We recently shared the article ‘Two-thirds of investors to snub property under Labor’ on social media which prompted a question from one of our followers;
“Investors would invest in new properties instead of negatively gearing curtains, kitchens and carpets, therefore allowing first homebuyers into the market?? I dont understand the gloomy headline?”
For anyone who doesn’t own an investment property, it is easy to suggest that the negative gearing benefits might be used to improve the property, like as our follow suggested, to buy curtains and carpets. But negative gearing is not just a ‘tax benefit’. It helps investors hold their properties throughout the good times and the bad. That means, if interest rates and their mortgage repayments increase, and the rent they are receiving doesn’t cover all the expenses, any loss may be offset against other income earned, such as a salary, reducing taxable income and therefore the tax payable.
But the negative gearing issue goes much deeper than just tax.
Negative gearing is not the preferred choice for an investor
In order for a property investor to benefit from owning that property, they must be positively geared. That means that the rent they receive from that property must cover all the expenses, including the mortgage repayments. Nobody wants to make a loss on any investment, so a strong yield (income vs expenses) is the basis for the purpose and value of an investment property.
Sometimes, due to market conditions, interest rates, mortgage repayment changes, strata fees, vacancy rates or repairs and improvements etc, a property will not return enough to cover the expenses. When this happens, the investor will need to put some of their personal money into the property to keep it. Under current legislation, if the owner makes a loss on the property, they will receive a tax offset so they don’t pay more tax than they need to.
If the investor is consistently having to put their own personal money into the property without any tax concessions, they will need to increase the rent to cover their costs.
And now we have another problem. Renters will have to pay more.
Old VS New – negative gearing to only apply to brand new properties
Labor leader, Bill Shorten is steadfast on removing negative gearing from pre-owned properties and believes only investors who buy brand new properties should be rewarded with negative gearing tax offsets. He thinks this will help first home buyers get into the market by reducing the number of investors in the market.
This could potentially work for suburbs where there is a high volume of new developments that aren’t selling, such as Box Hill, Rouse Hill, Castle Hill, Ryde.
But what about suburbs where there are no new developments?
Entire Central Coast suburbs could be devalued
Apart from Gosford and Terrigal, we can’t think of too many Central Coast suburbs where an investor could buy a brand new property. So, what happens to the established houses in those renter hot spots?
The Central Coast has long been a hot spot for investors. Popular suburbs for investors include;
The Entrance 64% investor owned
Lake Haven 42% investor owned
Gorokan 38% investor owned
Umina Beach 35% investor owned
These figures are from 2016 and expected to be much higher now.
Apart from The Entrance, not one of these suburbs has any brand new affordable housing developments planned, and none have high density zoning to cater for large scale developments. There is no way to tell how many of these properties currently leverage negative gearing tax offsets, but if that option is removed altogether, it’s likely investors will increase their rents to ensure they are covered for the losses.
Rents will increase
Currently an investor can absorb some of the losses because they receive a tax benefit, but if that tax benefit is no longer there, they will have to increase the rent to ensure that the investment property is profitable. Don’t forget, less than 10% of Australian property investors own more than 4 properties, so 90% of all investors are ‘mum and dad’ investors. They are tradies, nurses, fire-fighters, small business owners etc, not property moguls.
First home buyers duped into buying new properties
Labor have promoted the changes to negative gearing as a way to support first home buyers. So, Labor want first home buyers to buy brand new apartments in Sydney as an investment property so they can get negative gearing? Or does Labor want first home buyers to buy established properties that don’t qualify for negative gearing, because all the investors will be buying the new properties in Sydney, all the older properties will be much cheaper? How is that a good option for all the property sellers? And how much does Labor think established properties will come down in price? Whichever way, it’s clear these policies haven’t been thought through very well.
If you are looking to purchase an investment property or your first home, working with an experienced Central Coast mortgage broker will streamline the process. Contact the team at Mint Equity on 02 4340 4847 to find out how we can help.