Transcription
The federal budget just made the biggest changes to the property market since last century. Today, I'm going to go through what those changes are, what the federal government has failed to consider, and the unintended consequences this is going to have for the property market. Let's dive in.
First off, most people think the federal government just killed negative gearing. At least that's what the headlines are leading with. But here's what's actually hidden in the fine print. Yes, the government has restricted negative gearing. So essentially going forwards, if you buy something that needs to be built, like an off the plan apartment or a house and land package, you can still claim negative gearing. No problem, no change to that. But if you want to buy an established residential property, you can no longer offset your investment losses against your income, at least from the 1st of July 2027.
But that's not the full story. You see, you can still accumulate those losses. So, what does that mean? Well, for example, let's say you buy a property that's negatively cash flowed by around $20,000 per year. Now, as rents rise, let's say it takes about 5 years for this property to become neutral or positively cash flowed. And over that 5-year period, you may have accumulated, let's say, $100,000 in cash flow losses just to keep the numbers easy. Then what that means is once your property becomes positively cash flowed, that first $100,000 of net positive income, that's tax-free because you can offset it against the previous year's accumulated cash flow losses. Also, if you decide to sell the property, the first $100,000 of that net gain, well, that's virtually tax-free as well because it's offset against the cash flow losses. And if you already own other investment properties that might be positively cash flowed, well, you can essentially then earn $100,000 in positive cash flow tax-free because you can offset the positive cash flow against the cash flow losses on that new purchase.
So, negative gearing hasn't been killed. It's just changed in its format and it's really going to benefit those people who have the capacity to buy an investment property and sustain the cash flow losses for a period of time.
But here's where the unintended consequences start to kick in. If you're an investor who needed negative gearing benefits to be able to afford to buy an investment property, well, that means that property is probably no longer affordable for you. So, you simply won't buy. Now, of course, if you're like a lot of investors who really didn't need the negative gearing to afford the property and they simply use that one-off tax refund at the end of every financial year to either maybe pay for a holiday or something else, well, investing in property is still affordable for you from a cash flow perspective. But like I said, for some people, which is the government's aim, the removal of negative gearing benefits will make it harder for them to buy. So that means fewer investors entering the market, fewer investors buying established properties.
Now, a lot of people seem to be convinced this is a good thing. But consider this. Regardless of which data source you look at, over 90% of rental accommodation in Australia is provided by mom and dad investors, regular Australians, the vast majority of whom only have one or two investment properties. Now, when you reduce the number of investors entering the market, what happens? You reduce the supply of available rental properties. And it's not as if we have a surplus of investment properties just sitting there, right? We currently have a nationwide rental crisis. Vacancy rates are sitting at extremely low levels in multiple areas around Australia. Not enough properties to rent for the number of people who need them. Social media is full of videos showing how long the queues are for rental open home inspections in places like Sydney, Brisbane, Perth, and it's even worse in multiple regional locations.
So, it's already extremely hard to find a property to rent. Meanwhile, our population keeps growing. The budget forecasts Australia is going to add a net 260,000 people in this financial year, then 225,000 in the next financial year, then approximately 235,000 people per year ongoing after that. So even if we just look at the next 3 years alone, that's roughly 720,000 net new people over the next 3 years just from migration alone, not counting natural population growth, which is essentially more babies being born versus people dying. So we've got fewer rental properties being added to the market, a population that keeps growing, and a rental crisis that's already at breaking point. Simple supply and demand tells you what happens next. Rents, they rise and in some places significantly.
But I bet I know what you're thinking. You're probably thinking, "Hold on, Nero. If we have fewer investors entering the market, won't that make properties easier to buy for first home buyers? I mean, isn't that the premise of the federal government's entire budget here?" Well, consider these two points.
First off, the first step for most people looking to buy a property is they rent a property. They rent while they save for a deposit. Now, if rents rise because there are fewer investors entering the market, which means fewer properties available for rent, their ability to save gets harder because most of their income is going to be eaten up by rent. So, the goal to save to build a deposit that just gets further and further away. The government says this budget is all about helping first home buyers, but the actual mechanism, it's going to make their position worse.
