The property market just changed forever – A major shift for investors
In my latest video insight, I explain why I believe the budget could fundamentally reshape property investing in Australia. Changes to negative gearing and capital gains tax may discourage investment in established properties, slow housing and credit growth, and create unintended consequences for banks, property-related businesses and younger Australians trying to build wealth.
Transcript
Hi. I’m Roger Montgomery. So we’ve had a few hours now to digest the changes in the budget, and there’s a lot there.
The headlines of course have focused on the big items including changes to CGT and negative gearing as well as the gutting of trusts and the bucket company which has been a huge incentive to invest. But there’s also changes afoot to PAYG for businesses as well as incentives for investors in startups Although the capital gains tax changes disincentivize founders and employees who sweat for equity.
So what’s my take so far?
Well, this budget will flip thinking on property investing. It will kill some forms of property investing and it will incentivize others. Property flippers are probably hit the hardest. If you were buying an established property to renovate and flip say over 18 months, you can forget it now. You can no longer offset your holding costs. So for example, interest on any finance, council rates, insurance against your salary. These carrying costs or losses are now quarantined and they can only be used to reduce the eventual capital gain. Now this creates a larger 18 month cash flow drag that didn’t exist before. Any profits made after July 1 2027 are going to be subject to the new capital gains tax regime. That means cost based indexation plus 30 per cent minimum tax rates rather than the simple 50 per cent discount. While there are transitional arrangements, the administrative headache and the higher tax bill at the tail end of your profit makes the maths uglier for property flippers.
And then there’s the stamp duty, the selling costs, renovation and holding costs. You might actually need the property price to rise 20 per cent just for you to break even. That kind of forced appreciation is statistically unlikely.
And if you’re renovating to appeal to a property investor, forget it. Unless the government classifies the renovated property as a new build. Buyers of established properties don’t enjoy any of the negative gearing benefits of the past. So half your buyers or more than half have just vaporised. And that means you’ll be selling into a headwind, making a profit statistically even less likely.
Next, who’s going to buy an established property to rent out when the tax benefits for established homes have just been stripped away. These negative gearing changes discourage everyone, including the young, from buying investment property that isn’t new. That means even the young are held back from building wealth.
And here’s the thing. Where will the new properties come from? Builders, well, they’re gonna be too busy renovating luxury homes. Why? Well, the primary place of residence has been protected and kept free from capital gains tax. Fantastic news. So guess what happens though? People will pour millions into renovating their homes. Trophy home prices will rise the most as money that might have gone into a rental investment now chases a bigger and fancier primary home.
And back to those new builds that the government thinks the young will buy. Why would they when their new build is an established home when it comes time to upgrade and there aren’t any buyers because negative gearing doesn’t apply to them.
This is all bad news for the banks, by the way. Property price growth will slow, meaning credit growth will slow as people have less growing equity against which they can borrow to do other things. Bank profit growth will slow, and they’ll compete more aggressively on owner occupier loans and renovation loans, which means lower margins. Don’t be surprised if bank shares start falling for a while. The budget could also be bad news for the likes of REA Group, the owner of real estate dot.com.au. Property listings might initially pick up, but those listings are gonna take longer to sell for all the reasons I’ve just explained. And eventually, listings will slow or new listings will slow. The company might also find it harder to increase prices.
This budget has very little in it to help the young, and it now looks like it’s bad for the economy too.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
