As seen in The West Real Estate
The taxation reforms in the Federal Budget are designed to deter investment, allegedly to even the playing field for first home buyers. However, when you look beyond the political spin, the changes will do little for first home buyers and, in some situations, increase the competition with investors.
Affordability is a key issue for first home buyers, and changes to the capital gains tax discount and negative gearing are not going to reduce prices. The Federal Government expects investor demand to decline, which it says will lead to a small and temporary slowing of price growth, but it still expects prices to rise over the next couple of years, just by 2 per cent less than without the taxation changes.
This a very broad expectation, covering the whole of Australia. The WA property market is one of the strongest performing markets in the country. Demand for property is high, and while the reforms may discourage investment in established homes, there is enough competition from owner occupiers to maintain the competition for property and strong price growth.
Removing negative gearing for established homes is intended to reduce competition between first home buyers and investors. It will have the opposite effect.
Investors that do not want to build a new home will instead look to established homes in lower-priced suburbs, or at cheaper property types such as apartments and units, as their investments could potentially be neutrally or positively geared.
These are usually the suburbs and types of properties that appeal to first home buyers seeking to enter the market.
Deliberately driving investors towards new builds will also put them in direct competition with first home buyers, who often look to new builds as a way to enter the housing market.
Finally, first home buyers who rentvest to get into the market will be doubly penalised. Rentvesting involves purchasing a property you can afford, renting it out, while renting where you want to live. Over time you build equity through capital growth and paying down the mortgage, then sell the property and use the proceeds to buy the home you want. They will no longer be able to claim a 50 per cent capital gain discount and face a minimum 30 per cent tax rate.
Negative gearing also often comes into play when rentvesting. Now, if rentvesters want to claim any losses against their income, they will be limited to buying new builds, which may not be the best option for them.
Overall, the tax changes will do little to improve things for first home buyers.
Suzanne Brown
REIWA President
REIWA President
