The Royal Commission into Financial Services has dominated headlines since the final Hayne report was released in February. But in its shadows, there?s another important property issue that deserves our attention ? and I think it?s essential that people understand exactly what the consequences could be, before it?s too late.
With a federal election looming, Labor has confirmed that it will press forward with significant changes to the current negative gearing policy.
Negative gearing is a tax benefit that allows landlords to deduct the cost of owning their investment property, against their own taxable income. If a property costs $800 per week, and the rental income is $600 per week, they are entitled to deduct the surplus $200 against their income tax. That $10,000 in annual deductions could see them receive a tax refund of around $3,000-4,500.
Negative gearing was applied to housing to incentivise investors to buy property, and thereby provide more housing for everyday Australians. Landlords provide housing for more than 1 million Australians ??something the government benefits from, as it takes pressure off social housing.
Labor?s new policy states that investors will only be able to negatively gear brand new properties. If an investor buys a second-hand property, they are no longer able to claim any negative gearing deductions.
The reasoning behind the policy change is to:
- Drive more investments in brand new properties and boost housing supply;
- Put downward pressure on property prices and encourage affordability for first homebuyers; and
- Save the government billions of dollars in tax refunds.
At face value, these sounds like positives. The problem is, this policy fails to take into account the other impacts this policy decision will have.
Impacts like investors exiting the property market if this is introduced. This will therefore diminish rental supply and drive up rents. It will not only make it harder for those who are renting to save a house deposit, but it will also push affordable rental homes to the outer suburbs, in newly developed areas, where investors are encouraged to buy due to the tax benefits on new properties.
Translation: if you like living in an (already quite expensive), more urban, established city location, well, you might have to enjoy it while it lasts, as these suburbs are set to become exclusive to the wealthy.
In regards to downward pressure on property prices, this is already a factor at play due natural cyclical pressures. Values are declining in our major capital cities, a trend that is forecast to continue for the foreseeable future. With the changes coming out of the Royal Commission about to transform the mortgage broking industry ??and make it more expensive for everyday borrowers to get a loan, by way of a borrower-pays fee structure ? slower demand for property is going to keep a lid on price growth.
The Royal Commission is also stripping brokers of commissions and putting more money back in the banks? pocket, so they don?t need another helping hand from the government in this respect!
What can we do about it?
It is worth thinking long and hard about who you want to vote for this election, and the possible impact it could have on you.
The latest Newspoll confirms that Labor remains ahead of the coalition, with an unchanged two-party preferred vote of 53-47 per cent. If Labor gets into power, make no mistakes about it: property rents will go up. Landlords? access to negative gearing will be stripped. Everyone will have to pay a fee in order to get a mortgage, whether you go to a mortgage broker or direct to your bank.
One way or another, it is going to cost you financially if you vote for a Labor government.
That could be a very real possibility, however, so to any investors who are considering buying a property, I would suggest that you take action sooner rather than later. If negative gearing laws are changed, existing investors are likely to be ?grandfathered?, which means their tax benefits will remain.
Therefore, you have until the federal election to secure your next property and retain these benefits. If you are in the market to buy an investment property, feel free to get in touch, as I can connect you with an experienced buyer?s agent who can help you find a quality real estate asset.
The last couple of weeks have been a real shake up for the property and finance industry, and with Labor?s proposed changes, there could be even more turbulence ahead. I?ll aim to keep you updated as the situation evolves, and welcome any of my clients to contact me if you have any questions or concerns about the current state of play.
Louisa Sanghera is a Finance Broker for Residential Mortgages, Vehicle and Asset Finance, Commercial Lending and Budgeting and Cashflow Coaching with Zippy Financial.
She has?gained more than 30 years in the Banking and Finance Industry, and since founding Zippy Financial, has become a multi award nominated expert in the field of finance featuring regularly in industry press and speaking at finance and investment seminars across the country.