Negative Gearing: To Wait or Not to Wait
Negative gearing is set to be removed in January 2020 if Labor wins, except on new properties. So, where does that leave us? Do we jump in now or wait until after the proposed changes?
A study by experts released last week predicts the likely effect of the change on property sales and rentals and this could help investors make the right decision.
If the experts, SQM Research, are right, what does that mean? Do you take the plunge now or do you wait? Let’s take a look at Perth and try to figure this out.
1. PROPERTY PRICES
SQM predicts Perth prices will grow whether negative gearing stays or goes, because Perth is entering a state of under-supply.
We would have more growth with negative gearing than without, but either way SQM says you’ll pay more if you wait and see. This is just for Perth, though, most other city prices are set for a drop, being in different cycles to us.
With rents we’ll be ahead of the game with Labor’s proposed changes. Perth rents are to rise by a whopping 11% to 17% under the new policy and not as much with the status quo.
That may seem high but when negative gearing was previously abolished in 1985 to 1987, Perth rents rose by an astonishing 33.5%.
So, let’s have a look how this plays out in an example.
3. EXAMPLE 1 – HOUSE $500,000
Here we compare acquiring before vs after the proposed change, using SQM’s information.
- Pay today’s price $500,000
- In 2022 the value is up at $532,500
- Rent has increased, and
- You have the benefit of negative gearing
BUY AFTER the proposed change, in 2022
- Pay more – $532,500, not $500,000
- Still get the same (higher) rent
- You get no negative gearing benefit
So, by waiting you lose twice: First by paying more and second you lose your negative gearing benefit.
SQM predicts prices to increase in the run up to the proposed change as investors aim to secure a property with grandfathered negative gearing rights ahead of the cut-off.
So, based on the example, now would be the better time to invest because the market hasn’t yet digested the ramifications and sales prices are still at a low.
By SQM’s estimates you are likely to get in at a better price, enjoy the rent increase and still get negative gearing benefits locked in for the future.
5. EXAMPLE 2 – LEASED 2X2 APARTMENT
Here is another example of an actual property on the market that would make sense to acquire now and not after the proposed change. The SQM data is used for the model.
Jan acquires this unit now for $295,000. It’s leased at $340 per week, giving an already high 6.0% rental return.
It will be worth $314,175 in 2022 with the changes, with the rent up to $387.60 per week, now a 6.8% rental return, based on the SQM model.
Over and above this, Jan is a typical investor and enjoys a tax benefit from the negative gearing.
Joe decides to wait and acquires the identical unit next door in 2022.
Joe pays $314,175 and receives the same rent as Jan at $387.60 per week, giving him a lower 6.4% rental return. He paid more to earn the same rent. He also doesn’t qualify for any negative gearing tax benefit.
So, all round, Joe loses and Jan wins.
Even if the property value doesn’t grow to the same level as SQM’s forecast, Jan still wins with her negative gearing benefit on the same property and with the same rental as Joe.
This example uses a real property on the market in an area where rents have already started to rise and renters are calling, texting and putting in applications. Sale prices, however haven’t yet started to move even though stock is low, so investors gain all round.
Read about the rental growth here .
Learn more about this property, available to purchase through Property Wizards.
Disclosure: Please note this is not a buyer’s agency purchase, it is a property we are selling, in which we have an interest. There is no buying fee or authority and we represent the seller. Buyers should only rely on their own independent due diligence.
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Source data for the calculations:
SQM states that Perth is about to enter a state of undersupply. If the negative gearing changes are introduced SQM forecasts Perth prices to rise by 3% to 10% from 2020 to 2022. Without the negative gearing change Perth prices would grow 9% to 17%. In other words, on average, Perth price growth will be higher by 6.5 percentage points if the negative gearing changes don’t go ahead.
SQM forecasts Perth rents to grow 11% to 17% if negative gearing goes or 8% to 13% if it stays. That’s on average 3.5 percentage points rental growth lost if there’s no change to negative gearing.