Ignore the Negative Gearing Noise
There’s a lot of nervousness among property investors at the moment.
I’m not talking about the softening in property prices either, because the savvy ones know that you should act while others are hesitating.
I’m talking about the proposed scrapping of negative gearing provisions for existing property that Labor will seemingly make a reality should they win the next election in May.
A lot of would-be investors I’m speaking to are worried, but I’m here to tell you to ignore all of the noise about negative gearing.
It doesn’t matter. It shouldn’t concern you. And really, in the scheme of things, it won’t impact you.
It’s not a strategy for you
Negative gearing is a moment in time.
It provides some modest taxation benefits for the short-term, allowing you to offset the ongoing income losses of having a rental property that costs you more than it brings in.
Let’s break that down.
Your investment loses you money, and so you get a bit of a leg-up from the Tax Man.
That doesn’t sound like a fantastic investment to me.
It sounds like a short-sighted gamble where you’re banking on a hope that what you’ve bought will increase enough in value to make up for the money you’ve had to pour into it.
It means you’re buying speculatively.
You’re essentially paying to secure the investment, potentially haemorrhaging money while you’re holding it, and praying that you can sell it on to someone else for more than you paid.
The smarter thing to do is to think long-term.
That’s what sophisticated investors do.
They make smart buying decisions and hold – preferably as part of a 15-year plan.
Part of that smart buying is picking an investment that doesn’t rely on negative gearing.
Most well-bought investment properties are neutral within three to five years, and preferably positive not long after that.
Educated investors hold their ground and focus on the big picture.
They don’t roll the dice and hope for the best.
This isn’t the pokies.
They work with experts like buyer’s agents to source the best deals with the absolute best prospects that can deliver solid growth.
They have a strategy to maximise their returns without having to speculate.
The plan doesn’t work anyway
Labor hopes its scrapping of negative gearing will improve housing affordability.
They feel that by giving “tax breaks” to property investors, it stimulates activity and drives up house prices.
It’s not a new idea.
In fact, this is simply history repeating – one from long enough ago that many seem to have forgotten how it played out.
In 1985, the newly minted Hawke Labor Government abolished negative gearing on rental properties.
They, too, believed it would aide housing affordability by evening the playing field, so owner-occupiers could get into the market at the expense of landlords.
You know what happened? Rents went up. With less rental stock in the market, supply dwindled while demand remained high and prices increased.
At the same time, the promised relaxing of house prices didn’t really eventuate.
Interest rates were also in double digits, which made getting a mortgage and paying it off an unrealistic prospect for first homebuyers.
At the same time, they had less money to save because they were forking out more in rent.
Negative gearing was reinstated pretty quickly.
Change will help the market
Let’s say Labor wins the election, which most polling indicates is a strong reality.
They scrap negative gearing – except for investors buying brand new property; part of the strategy to seemingly boost housing supply.
You’re a savvy, strategic-thinking property investor who focuses on the long-term, remember? So, it doesn’t really matter to you.
But here’s what would likely happen.
Rents will increase. We know from basic economics of supply and demand that this is likely to happen.
Supply is already tight, with new housing starts falling because big developers are nervous about softer prices, the global economy and lending restrictions.
Should mum and dad landlords who need negative gearing decide that it’s not worth their while and sell up, more supply will be ripped out.
Rental demand remains extremely thanks to population growth and low levels of first-time buyers in the market.
And, so, rental prices will go up.
For strategic investors, fewer first-time buyers means less competition at the affordable end of the market – the price pocket that deliver now-higher rents will be attractive prospects.
Given that Labor’s plan means negative gearing will only apply to brand-new properties, we’re likely to see a lock of speculators out and about.
They’ll target brand new builds, which will be overpriced as a result.
Those investors with their focus elsewhere, on properties with fairly ordinary investment fundamentals, will again lower competition among savvy buyers like yourself.
You’ll be away from the feeding frenzy, targeting well-located property with good capital growth prospects for the long-term.
We could see a mini boom
The likely Labor election result will see a lot of change.
There will be a change in regime in Canberra with the focus shifting away a bit from getting the Budget back to surplus and towards investing in big-ticket infrastructure, health and education.
There will be an uptick in consumer confidence. Major sectors like construction will likely also enjoy renewed activity.
And, I predict, there will be a rush of investors keen to take advantage of the grandfathering clause in the negative gearing changes.
They will buy while they can, to lock in the tax break for established properties – not that negative gearing is their motivation, but it does help in the first few years of owning an investment property.
This may drive a short mini property boom, helping to kick along the recovery phase for markets like Sydney and Melbourne where prices have fallen but, in some cases, appear to be beginning to plateau.
So, let’s sum up.
If you’re savvy, negative gearing changes won’t matter to you, but they will see rents increase and your competition for good investment opportunities dry up.
And the prospect of the changes between now and then will likely spark a rush of activity that will help markets bounce back.
All that’s left for you to do is keep your eye on the long-term prize, buy well now, and position yourself for the best returns in the years ahead.