Why So Negative?

Posted by Daniel Joseph

Hello, property investor. Negative gearing is in the headlines and I bet you’re feeling a sense of déjà vu!

I understand you have a few questions about the future of the tax incentive. Given what you’ve heard in the media over the past month or two, I get where you’re coming from. Your job is to become educated. Why? Education enables you to live above the chaos, make informed decisions and avoid becoming a slave to sentiment.

Now, I don’t profess to be a mind reader but I can guess that some of the questions you have include:

There are conflicting policy proposals between the two (primary) sides of government regarding negative gearing. What is the likely impact of both?

Couldn’t have asked a better question myself. Let me break it down:

Team Shorten: let’s incentivise construction by limiting negative gearing to new property. Sounds awfully similar to the rationale behind limiting foreign investment to new property. Nothing inspired here. The risk we run in adopting a policy like this is creating a two tiered property market with higher demand for new property inflating prices above fundamental levels. Given that the proposal will not retrospectively affect existing investors, young Australians miss out on opportunities afforded to those progressed in their investment journey. In addition, the resale market for second hand property will likely diminish, further exacerbating the potential premium on new property. Team Shorten: you don’t have my vote.

Team Turnbull: before I begin, I must be upfront and admit that the member for Wentworth will have my vote come election time. Without revealing policy of their own, team Turnbull have affirmed that the opposition’s policy will likely make it harder for first home buyers to buy a newly constructed home, as they’d be competing against investors seeking negative gearing in a much more narrow market. ‘Labor (team Shorten for continuity) thinks all people who negatively gear are property barons to be fleeced,’ Federal Treasurer Scott Morrison said. We’ll have to wait until the May budget before Team Turnbull’s policy is handed down, however, there have been murmurings that they’re assessing the possibility of limiting the number of investment properties that you can negatively gear or putting a cap on allowable deductions.

Which policy is likely to be enforced?

Given that Turnbull’s approval rating is fourfold that of Shorten (60 vs 14 per cent), at this point it’s probable we’ll be governed by Team Turnbull until at least 2020. This of course does not account for a potential (let’s face it, probable) political coup d’état in the interim, but it does mean that Team Shorten’s policy is unlikely to gain any traction. In addition, Treasurer Scott Morrison’s former post of National Manager of Policy and Research at the Property Council of Australia suggests that any policy change will be better thought out than the recycled foreign investment strategy of Team Shorten.

I’m a first time investor, how do these policies affect me?

I was waiting for this question. First of all, well done on taking a step to secure your financial future. Under Team Shorten’s plan, if you intend to benefit from negative gearing, you’ll need to buy a new property. Here’s the good news: New property has a number of distinct advantages over old:

Depreciation: the net present value of the depreciation write off for a $500,000 property is approximately $170,000
Government concessions, like pro-rated stamp duty in Victoria
Maintenance: new property costs less to maintain by virtue of improved construction techniques and the presence of builder’s insurance
Asset selection: the opportunity to select the most appropriate property in a development, not just the one that happens to be for sale at a specific point in time

From what we know of Turnbull’s plan, it’s business as usual for you.

That’s all from me today. I trust that I’ve been able to shed some light and alleviate your concerns about the future of negative gearing. Remember: education is key, research is more important than media and success is born of action.

Posted by Daniel Joseph, on 16th Feb 2016