What negative gearing changes could mean to you

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With big changes to negative gearing on investment properties proposed by Labor, SUE WILLIAMS looks at what a change of government might mean to the value of your apartments.

The coming Federal election is the most critical event for the real estate industry in many, many years, says the president of the Real Estate Institute of Australia (REIA), Adrian Kelly.

But home buyers who don’t negatively gear will benefit as prices soften slightly and the budget gets a boost form increased revenue, says the Grattan Institute.

With the property market already softening in most areas of the country, the result of the May 18 poll could have a massive impact on prices, values and the long-term prospects of investments, Mr Kelly believes .

“This is such an important election because of the Labor Party’s proposed changes to taxation arrangements, particularly to negative gearing and capital gains tax,” says Mr Kelly, who has been rolling out REIA’s election campaign across Australia.

“So it’s very important that agents should know the parties’ policies as potential vendors and buyers will be asking them questions that they need to know how to answer. It’s not our role to tell people how to vote – we don’t play the man, but play the ball – but we want to tell people the potential problems of policies, and this one in particular.”

If Labor wins the election, it plans to scrap negative gearing on the purchase of existing properties, preventing investors writing off the losses they make on their investments against the tax they pay on wages. It will only exist from January 1 on the buying of new properties. In addition, the Labor policy will charge tax on 75 per cent of the capital gain on selling, rather than on the current 50 per cent of their gains.

The Grattan Institute’s Danielle Wood says in this article, that on the plus side, such a policy will substantially boost the budget bottom line, with the winners being those people who don’t negatively gear, while house prices will be reduced “a little”.

With Labor promising to ‘grandfather’ existing negative gearing arrangements, now is definitely a good time to snap up an investment property, suggests economist Trent Wiltshire of Domain real estate magazine.

“Prices may fall a little more but then the market will bottom out in late 2019,” he says. “The lending environment is easing a bit so banks are offering better deals, too.

“Consumer surveys also show people thinking now is a good time to buy, with signs the market is turning around in terms of days on market and clearance rates.”

Sydney’s popular blue chip investment areas – the eastern beaches like Coogee, Maroubra and Bondi, the lower north shore with Neutral Bay and Kirribilli, and the inner west including Annandale and Balmain – can be the best bet, believes Chris Gray, the CEO of Your Empire and host of TV’s Smart Investing.

“For the best capital growth and rental returns, you need to stay within 5km to 15km of the centre, in areas that are short of supply but always high in demand,” he says. “Also, try to buy a property that’s priced around the median as the majority of renters, and later buyers if you want to sell for capital growth, can afford that. For apartments, choose a two-bedroom apartment with parking and nice-sized rooms.”

New developments can also be a good buy now, with finance tight for developers and many offering discounts, says Loanmarket East director Alex Lambros. “But you wouldn’t want to go further than 15km out from the CBD,” he says.

“Rental returns will be stronger there and, although prices are higher too, you have the advantage of being able to claim depreciation. Choose something close to transport and smaller buildings of 50 units or less are good as when you come to sell, you’ll have less competition.”

On the lower north shore, Olivia Chung of McGrath Neutral Bay favours older-style apartments or houses for investment. “Choose a two-bedroom apartment with parking and a balcony as demand will be higher and they offer the highest yield and good capital growth,” she says.

In the east, around Paddington or Surry Hills, Tony Laing of The Agency Eastern Suburbs says apartments in smaller blocks with fewer amenities like pools and gyms and therefore lower levies are a good idea.

“They also mean you don’t have as much land tax or other maintenance costs,” he says. “I’d also lean towards newer blocks as they have less future costs while older buildings might have special levies coming up to replace windows and doors and on fire ordnances.”

Versions of these stories first appeared in the Sydney Morning Herald’s Domain section.

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