This Saturday is shaping up to be the biggest election day ever for the property and mortgage industry. Property investors, first home buyers and mortgage brokers will be on the winners AND losers list.
Labor, which the polls predict will be the likely victor, are proposing to make changes to the negative gearing laws and how the mortgage broker industry operates and how they are paid. The Liberals announced a first home buyers deposit scheme that would see the government lend them up to 20% deposit. This was was quickly matched by Labor.
Both will have major impacts and we explore the likely impact of these changes.
First home buyers
The Liberals announced a first home buyers deposit scheme that would see the government lend up to 20% deposit which was quickly matched by Labor.
This scheme is designed to help first home buyers into the market sooner. It is effectively topping up their deposit by way of a loan from the government. It helps them get to the 20% deposit sooner, meaning first home buyers will avoid lenders mortgage insurance. This is a huge saving to them.
Lenders mortgage insurance is a cost that only insures the bank against any loss. The only benefit of lenders mortgage insurance for the first home buyer is, they can borrow now instead of waiting until they have 20% deposit. So with current falling house prices and a boost to their deposit, this election is looking good for the younger generation whom ever is elected.
For the Coalition (Liberal–Nationals) it’s business as usual for investment properties. Labor on the other hand are proposing the following negative gearing changes –
- Limit negative gearing to new housing from 1 January 2020. All investments made prior to this date will not be affected by the changes and will be fully grandfathered.
- Halve the capital gains tax discount for all assets purchased after 1 January 2020. This will reduce the capital gains tax discount from assets held longer than 12 months from 50 per cent to 25 per cent. All investments made prior to the 1 January 2020 will be fully grandfathered.
These changes means your existing investment properties will be unaffected from the current deductions you receive. Also when you sell you will receive the current Capital Gains Tax discount of 50%.
Labor’s objective is to create a fairer playing field for first home buyers. To increase the supply of housing whilst having a fairer tax system and budget bottom line. A noble objective but one that is not with out big risks.
From a cash flow perspective it means that the loss between the costs of the property, interest & depreciation etc. V the rent received – can’t be offset against your income. You can accrue the loss each year but can not claim the loss until you sell the property (where it comes off the amount of capital gains tax you pay on your property)
The risk for prices of existing houses if this is introduced
This means investors will pushed out of the future ‘existing dwelling’ property market. Mum and Dad investors will no longer be able to cope with the increased cash flow as any losses can only be offset at the time of sale. This will make it unsustainable for the majority of investors, especially if they are also paying off a home.
Lenders will also only be able to approve the strongest of applicants, as bank servicing calculators will no longer have the tax benefits built in, dramatically reducing applicants borrowing capacity.
As investors represent 30% – 40% of property purchasers, this is a huge amount of potential purchasers removed from the existing stock housing market . If housing supply remains stable or increases, then basic economics of supply V demand would dictate existing houses prices will fall as a direct result.
Labor suggest that this will be a minor adjustment based on a study from the Grattan Institute but this at odds with AMP chief economist Shane Oliver and Realestate.com.au’s economist Nerida Conisbee.
Labor’s case may very well play out, but then how does this benefit the first home buyers? Perhaps the hope is this will keep prices flat for an extended period for their income to catch up so it becomes more affordable?
If that scenario occurs the catch for Government is it will receive less in Capital Gains tax, as property has not gone up. Even though Labor will have a higher tax on CGT if there isn’t a gain, it’s still a sum zero gain leading to a hole in the budget.
On the other side of the coin, investors will be condensed into new housing. When property markets pick up, we fear the additional demand will over inflate new dwellings prices and once resold, we get back into the situation of the previous paragraph.
The net result could be new properties could be like buying a new car. You feel great because you have a great shiny vehicle but the instant your front wheel hits the road from the car yard, you know you just dropped a large amount of money. Investors will have to live with the fact it will be sometime before they get that lost value back.
The risk to renters if this is introduced
If this does play out, investors will sit on the sidelines for fear of being burnt by the process. This will mean the supply of property will reduce overtime leading to higher rents, which impacts the people who can least afford it.
Another potential longer term impact is, a reasonable supply of rental properties in established suburbs, that don’t have land or apartment complex zoning. Rental properties will gradually decline as properties are sold off, investors impacted by the cash flow and lending restrictions to existing dwellings, wont purchase there, making it difficult for tenants to be closer to work or schools in these area, especially if they require a house.
This is of course is all hypothetical. It is difficult to predict exactly what this will bring about in the next 5 years. Property markets are as close to an economic theory known as perfect competition, which eventually means it will sort it self out through supply V demand.
The issue though with housing is, it’s a slow moving market. It takes around 5 years from initial planning for an apartment complex to be completed. So this could take a decade or longer to find the equilibrium. That would require a three term government to see it through and given our current political environment, it is hard to envisage that happening for better or worse.
Saturday’s Election is a big day for Australian Property. We will be keenly watching the result and will continue to keep you informed.
For more advice on your property and help to make the most of your investments, contact Vision Property & Finance. Give us a call on 02 8354 3000 to reach Sydney’s office or 02 4014 1999 to talk to someone in Newcastle’s office. You can also contact us here.
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