Property Point

I was among the Mackay real estate agents who received calls from buyers agents from southern capitals last week saying they had investors who were more interested than ever in securing a property in this town.

‍

That is not to say that investors around the country are not spooked and considering their options after the Federal Budget announcement that negative gearing would no longer be available for new investments other than brand new builds.

There will be plenty who will be watching the impact of the removal of negative gearing and it remains to be seen what happens with property prices both in Mackay and in the nation generally.

‍

Someone told me the other day that they didn’t understand exactly what negative gearing is, which is fair enough because not everyone lives in my world of property prices, rental yields, capital gains and tax benefits.

So for those who are unsure, the basic meaning of negative gearing is that an investor can claim the losses they make on a property on their personal tax. So if an investor has a property that gives them a rental return after costs of $600 a week but their mortgage is $800 a week, they are able to claim the $200 a week loss as a reduction from their personal tax payments.

‍

A lot of people are suggesting that the removal of negative gearing will have the biggest impact in Sydney because the cost of housing is high and rentals do not typically cover the mortgage if someone had a 20 per cent deposit on the property they had bought. The rent on a $2m Sydney property does not go anywhere near covering the mortgage so  being able to claim the loss as a reduction on your PAYE tax is the only way most investors can do it.

Investors who had an investment property prior to this month’s Federal Budget will be able to continue to negatively gear their property but anyone who buys after Budget night will not be able to unless they are building a new home.

‍

The impact in Sydney was immediate, with an auction clearance rate of under 50 per cent last weekend. Sydney is an auction town so the results send a clear message that investors there are spooked and possibly no longer see the value in buying an investment property at current prices and with current rental returns.

The impact on prices in Sydney, and around the country, will be the big real estate story this year.

‍

As I said in my column last week, there is a theory – completely untested and not to be taken as gospel until the facts emerge – that the removal of negative gearing will not have a huge impact in Mackay because house prices are lower than in southern capitals and rental yields are much better. Investors with a decent deposit on a property don’t need negative gearing because rental returns cover the mortgage; so their properties are actually positively geared.

‍

Will this make Mackay an attractive place for southern investors looking for an investment that doesn’t run at a loss? We’ll have to wait and see.

It is interesting to note what has happened to real estate prices in New Zealand in the years since the government there made changes to negative gearing; prices have dropped by 30 per cent (adjusted to inflation) since their peak about five years ago.

‍

Other factors play into that: there has been a reduction in immigration and Kiwis prefer to live in Australia than in New Zealand (only joking!) but there is no doubt that the removal of negative gearing has had an impact.

With fewer investment properties coming onto Australian markets, we can expect to see fewer rental properties which, in a world of demand and supply, could push rental prices up.

‍

And young people looking for an investment will not be able to claim the negative gearing that older Australians could access. It’s a nuanced world.

‍

‍