Will property investment still be viable without negative gearing

Since negative gearing won't apply to existing houses, it will be less affordable to invest in property for people not buying new. Do you think property will continue to be a viable option for PI new starters?

 

It will just make it more beneficial to pursue positively geared properties.

 

Investors who can't afford to hold will sell up causing a basal shift in the housing index being reflected in the affordability of housing stock resulting in massive downturn in prices of established housing stock and a retirement of housing debt and a change in investment preference to equities where negative gearing benefits would still be available for those with an appetite for risk in an open and free market.

 

Most of my properties are held in trust. Negative gearing doesn't come into it when a trust is involved.

I'm not investing at the bottom of the market. All properties are in blue chip metropolitan locations. They were all loss makers (at least on paper) at some point.

We've held some of our properties for as long as 16 years. Over that timeframe, I can assue you it's worth it. Even the most recent aquisitions are positive cash flow to the point we take a holiday every Christmas on the profits. We've had massive growth over that time as well.

 

I suggest new property investors watch "falling down" I think gen y already have.

 

Tax benefits (like neg gearing) are only the icing on the cake, not the actual cake itself. There is plenty of money to be made in real estate without a tax benefit, IMO.

 

This issue is very subjective and subject to personal circumstance.

At present (and until otherwise laws change) neg gearing remains an accepted practice. Banks are tightening lending and geared IPs are the focus. However the tax concessions definitely assist buyers with cashflow tax benefits from neg gearing and generous deductions for depn and cap allowances. However not all investors chase these benefits ie : cashflow neutral property, ungeared property, property without depn and cap allowances etc

If neg gearing was to end there may be a paradigm shift from younger investors towards cash rich investors who may aim to take advantage of supply falling and hence rents may rise. I already see many older clients buying ungeared property for the yield as deposit rates are appalling. The moderate yield and capital growth can be appealing to some investors.

One of the concerns of the recent east coast (and Westcoast) boom has been the parlay strategy. Investors who are refinancing growth and reborrowing to leverage one property to two or three etc. Many of them at present have poor overall equity but a solid base to gear up with a small % growth magnifying. It could also work the other way too. The banks now identify that net equity is important and lending will reflect that position for the immediate future.

Peters example is fairly typical of a investor not chasing neg gearing but seeking a long term plan.

 

Actually after the initial shocks property investment will be more attractive without negative gearing.
With the speculative element damped yields will be higher via lower property prices.

 

Investment should be based on net cashflows to generate yield. Loss of neg gearing reduces cashflow and yield overall. Sellers enter property market and supply falls. Willing buyers buy that property. In theory supply = demand. Rents are stable.

However key issue is alternative markets - Shares, cash etc. These are compelling alternatives at present.

However the issue is if buyers are unwilling to accept the new lower yields then property prices fall OR rents rise as supply falls. I suspect oversupply in apartments will keep those prices down stable and house prices could yet rise further in some markets.

Its all theory.

 

Has labor outlined their policy yet? I'm curious to know if their proposed change is over your whole portfolio or on individual properties. If I have two positively geared properties and I bought one new one after their changes, would the income across the three be considered or would I pay full tax on the two positive and claim nothing on the loss of the new one?

 

I don't think its viable with negative gearing, if you are dependent on this one then perhaps you should be looking at other asset classes to make money, you wont be doing this way, especially now that markets around Australia are peaking, close to peaking or going backwards.


MTR

 

What Paul said.
It wont be viable for those who are negative gearing.
It will not effect people who are not negative hearing.

@Paul@PFI - what is the percentage of investors who are actually using negative gearing benefits and relying on them? I think it's only a minority of investors but it would be good to hear some real facts.

 

The rest of the world seems to invest in property without negative gearing.

When I arrived here I couldn't believe such a thing existed.

 

ATO data says approx 34% in 2014. 2010 it was 24%. There is no data for 2015/16 and Treasury modelling suggested approaching 50%. The trend is the alarming element. The "losses" are rising. This means tax revenue collected from wages is later refunded.

 

Sounds hardcore

 

Ever hear of bullschitt bingo? I gave it a good crack

 

There are other potential problems with ending negative gearing as the ALP propose:

1. Interest on builds (to rent) under Steele's principles may become non-deductible (subject to how the proposed law would be drafted)
2. Margin loan interest and use of borrowed money may affect some share and financial investment owners. (Those that negative gear).
3. Interest on loans which remain after sale of a CGT asset at a loss generally remain deductible after sale at present. (eg $300K loan and property is sold for $250K and a $50K loan remains). This commonly applies to shares and could also apply to property if prices fell.
4. Death of the tax scheme industry ? Many tax scheme (OK lets call them Products ) products such as vineyards, forestry etc all rely on immediate deductions and deferred income. If the schemes dont diminish they may just get more and more problematic.

SMSF lending is a good example of what may happen. The normal strategy for a SMSF loan is to avoid heavy neg gearing and neutrally / positive geared is preferred to avoid cashflow burn. Applications with large neg gearing get rejected on this basis. Yet it hasn't lessened demand. I might imagine property loans would reduce for those who heavily leverage / gear and possibly push rents up. Higher rents = possible stronger yields for self-funded retirees etc. Term deposit and cash rates make it an attractive option. I'm seeing more and more clients choose property rents v's cash rates. Every drop in interest rates just reinforces it.

Widely held trusts etc could escape the proposed rules too ?