Please note - Due to the holiday season, builders and developers may be slower than usual in responding to any queries Close

What happens to property investment under a Labor government?

With the recent turmoil witnessed within the federal Liberal party that led to the very public change in leadership, and with the current 8% gap in the polls for the two party preferred vote in favour of the ALP, we should all be starting to think about a world governed by Labor in Australia.

While the timing of the next election is largely up to our newest Prime Minister, Mr Scott Morrison, most commentators are now tipping it to be May 2019, at the latest. By no means a slam dunk that the ALP will win the next election with the Liberal party still enjoying preferred PM status in the polls under its new leadership regime, it remains a very high probability we will see a change of government.

Policy Changes

There are two key policies that will impact property investment that Bill Shorten has been consistently firm on in order to minimise the federal budget deficit. The first is negative gearing, and the second is the Capital Gains Tax (CGT) discount. These two policies are currently costing the nation around $10 billion a year to maintain according to the ALP (and Treasury), which as Bill Shorten has highlighted on many occasions is simply not sustainable on a long run basis. Most would agree something needs to change. So what do the ALP propose to change?

With respect to negative gearing, the ALP propose to abolish the claiming of investment loan costs on property against rental and other PAYG income. Essentially, the interest you may currently be claiming on a property investment loan will no longer be deductible, for properties purchased after the effective date (which is yet to be determined, but likely to be around 1 July 2019).

The exception to this rule under the ALP proposal is when the investment is made into newly constructed housing, which means that if you buy off-the-plan (such as a house and land package) you will still be able to claim interest on your investment loan. Don’t stress if you already have an existing investment property, these rules won’t be retrospectively applied. However, if you are thinking about investing in property moving forward, investing in established property will get a whole lot less tax effective if the ALP policy is enacted.

The CGT discount change is the other major policy change that will impact all asset classes, including property. Currently, if you hold an asset for more than 12 months, if you make a gain on sale you can reduce the taxable gain by 50%. The ALP has proposed to reduce this 50% discount to 25%. So if you make a capital gain of say $100,000 on an asset you have owned for more than a year, rather than paying tax on $50,000 of the gain, you would now pay tax on $75,000 of the gain. Again, investments made before the effective policy date will be grandfathered, meaning you will still be entitled to the 50% discount when sold, but it’s certainly a consideration moving forward for all investors should this policy be enacted.

What’s the Impact on Property Investment?

The proposed negative gearing change is the most significant one, and it’s really the yield on the property that takes the biggest hit. Rental yields on established properties on a gross basis may indeed be 2%, up to perhaps 3% on the odd occasion. However, on a net basis they are often break even or up to about 1% once you factor in the after tax benefit of the currently allowed interest deductions.

Moving forward however, the rental yield on established properties purchased after the effective change date will be negative, meaning you will be out of pocket every month without the tax benefit (which can be realised monthly with a PAYG variation). Given the carve out for newly constructed housing being proposed by the ALP, this will further strengthen the benefits of investing in off-the-plan properties, such as house and land packages, which can generate net yields of 4-5%.

While the ALP is hailing improved affordability for first home buyers from this change, the reality is it will only soften demand for established properties that are already under valuation pressure in most markets across Australia. First home buyers may see some benefit, but the reality for most is median house prices are already so far out of reach (especially in Sydney and Melbourne) that some 5-10% cooling of prices on established homes probably won’t move the dial for most.

accounts-sheet

If you are a first home buyer and do want to get into the property market, rent-vesting into a newly constructed property would be a no-brainer under the ALP policies (and arguably already is), where you will still be entitled to claiming interest deductions – and more importantly depreciation at favourable rates on fixtures and fittings (relative to established properties).

The impact on capital values from the proposed changes is a fascinating one. The benefits off-the-plan properties will enjoy in terms of access to negative gearing won’t be able to be passed onto subsequent buyers of the property, so the benefit there on face value is just improved net rental yield. However, should interest rates remain relatively low and the supply picture doesn’t change significantly, new properties will see greater investment demand for the reasons above, and this may continue to fuel capital growth.

Arguably capital values could soften in the short term due to sentiment alone, but property investment has always been about the long-term game, and with supply and demand fundamentals solid in most markets across Australia on a long-term basis it’s unlikely to hit capital growth for those that stay the course. As for the CGT discount changes, well we are still better off than we were pre September 1999 when the discount was first introduced.

