Face Facts, Not the Alternative Ones

Last week’s budget was well received by most in the property industry. Both the Property Council and the Real Estate Industry of Australia were among those quick to release statements. According to an AFR article the next morning, everyone was pleased the Government had “tackled affordability” and “not moved to limit or remove negative gearing”.

But although there were certainly some positives for property in the budget, it seems the “experts” might not have been listening very carefully. Or at least buying a version of the facts that at best could be termed “alternative”.

Firstly, a recap of some of the good stuff. Young people looking to buy their first home will now be able to use up to $30,000 of voluntary super contributions towards a deposit. There’s also a bunch of new rules around foreign investment that include removing any capital gains tax exemptions for that buyer segment. Foreign buyers will also not be able to purchase more than 50% of a new development and if they leave a property sitting vacant for more than six months a year, they’ll be slugged with an extra $5K a year in tax.

All of that’s got to be good to help young people and local buyers have a fighting chance.

And now for the scary stuff – the changes that no one seems to be talking much about. Yet. Effective immediately, investors buying property will no longer be able to claim depreciation on plant and equipment, unless they bought the items themselves. That means items like ovens, blinds, light fittings, hot water systems and anything that’s “easily removed” from the property will no longer appear on the depreciation schedule for most buyers. Depreciation allowances could be more than halved in some cases and cash flows on property investments will be hit.

Despite the headlines, this is effectively a change to negative gearing.

Now add to the equation the bank levy also announced in the budget, which will almost certainly result in another round of interest rate increases on mortgages soon. You might see where we’re going with this. It’s not good news.

Almost a week later, the AFR seems to have twigged to the problem. In a Monday article, Louis Christopher of SQM Research, who also happens to currently be Australia’s most accurate forecaster, deemed the changes “the final nail in the coffin”. He’s now bringing his prediction for a market slowdown forward to the second half of 2017.

We’re not a fan of doom and gloom but we also like facing facts. For agents around the country, time to plan for a change in market conditions, which may well be sooner than you think.

All the best,

Gordon MacDonald