Concession's removal would make property investment unviable, says broker
Getting rid of negative gearing would likely make it financially unviable for mum-and-dad investors to hold on to their properties or buy them in the first place, says mortgage broker Nathan Smith.
The director of Sydney brokerage Birdie Wealth spoke to MPA in the wake of news that the federal government had asked Treasury to model potential changes to negative gearing concessions.
The Labor government has also come under pressure from some of its own MPs who are calling for changes to negative gearing and capital gains tax, as well as the Greens who want the tax concessions for investors phased out in return for support of the government’s stalled Help to Buty and Build to Rent bills, which are stuck in the Senate.
Negative gearing allows property investors who made a loss on their investment for that financial year to deduct that loss when they do their tax returns. The loss is incurred when the investor spends more on the cost of their property than they receive in rent.
Prime Minister Anthony Albanese said the government was not considering taking negative gearing and capital gains tax reform to the next election. “What we’re doing is planning for our homes for Australia policy,” Albanese told ABC Breakfast. “That’s the policy we have and that’s what my government is focused on.”
When asked about whether negative gearing affected housing supply, Albanese said if there was no investment in housing there would be no private rentals. “You would have less supply and less construction,” he said.
Smith (pictured above) said 70% of Birdie Wealth’s clients were owner-occupiers, either buying or refinancing their own homes and 30% were investors, refinancing or purchasing an investment property.
He said the business also opened a property management arm, Birdie Property, about 12 months ago, so he had a good understanding of what both landlords and tenants were experiencing in the current market. Birdie Wealth also operates Birdie Conveyancing.
Birdie Wealth, which was the joint winner of the Best Customer Service from an Individual Office award at the 2023 Australian Mortgage Awards, is based in Miranda in the Sutherland Shire, covering the southern suburbs of Sydney. It has a team of 35, including six brokers.
Smith said the brokerage’s investor clients were generally local mums and dads who owned one investment property as well as the home they lived in.
“They have one property that they’re using to try and bolster their retirement and put themselves in a better position to retire at a reasonable age or set themselves up to have a level of lifestyle beyond retirement,” said Smith.
Many of them were essential workers, such as nurses, teachers and firefighters who wanted to pay off their mortgage faster, and one way to do that was to buy another property, benefit from the growth in that property.
Smith said without negative gearing “the numbers just might not have stacked up” for those people to invest in property.
“The difficulty is for a lot of people who have made an investment and run their cash flow and budgets on the gearing being there – what happens if that’s taken away from them? What happens to those properties, can they still afford to hold them.”
It was evident that with the rise of interest rates, the costs of owning an investment property also went up and some of those costs were passed onto the tenants.
“The concern is that if negative gearing disappears, who eventually wears the cost?”
Smith said it might mean a smaller supply of properties available for rent and added price pressure on rental properties.
“If there’s a shortfall in somebody’s cashflow, as a landlord do they need to increase rents in order to cover that shortfall?’”
Some Birdie Wealth investor clients who own properties in Melbourne are looking to increase rents due to recent changes to land tax rules, “in order to cover the cost and keep their cash flow position the same”, said Smith.
If investors were forced to sell because of changes to negative gearing, it would mean fewer available rental properties.
“When we attend open homes through Birdie Property we’re already seeing certain properties that are fair market value and are well priced for families in the area – there are queues out the door for people trying to rent these homes,” said Smith.
“The last thing we need is less properties available.”
Negative gearing helps property investors
Smith said negative gearing was particularly useful to investors when they bought a property.
“When they’re buying the property, they’re borrowing 80% or higher … they may be drawing equity from their own home and borrowing 100% to purchase a property.
“The gearing is there to assist them in holding the property in those first five to 10 years to allow the property to grow in value and achieve the investment goal that they’re after.”
Once the property had been held for a long time, it could become positively geared and the investors ended up paying tax on it.
“But in order to get that point, they have to hold the property for a period of time, wait for loans to be paid down and for the rent to go up and put the property in either a neutral or positive position.”
Property buyer interest increasing
Despite the fact that the Reserve Bank of Australia kept the official cash rate on hold this week for the seventh consecutive time, Smith said Birdie Wealth and other arms of the business had seen enquiries from both owner occupiers and investors increase in the last few weeks.
“Birdie Conveyancing’s enquiry levels tripled last week so there’s certainly some confidence back in the market,” he said.
“People are feeling we may be near the top of where [interest] rates are going to go .. that the trend is likely to head down … and they’re ready to head to the market and look to buy a property.”
While local real estate agents and buyer’s agents had been desperate for property listings in July and August, with few properties on the market, Smith said now there were more listings available and more buyers getting loan pre-approvals.
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