If you’re an investor or first home buyer and looking to get into the property market but aren’t sure where to start, speak to a consultant at iBuildNew on 1800 184 264, or book a call.

Alternatively, you may wish to attend one of our property investment seminars, find out more details at www.ibuildnew.com.au/investment-seminars.

Daniel Peterson

Daniel is CEO of iBuildNew, after building 3 homes himself including dual villas in Bali he has plenty of personal experiences that makes him a strong advocate for the new home building industry.

About

iBuildNew is the market leading aggregator dedicated to residential home construction and land development. As an independent platform, iBuildNew helps Australians identify and compare new home designs, house and land packages and land estates. It’s the smart way home buyers, who are considering a new build, can find the ideal options to match their individual needs. Home building is a big decision, we make sure you get it right.

You may also like

Dec 13, 2018

What is rentvesting and is it a viable option for you?

The Australian property market is becoming increasingly accessible to first home buyers...
Read More
May 14, 2018

Make Sure You Talk To These 3 Property Investment Ex...

Starting your investment journey can be an incredibly exciting and stressful process, b...
Read More

Securing Your Property Investment With a Building Co...

If you are building (including repairs, renovations & extensions) regardless of wha...
Read More
Mar 27, 2018

Understanding Property Management Fees and Services

Property management fees can be difficult to comprehend at first. There are so many dif...
Read More

10 Questions to Ask When Buying Off the Plan

As the name suggests, buying off the plan means to purchase a property that hasn’t yet ...
Read More
Dec 12, 2018

WA announce $421 million expansion programme for Key...

Premier Mark McGowan has announced a predicted budget surplus in the forthcoming mid-ye...
Read More
Jul 16, 2019

8 Essential Skills of a Strong Property Management T...

Sourcing a good property manager can be a daunting task for even the most experienced l...
Read More
Jul 12, 2019

It Pays To Keep An Open Mind: Investing In Regional ...

It is so common for us to hear about capital growth rates and rental yields for propert...
Read More
May 15, 2019

Important Questions to Ask When Seeking a Property M...

Many savvy investors spend a large amount of time and effort in researching the market ...
Read More
Aug 18, 2017

5 Tips for Investing in Property

Whether you’re looking to get a foot on the property ladder or you’re looking to expand...
Read More
Jul 04, 2019

Capital Gains vs. Rental Yield: Which is Better? 

It’s the age-old question when it comes to property investing: should I opt for capital...
Read More
Oct 02, 2019

Think Like An Investor And Achieve Your Investment G...

When adapting the mindset of a property investor, it is important to be well-informed w...
Read More
Jul 24, 2019

Guide To Building Up Your Investment Property Portfolio

It’s vital to have a solid foundation and strategic plan when it comes to securely inve...
Read More
Jun 12, 2018

3 Big Things That Will Make Great Real Estate Invest...

Location Want to ensure you've made a great real estate investment opportunity? Repeat ...
Read More

Depreciation dilemma: old or new?

When thinking of investing in property, investors tend to focus more on the location, t...
Read More

House and Land Package, A Dynamic Duo and a Great In...

When considering an investment property, there are a number of key features to take not...
Read More
Oct 05, 2017

Investing in Property? Prepare Your Team Now

If you’ve decided to invest in property, then you have made the first big move towards ...
Read More
Mar 15, 2017

Tips To Make Property Investment Easy

Originally posted here Building a new home and property investment can feel like a scar...
Read More
Feb 05, 2019

Property Management for Beginners

So you’ve decided to manage your property to rent out for the first time, and opted to ...
Read More

5 Interesting Ways to Customise When Buying Off-The-...

One of the biggest differences between a custom home and buying off-the-plan home is th...
Read More
Apr 03, 2017

Why Sydney Investors Are Heading To Melbourne For Pr...

As house and land prices continue to increase in Sydney, more and more property investo...
Read More

Checklist For Your Investment Property Plan

Property investment is not a simple task, and getting financially ready for an investme...
Read More
Jan 21, 2020

What Every First Time Property Investor Needs To Know

Finding the perfect property can be daunting for a first-time property investor. A good...
Read More
Jan 15, 2020

What Is Rentvesting And Is It Right For Me?

Renting in a bustling inner-suburb may give you the lifestyle that you are after and ha...
Read More

Get more from

Browse House and Land Packages