What are the key threats to the Australian economy and its property market right now?
Published 5:27 am 16 Nov 2018
What are the key threats to the Australian economy, and its property market, right now? DG Institute Founder and CEO, Dominique Grubisa shares some insights about what you need to be forewarned about and what may happen if Australia has a Labor government in the next election.
When I travel around the country, and regularly speak in different parts of Australia, the most common question, that comes up, is, “What is happening that may affect “the property market right now?” It’s timely that I share that with you, because, right now, there’s a few things in the sidelines that, if they do come into play, may cause people to panic. And that is because of our current political environment.
We’re in a time of flux where we’re not sure. We’ve got an upcoming federal election, and we’re not sure what party is going to get in. Now I don’t want to weigh in on politics, who’s right, who’s wrong, and I’m not sure that it makes any difference anyway, but one thing that you need to be aware of, to put all this in perspective, is that the Labor government policy around negative gearing is going to come up again.
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So what negative gearing is, it says that if you have an investment property, and it makes a loss, you can write that loss off, as a property investor against your income tax. And Labor’s policy around this has said, “We want to get rid of negative gearing.”
Negative gearing was brought about to encourage people to invest in property. Because it was felt, well, “There’s jobs in building and construction, it’s good for the economy, it eases pent-up demand, it provides supply of property, which is a good thing. So we will give people incentives to invest in property and drive the economy that way.”
And the Labor government’s policy has said, “No, we don’t need negative gearing anymore. The market is okay, and it doesn’t add any benefit.” And, this debate comes up, around every election, from time to time, and people tend to panic, in the property market. Don’t panic.
What I want to tell you is that whatever happens, with negative gearing, the market has already sorted itself out. What do I mean by that? Well, when a property market has really, really low interest rates, like we’ve seen recently, and rising prices, yes, negative gearing is really, really attractive. Because you can borrow money, cheaply, you can buy into a rising market, and people are speculating for capital growth. They’re not buying for yield, they’re saying, “You know what, if I spend, if I buy a million dollar house, this year, in a couple of years it’ll be worth two million dollars.” So they’re riding the market, based on rising prices, or capital growth.
The way the market is right now, though, is we’ve still got the low interest rates, but we’ve got really, really high prices, and we’ve got investors leaving the market, because investment loans are really hard to get. Banks aren’t lending as much to investors. Because we’ve got a banking royal commission, and because we’ve also got APRA, the Australia Prudential Regulation Authority, making rules to stop banks lending to investors, it’s not as easy for investors to put their money into property. They just don’t qualify for the finance, or the credit, as easily.
We’ve had lower rates, in the past, and now banks have said, “Well, if APRA says we can’t lend that much to investors, let’s increase interest rates to investors, to discourage investors from wanting to borrow from us.” It’s a premium above the owner-occupier rate that investors are having to pay. So with those rates going up, and with property prices so high, and now coming down, there’s a natural hand brake on property markets, anyway.
Why negative gearing isn’t an attractive proposition to investors anymore:
1) Negative gearing is great, in a rising market, and it has an impact, but right now, it won’t have an impact at all, changing those laws.
There’ll be a lot of talk about it, in the media, but, at the end of the day, that boom time is already over. It’s the beginning of the end of that part of the cycle anyway. So negative gearing will not impact it or change anything dramatically.
2) The Labor government policy is in relation to capital gains tax.
What they’ve said is they’re going to stop capital gains tax benefits. So if you own a property for 12 months, or more, then the capital gains that you pay, when you sell that property, as an investment property, is halved. So after 12 months, what you pay in tax, on your profit is halved. And what the government have said is, “We’re going to get rid of that.” The thing you need to remember there is that if it’s your own home, you don’t pay capital gains, and, secondly, if you’re an active property trader, like property is your business, and you’re buying and selling, and doing a few transactions a year, then you’re probably paying income tax on that profit, and capital gains tax isn’t relevant to you anyway. Just be aware of those changes. They may not even happen – who knows how long’s a piece of string, when it comes to politics, and governments, and policies?
Whatever the policy is, the impact on the property market won’t be that great, because the natural change in the cycle has already happened anyway. And what you need to do is be forewarned, that’s forearmed, understand the market, and know the right strategy for the market, and the laws, as they are, at that time.
Lawyer, Asset Protection Specialist and Property Educator
Dominique Grubisa is a practicing legal practitioner with over 22 years of legal and commercial experience. She is a property investor and developer, an entrepreneur with businesses in Australia and Southeast Asia, a speaker, educator, writer and published author. You may contact Dominique at email@example.com
This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.