Investment property owners – here we go again!
Investment property owners have been once again branded as fat cats and negative gearing is under threat. And what do buyers do?
Well most don’t act like cats, they act like sheep!
I find property buyers fascinating. Over the past three years, Sydney buyers have been frenzied in their quests to get onto or climb up the property ladder. There seemed to be a bottomless pit of optimism about capital growth and a palpable sense of FOMO (fear of missing out) was present at nearly every auction we attended. And now, with our property tax breaks in the spotlight, there is a different fear in play: fear of change.
So, while the majority of erstwhile real estate investors will probably sit on their hands and “wait to see what happens”, a brave few will seek to take advantage of opportunities that will come their way as a result. I think this will happen because history has a habit of repeating itself…
The introduction of CGT didn’t stop property investment.
Back in 1985, alas before my property buying days, Capital Gains Tax was introduced. This meant that anybody who owned an investment property purchased before September 1985 could sell that property without having to pay any income tax on the profit they made. At the time I didn’t pay attention to the immediate impact of this tax (I was still at school!), but I imagine there was probably a rush to buy up before the deadline and a short term slump in buyer activity immediately afterwards. And then, after a period of time, it must have been business as usual because LOADS of investment properties have been purchased since then and plenty of people have had to pay tax on the money they made. Which is great, because it means their investments paid off if they made a profit…
The FHOG meant first home buyers actually paid more.
I was around for the introduction of the First Home Buyers Grant, which was brought in in July 2000 as a way to minimise the impact of the GST on first home buyers. So, with the lure of an extra $7000 towards their deposit, the majority of this group of home buyers sat on their hands in the preceding months. I remember trying to sell small apartments and houses during this time and being frustrated that few would make offers. There were plenty of good buying opportunities at the time, simply because demand had dried up.
Roll on July 1 and immediately we were flooded with new buyer enquiry and the listings flew out the door, competition often pushing the prices up well in excess of the $7000 bonus. Now, I know this was not a tax, but it was a government initiative, so the same principal applies. The moral of this story is that those who waited for the grant paid dearly. Only those few who chose to act against the tide and purchase before July 2000 effectively saved any money.
The VET was branded a “stupid tax”.
The short-lived Vendor Exit Tax was brought into being by the NSW state government in June 2004 and lasted until August 2005. Investors who sold during this period were slugged with a levy of 2.25% of the sale price of their property.
Many say the tax was stupid (and I must say that I agree) but the way some property buyers and owners reacted was even stupider (is that a word?). Some people sold up quickly, thinking that property values would now be on the downward slide and they wanted to get out as close as possible to the top. Others bought up in other states, thinking that NSW had had it’s day and capital growth would grind to a halt now.
I still feel sorry for the people who had to pay that tax, it was unfair, especially given the short timeframe in which it was applied. And those buyers who parked their money interstate missed out on the capital growth since experienced in Sydney, Australia’s highest performing property market. The memory of the VET lives on as a warning against knee-jerk reactions to government intervention in the property market.
The silver lining.
There are a number of reasons why this uncertainty about negative gearing could create an opportunity for savvy buyers. The property market fundamentally runs on the economics of supply and demand, fuelled by consumer confidence. If there is a lot of available property and not many buyers out there, we have a buyer’s market and visa versa. Consumer sentiment or confidence has a major impact on buyer numbers and rumours of tax increases will always challenge confidence.
Buyers who run against the tide often find very good deals. Just look at some of the gains made by those brave enough to buy in the wake of the GFC. So, if the investment market grinds to a halt while people wait to see whether the tax is changed, this could result in some property bargains.
Since I prefer low risk property investment, I don’t like to rely on negative gearing for my investments to be affordable. That to me is too risky. So we will continue to assess each investment property on its own merits, with above average capital growth being the end goal.
Published:- February 2016
Good Deeds buyers tips are intended to be of a general nature. Please contact us for advice that is specific to your individual circumstances. You may also need to get advice from other professionals such as an accountant, mortgage broker, financial planner or solicitor.