But then some people might say, "Ah, but if fewer investors are buying, that's going to crash the market, right?" Well, here's what those people have got wrong. Number one, the negative gearing changes are grandfathered. So, every investor who owns a property as of 7:30 p.m. on the 12th of May, 2026 keeps their negative gearing forever on all their properties. So, existing investors are not being forced to sell. If anything, they have a very strong reason to hold for longer because if they sell and then they buy a different established property, they lose the negative gearing benefits on their new purchase. So, then why would they sell? They're just not going to. You're going to see more investors holding on to their properties for longer, which means less properties coming onto the market.
Now, the government is trying to fix this by saying, "Oh, you can still negatively gear, just need to go and buy a new build, a brand new property that hasn't been built yet." The theory is they want investor money to flow into construction to increase supply. But most new builds available to investors are either in off-the-plan high-rise apartments, and history tells us those properties almost never perform from a capital growth perspective, or they're going to be a new house and land package out in the middle of nowhere because there's almost no available land left in our major population centers. So if you're a smart investor, you're not going to chase those properties just for a tax benefit when you're not going to get much capital growth. And most tenants don't want to rent something in the middle of nowhere because they want to be closer to all the infrastructure and amenities. In fact, that's often a big reason why people do choose to rent so they can be closer to the things they want to be closer to. And if there are fewer properties to rent in those locations, rents rise. That's the problem with these changes to negative gearing. You'll end up with less investor activity, less rental supply, and higher rents.
But there was a second change that could make this situation even worse. The 50% capital gains tax (CGT) discount has been removed. So from the 1st of July 2027, when you sell an investment property, you don't get the 50% discount anymore. Instead, the government applies an inflation adjustment to your purchase price, then taxes the real gain at a minimum 30% rate. Now, what does this actually mean in practice? What it means is that the longer you hold the property, the more inflation works in your favor and the better your tax position becomes when you eventually sell if you decide to do so. And again, this is grandfathered. Existing investors, they get to keep their 50% CGT discount on any gains they've already accumulated up to the 1st of July 2027.
So, put these two changes together for existing investors. If they sell now, they lose their negative gearing on their next purchase and they lose the CGT discount they've built up. If they hold, they keep both benefits and inflation adjustment works progressively in their favor the longer they wait to sell. Can you see how every signal in this budget is telling existing investors to hold longer, to sell less, to keep their properties off the market? And that's the big problem. The supply of properties for sale is going to fall because the investors who own them, well, they've got less reason to sell.
So then what does that mean for the market? Well, in areas where the majority of people buying were investors, so for example, pockets of Darwin, parts of inner-city Brisbane, certain apartment-heavy areas, you might see slight price falls because some investors, they're going to look to cash out before the 1st of July 2027, but there'll be fewer investors coming in to replace them. But in areas where supply is genuinely tight, so for example, established family suburbs in capital cities where there's very little available land or regional markets with strong owner-occupier demand, those areas, they're going to keep rising because owner-occupiers, they're not affected by any of these tax changes. They're still buying and there's not enough properties to go around. That's why we are not going to see a nationwide property crash.
Treasury's own modeling suggests the changes will slow growth at a national level by around 2% over a couple of years. Now, to be clear, they are not saying that prices will drop 2%. They're saying the rate of growth of prices will slow by 2%. So if we apply that to say the Perth market where prices are currently rising at around 26% per annum, Treasury's modeling says that that would drop to 24% per annum for the next couple of years before these changes lose any impact on capital growth. So if you think prices are going to fall as a result of these changes, even Treasury's own modeling refutes that, and I think they're being quite conservative, but it confirms what I'm saying.
These changes, they're going to make affordability in Australia worse, not better. Rents are going to rise. New first home buyers are going to have a harder time, not an easier time, because there's going to be fewer properties to choose from, and they're going to have to pay more in rent. So, it's going to take them longer to save a deposit. The policy that was sold as an intergenerational fairness policy is going to do the exact opposite of what it promised. Prices will keep rising, but they're not going to rise equally everywhere. It's all going to come down to the supply and demand metrics.
And if you watch until the end of this video, you're clearly someone who wants to understand what these federal government changes actually mean for the property market without just relying on the headlines. And that's the exact type of person I want watching this channel. So, let me ask you, are you someone who can afford to buy a property that's negatively cash flowed right now without any tax benefits? If so, and you want to find the best places to invest so that you can grow your wealth, as well as where rents are likely to grow quickly as well, then that's exactly what we help people do every single day. So, if you'd like to find out more, you can book a totally free, no obligation call with a member of my team using the link in the description below. And look, even if you don't, make sure you hit that subscribe button so you don't miss what's coming.