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 to most that the recent debate about possible negative gearing changes dampening the property market is mostly the media creating a storm in a teacup.
For a start, 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 percent of negatively geared investors earns less than $80,000. This debunks the myth that this tax tool only benefits the rich.
The other vital point involves a lesson in history. The last time that negative gearing was quarantined – way back in 1986 – it had an adverse impact on the broader economy (and the policy was consequently reversed 18 months later) but very little impact on the property market itself, other than to force rental returns to increase more quickly than they otherwise would have. So even in the unlikely event that the broom is put through negative gearing, it should not stop property investors from making good returns in well-selected markets.
Here are five 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 – easily 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 partly why the outlook for Brisbane is so strong – regardless of negative gearing policies – and why investors should be looking north of the NSW border.
In this current market, a change to negative gearing may even push growth higher in Brisbane as investors focus even more on better yielding markets, and further away from Sydney’s current low rental returns.2. Affordability is 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% during the next decade. So even if investors get only half of that growth from the Brisbane market, it represents a great return.
Certainly, it is a far better approach than letting all that property equity sit around lazily in a bank account doing nothing.3. Tighter developer financing to significantly constrain supply. The supply of property is another factor to consider when assessing markets – the higher it goes, the lower that prices should be. Major banks are putting the squeeze on finance for property developments as their way of curbing supply and limiting lending risks. The big hope for investors is that markets strike a balance on the supply side so that purchasing prices are reasonable while access to properties is sufficiently limited for capital growth to kick in.
Again, 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, the last time when median property prices in Brisbane were half those of Sydney. 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. As long as affordability and yields are attractive, the level of property supply becomes a less significant issue. However, Sydney is a different story. While the past years accumulated undersupply has taken a few years to satisfy, the current rate of property supply is sitting at record highs, while prices are at the top of the cycle and yields are low. The result is that affordability in Brisbane is about 70% higher than Sydney.4. Pay far more attention to the professionals than the media! BIS Shrapnel is the most experienced and respected property research house in Australia, so much so that QBE Mortgage Insurance have been using their research for many years and even publish it openly on their website.
If a conservative mortgage insurer who has billions of dollars at risk has faith in BIS Shrapnel’s ability, then we should take far more heed of them than a journalist trying to get some attention with dramatized headlines and selected facts. BIS Shrapnel, while very conservative, has forecast Brisbane to be easily the best performing capital city for capital growth over the coming years, while enjoying significantly better rental returns than the closest rival capital cities.5. 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. Capital growth and rental returns typically grow in different cycles, but they both ultimately trend upwards. Under a scenario in which rents go up for a long time, it translates to impressive capital growth because members of the public see that it becomes a viable option to buy. So, either way, the total returns for investors are likely to remain robust if negative gearing policies change. 6. Play it smart with an overarching investment strategy. A final point to remember is that using the power of negative gearing is, in itself, not a well-rounded property investment strategy. It should just be part of the overall equation. Smart investors know it makes sense to team up with specialist property market experts to develop a long-term blueprint for growing their wealth through property!
So let’s not get too caught up in all the media hype about negative gearing and what it will or will not do to property markets. Ultimately, the most successful investors listen to the experts and make their decisions based on long-term factors using a well-developed strategy
At the moment, all the signs point to the Brisbane market performing relatively very well, far stronger than any other Australian capital, and easily strong enough to profit from making better use of any spare equity.
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.