined capital cities, the decline has been larger than national falls with values of -9.2% lower than their September 2017 peak. This translates to an approximate $59,478 reduction in dwelling values. Throughout the combined regional markets, values have fallen by -2.5% or $9,464 from their May 2018 peak.

Let’s take a look across the states…

New South Wales

Sydney values are -13.9% lower than their peak or down $124,739. In regional NSW, values have declined by -4.1% or -$18,674.

Victoria

Melbourne dwelling values have fallen by -10.3% or $71,404 from their peak. Regional Vic values are $2,749 lower than their peak having fallen by -0.8%.

Queensland

Brisbane dwelling values are $7,796 or -1.6% lower than they were at their peak. In regional Qld, values are -4.9% lower than their peak of -$18,773 lower.

South Australia

Adelaide dwelling values are -0.5% or -$2,307 lower than their peak. Regional SA values are -3.4% or -$8,623 lower than their peak.

Western Australia

Perth dwelling values peaked in mid-2014 and are currently -18.1% or -$97,797 lower. Regional WA values have fallen -31.6% from their peak taking them $118,734 lower.

Tasmania

Hobart and regional Tas are the only two major regions of the country in which values are yet to have fallen from their peak.

Northern Territory

Darwin dwelling values are -27.5% or -$145,980 lower than their peak. In regional NT the falls have been much more moderate at -7.9% or -$31,761.

Canberra

Values are -0.2% lower than their peak or -$1,071.

This translated into dollar terms looks as follows:

What these charts are saying is that from the market peak in October 2017 to March 2019 all regional areas, Adelaide and Brisbane have experienced marginal declines in property values, whereas Melbourne, Sydney, Darwin, Perth and Regional WA have experienced a significant decline.

Looking forward, CoreLogic are forecasting that over the coming months, the decline in property values is expected to continue. Hobart is the exception; it’s property values have increased not declined but is at its peak.

Given that:

  1. There is a high likelihood that we will have a Labor government in power after 18 May 2019 and with it, changes to negative gearing, capital gains and Trust taxation laws.
  2. All capital cities generally, only have negatively geared investment properties whose values are in a significant state of decline.

Then you don’t need to be Einstein to deduce that under Labor’s proposed changes, buying negatively geared property will become a big no-no for most property investors.

Instead, markets where you can find neutral to positive cash flow properties such as Adelaide, Hobart, Brisbane and major regional areas in all States except WA, are where the property investing action will be and where it is likely to stay as long as Labor persist with their draconian negative gearing, capital gains and Trust tax changes.

After the election (regardless of who wins), I will put out a 3-part blog series explaining all the in’s and out’s and next steps for property investors.

Either way, there will be a silver lining, it will just be a case of whether you are ready to jump on board and make hay while the sun shines. 😊

Cheers.

 

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