Even if the controversial and unlikely changes to negative gearing rules are somehow adopted, property investors who target the right markets can withstand any fallout and make strong profits, writes Richard Sheppard.
It’s no surprise the recent debate about possible negative gearing changes dampening the property market is mostly the media creating a storm in a tea-cup. Despite the Labor Party’s proposal to permit access to negative gearing on new housing stock only, politicians of all persuasions will be very nervous about enacting any reforms in this area given that Australian Taxation Office figures indicate that 70 per cent of negatively geared investors earn less than $80,000.
This debunks the myth that this tax tool only benefits the rich. Remember, too, that the last time negative gearing was quarantined – way back in 1986, it had an adverse impact on the broader economy but very little effect on the property market itself other than to force rental returns to increase more quickly than they otherwise would have.
HERE ARE FOUR CRUCIAL POINTS RELATED TO THE NEGATIVE GEARING BROUHAHA.
1. Plenty of positives for Brisbane
Even if negative gearing rules do change, it is important to understand that most properties in Brisbane, the standout investment target in Australia, are rarely negatively geared. Indeed, as rental yields are so high, most properties are typically neutrally geared or even positively geared, a far cry from the situation in the Sydney market, where most properties are highly negatively geared because of a cycle of very high apartment and housing prices and relatively low yields. That’s why investors should be looking north of the NSW border.
2. Affordability is always the key
Tax incentives aside, smart investors are rightly focused on affordability, and median property values in Sydney are now more than double those of Brisbane, while incomes are only marginally lower. The last time that happened was in 2003, leading to a scenario where Sydney values plateaued in the ensuing years and Brisbane registered growth in the order of 80 per cent during the next decade. Even if investors get only half of that growth from the Brisbane market, it represents a great return.
3. Tighter developer financing to significantly constrain supply
Major banks are putting the squeeze on finance for property developments as their way of curbing supply and limiting lending risks. Again, however, the picture looks brightest in Brisbane in this regard. The supply of units and apartments has been on the rise in the Queensland capital, but it is still well below previous market highs and currently sits at similar levels to 2003.
That level of supply 13 years ago didn’t put the brakes on the aforementioned decade of growth in Brisbane, and it is not likely to do so this time either. Sydney is a different story because property supply is sitting at record highs.
4. Gear up for profits, any which way you can
If major negative gearing reforms are passed, investors can still take some comfort. While such a policy could temporarily slow capital growth, it almost certainly would cut the availability of rental properties and cause an acceleration of rental prices. So yields could still be very strong.
So let’s not get too caught up in all the media hype about negative gearing. BIS Shrapnel’s forecast for Brisbane is over six times stronger than for Sydney (and it is the most-respected property analyst in Australia). That puts any debate about negative gearing in the shade.
Richard Sheppard is the Managing Director of inSynergy Property Wealth Advisory. inSynergy provides professional property investment advice, property market research, specialised mortgage broking services and is an accredited investment property buyers’ agent. Visit www.insynergy.net.au or phone 1300 425 595.