Expert Advice with Michael Yardney.
How will the outcome of this weekend’s federal election affect the value of my home and our property markets?
That’s the most common question I’m being asked lately.
With taxes and property being significant federal election issues, this seems to have been one of the most polarising election campaigns I can remember and, in my mind, the end result will significantly affect our property markets’ performance over the next few years.
What the result will mean for you personally will depend on where you are in your property journey, see let’s look at what could happen.
What if the Coalition wins?
If the Coalition were to be re-elected it’s likely our housing markets would pick up by the end of the year.
Sure we’re still in the slump phase of the property cycle with prices around Australia falling since late 2017, but there are green shoots appearing.
Last year property investors stopped buying because they were having difficulty getting finance under the new stricter lending criteria.
Then home buyers got scared as they kept reading headlines of impending property doom.
And things got worse when that 60 Minutes Program came out forecasting property values would fall by 40%. That really sent a fright through the market.
In turn sellers went on strike.
Unless they really needed to sell, they put off the sale of their home as they were worried they would not find a buyer or that they’d be offered a price much lower than they would have received a year or two earlier.
But things are slowly improving.
• While property prices are still falling, the rate of decline is easing.
• Auction clearance rates are improving, albeit on much lower volumes than a year ago.
• Buyers are back in the market. Particularly first home buyers encouraged by incentive packages, but also established home buyers and investors.
The market hates uncertainty, and a Coalition win would return confidence to our property markets.
The timing of the bottom of this downturn will however depend upon the banks loosening lending restrictions and the timing of any interest rate cuts, both of which are likely to occur later this year.
What if we get a change of Government?
Labor plan to scrap the ability for investors to negatively gear established properties bought after January 2020.
And they also plan to lower concessions for Capital Gains Tax when selling an investment property.
However negative gearing will remain for newly built homes, as well as for investors who already owned their properties before January 2020.
With many investors relying on negative gearing tax benefits to assist with the poor cash flow they experience in the early years of owning an investment property, it is likely they will rush to buy properties before the end of the year so they can be grandfathered under the old rules.
Since investors tend to buy properties in the $400,000 to $900,000 price bracket and prefer to invest in established, rather than new properties, this should boost the value of established properties, particularly apartments, in many of the inner and middle ring capital city suburbs in the second half of this year.
But bringing forward this buyer demand means that property values will fall in these same suburbs in the first half of 2020.
Of course suburbs with a large proportion of owner occupiers and fewer investors are less likely to be affected than locations targeted by mum and dad investors.
Another unintended consequence of Labor’s proposed restriction to negative gearing will be to flood the market with a new breed of property marketers and spruikers who will financially bribe investors to overpay for new homes in outlying estates or new and off the plan properties which have always made poor investments.
Here’s how a Labor Government could affect various segments of the property market.
1. Renters
ALP are aiming to stop investors buying similar properties to first home buyers, in order to make housing more affordable for young Australian families.
Sure falling property values will enable some people to transition from being tenants to first home buyers, but most will not.
If the new taxation policy discourages people investing in property, at a time when our population keeps rising, the supply and demand ratio will eventually push up rentals.
At the same time, more investors will elect to buy new properties, either apartments in those inner-city high-rise towers or new homes on the urban fringe.
The problem for tenants will be a lack of rental accommodation in our middle ring suburbs where many want to live.
This means that rents could increase by up to 15 per cent in part due to the lack of rentals properties as well as compensating investors who buy established properties for their loss of tax deductions.
2. First home buyers
First home buyers and investors tend to target similar properties, so first home buyers may face more competition in the second half of 2019.
Labor believes their proposed changes will assist first home buyers by lower house prices and encouraging the construction more new homes.
However both the Master Builders Association and the Housing Industry Association disagree, suggesting that fewer new homes will be built.
Of course when these first home buyers get into the property market they won’t want house prices to fall any further – will they?
It’s interesting how your perspective changes once you’ve got a foot on the property ladder and a mortgage to pay.
3. Investors
Established investors who already own a property portfolio will benefit if Labor comes into power as their ability to negatively gear their portfolios will be preserved, and they will enjoy rising rents.
However, they may find a smaller pool of potential buyers if they need to sell their investment properties in the future. Yet there will always be a market for good “investment grade properties” with owner occupier appeal.
First time investors or current investors planning to grow their portfolio are going to have a tougher time buying good established properties in popular suburbs as the cash flow drain they will experience will no longer accrue the same tax benefits.
They will also find their borrowing capacity will be diminished, as many banks currently take the benefits of negative gearing into account when calculating serviceability.
On the other hand, wealthier more established investors with income from other sources including investment properties will be able to still claim negative gearing, even if they buy established properties because the proposed new legislation will allow them to negatively gear properties against other investment income.
4. Home Owners
Most commentators believe a Labor win will be generally bad news for our property markets and the uncertainty will lower property values.
While no one likes to see the value of their home go down, it will be good news for upgraders, who will find the new home they’re looking for will similarly have decreased in value and the price gap to upgrade could be less.
There will also be a window of opportunity for sellers of properties that would appeal to the increased number of investors who will be looking to buy before the end of the year.
The Bottom Line
Whether you’re a home owner or an investor property is a long term game, and while governments will come and go, and prime ministers and policies will come and go even more frequently, in the long term property values in Australia will be driven by the long term fundamentals of our growing population and the wealth of our nation, ensuring well located capital city properties will keep increasing in value.
According to REIA data, the average compounding capital growth rate of Australia’s five largest capital cities since 1980 is 7.2% p.a.
Of course, investment grade properties would have delivered a higher growth rate than this median figure.
I understand how uncertainty creates concern amongst investors but having now invested in property for almost 45 years I have a different perspective.
During the time I’ve invested we’ve experienced:
• Both Labor and Liberal governments and too many Prime Ministers to keep count.
• Periods of high inflation and low inflationary times
• High interest rates (17%+) and low interest rates
• Recessions here and abroad, including the Global Financial Crisis
• Negative gearing and the removal of it
• The introduction of GST (which was meant to kill the new construction industry)
• Share market crashes.
• A number of major Australian financial institutions collapse
And during that time the Australian property market has proven its resilience as the excess demand from our affluent growing population, who in general want to live in the same locations in our big capital cities, and in fact in the same location in those big capital cities, has ensured the continual growth in value of well located properties.
Remember…the proposed tax changes will in general affect property investors, but the bulk of the market (around 70%) are home owners who don’t view the market in the same way – they’re long term players.
And in the long term, after the dust settles, property investors will return and invest in property recognising it as the most stable sound investment vehicle available.
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Michael Yardney is CEO of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.
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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.
