Why the Proposed Budget Changes Don’t Alter Our Long-Term Strategy
With the lowest vacancy rates in recorded history, a chronic housing undersupply, and immigration still near record highs, while disappointing in many respects, the Federal Budget changes make virtually no difference to the strategies and research we have spent more than 30 years developing and refining.
What these changes will do, however, is make an even bigger difference to those choosing to make ill-informed investment decisions without proper advice – particularly investors buying into overpriced, very low-yield markets such as Sydney houses.
By contrast, in high-yield and highly undersupplied markets such as Brisbane, Adelaide, Darwin and Perth – which have been achieving growth of around 20% per annum – well-selected properties do not rely heavily on negative gearing, so very little changes.
Why Some Markets May Face Greater Pressure
Sydney and Melbourne housing markets had already generally been underperforming for the past 4–7 years, but they are now likely to face even greater challenges for a longer period if the proposed Federal Budget changes come into effect.
Regardless, Sydney houses had already been near the bottom of our recommended list for years, with or without the Budget changes, because they were already at the top of their cycles, delivering some of the lowest rental returns in Australia and relying heavily on negative gearing benefits, which is never ideal.
At the beginning of a property boom cycle, rental returns are typically high and relatively close to loan repayments, which is largely what triggers markets to start growing strongly.
Then, during the next 7–10 years, capital growth often significantly outpaces rental growth. Over time, this causes rental returns to deteriorate relative to property values – which is where Sydney has been sitting for a number of years.
Understanding Property Market Cycles
It then normally takes another 6–10 years of lower capital growth and stronger rental growth for rental returns to recover back closer to loan repayment levels before more renters begin transitioning into buyers again and the cycle repeats.
This is largely why we only recommend markets with strong rental returns that are also at the beginning of their growth cycles, because investors can potentially benefit from the best of both worlds – high rental income and strong capital growth – while also reducing risk, as this is when the underlying fundamentals are typically strongest.
Why Economic Fundamentals Matter More Than Headlines
We also overlay the major economic drivers most relevant to property, including the Olympics, AUKUS nuclear submarine projects, and other major medical and infrastructure developments.
When you analyse these factors over a 10-year period and compare them on a per capita basis, Brisbane, Adelaide, Perth and Darwin currently have up to thirty times the economic growth per capita of Sydney.
That is why understanding which markets have the strongest combination of these characteristics is so important before investing – particularly when governments attempt to make substantial changes to property tax policy again.
Lessons From Previous Negative Gearing Changes
It should also be remembered that the Labor Government previously abolished negative gearing in 1986, but after it caused significant damage to the broader economy, it was reinstated approximately 18 months later. If these current proposals ultimately proceed through Parliament, there is every chance history could repeat itself.
Regardless, with or without these changes, it has always made more sense to invest in high-yield markets at the beginning of their growth cycles, when the fundamentals are strongest. In our view, this is also considerably easier to predict than the far more volatile share market.
Why Strong Property Opportunities Still Remain
While the fundamentals remain incredibly strong in the better-performing markets, there are still likely to be very strong returns available.
If all the proposed Federal Budget changes are implemented and remain in place long term, they are likely to impact low-yield markets significantly more than high-yield markets, if at all, because investors will become even more focused on avoiding low-yield assets and seeking stronger cash flow opportunities.
Growth may slow from the circa 20% per annum currently being achieved in some of the strongest-performing markets, but rental growth is likely to accelerate, meaning overall total returns may not change substantially.
This is because the underlying demand for both buying and renting property is unlikely to materially change while net migration levels remain so strong.
Why Informed Investors Will Continue to Benefit
Even if growth slowed from 20% to 10% per annum in the strongest markets, 10% growth on a 20% deposit still represents approximately a 50% return on investment, so why would investors choose to invest less?
Change simply creates greater opportunities, and the most informed investors will almost always benefit the most over the medium to long term, while also enjoying the journey far more.
The market also benefits from well-informed investors creating more rental supply and helping stabilise housing availability, so continue learning and seek evidence-based, data-driven advice.
Almost all of our clients are currently generating between two and six times more income from their investment portfolios than from their jobs. If yours is not, do your best to understand how you can improve that over time.
Review Your Portfolio Strategy
Want to understand how the proposed Federal Budget changes may impact your portfolio or future plans?
Speak with the team at inSynergy Advisory.
Richard Sheppard is the Founder and Director of inSynergy Advisory and has spent more than 30 years researching property markets and advising Australian investors on long-term wealth creation through strategic property investment.