It’s a big day for finance nerds around the country; not only is it budget day, we’re also likely to see a reduction in the cash rate when the board meets at 2 PM. I’ve chosen to release this blog before the announcement largely because I’d like to proclaim myself a modern day Nostradamus if the prediction falls true.
SPOILER ALERT: The Turnbull Government has made some preliminary announcements that will come as welcome news for property investors:
- Negative gearing will remain in its current form. Naturally, the news was met with the familiar cries that the tax concession distorts property prices and encourages speculative investing. Some of the most vocal criticism came from the Grattan Institute who released a paper titled ‘Hot property: negative gearing and capital gains tax.’ In a break from tradition, the Prime Minister responded to criticism of the announcement in writing, saying that ‘the [Grattan Institute’s] paper is littered with factually incorrect statements, claims that are unsupported by evidence and direct contradictions. And its economic analysis in many places leaves a lot to be desired.’ He further builds the case for negative gearing by noting the effect of its removal on the rental market and income equality, the former of which we have long advocated.
- Capital gains tax discount will remain at 50% if a property is held for at least twelve months. Shorten and Co. have proposed reducing the discount to 25%. One often unreported fact in the debate is that capital gains tax applies for all investments, not just those in property. In other words, the policy changes proposed by Shorten and Co. will not favour an alternate asset class to property.
That brings me to interest rates (target cash rate, more accurately). As I mentioned in the opening, my prediction is that we’ll see a reduction in the target rate when the board meets today. Why? Last Wednesday’s first-quarter consumer price data showed a 0.2% contraction, and a year-on-year reading of just under 1.6%, indicating deflated demand. This is well below the RBA’s target band of 2% to 3%. Even if we don’t see a reduction today, the likelihood is that we’ll be in a low interest rate environment for the foreseeable future. What this means is that the holding costs on your investment property will in all probability remain at historical lows – in terms of cash flow, it’s still a great time to invest in property.
EDIT: The official cash rate has declined 0.25% to a historically low 1.75%. I’ll hold for applause.