Which direction for property prices now that we have a coalition win
The results are in and to the surprise of many, Scott Morrison has led the Coalition to win this year’s Federal election.
And this means our housing markets are likely to pick up by the end of the year.
The stability of the government and the fact that there are no changes to negative gearing or Capital Gains Tax will encourage investors.
The market hates uncertainty, and the Coalition win should return confidence to our subdued property.
We began the year with two big stumbling blocks which have both been overcome.
- The Haines Royal commission into banking
- The Federal election
Now it’s time to get on with business as usual.
The timing of the bottom of this downturn will however depend upon the banks loosening lending restrictions and the timing of any interest rate cuts – the first of which seems likely next month and deliver a boost to our languishing markets.
Sure we’re still in the slump phase of the property cycle with prices around Australia falling since late 2017, but there were green shoots appearing before the election campaign stalled things.
Last year property investors stopped buying because they were having difficulty getting finance under the new stricter lending criteria.
Then home buyers got scared as they kept reading headlines of impending property doom.
And things got worse when that 60 Minutes Program came out forecasting property values would fall by 40%.
That really sent a fright through the market.
In turn sellers went on strike.
Unless they really needed to sell, they put off the sale of their home as they were worried they would not find a buyer or that they’d be offered a price much lower than they would have received a year or two earlier.
But things are slowly improving
- While property prices are still falling, the rate of decline is easing.
- Auction clearance rates are improving, albeit on much lower volumes than a year ago.
- Buyers are back in the market. Particularly first home buyers encouraged by incentive packages, but also established home buyers and investors.
However, there are still headwinds holding things back including our constrained economy, low inflation, minimal wages growth and rising unemployment.
First Home Buyers win
First home buyers (FHBs) have been promised some assistance under a Coalition government.
It has indicated it will assist a FHBs and enable them to buy their home with a deposit of only five per cent without having to take out Lenders’ Mortgage Insurance.
While the details of this scheme aren’t clear yet, FHB’s will still be required to meet the bank’s current strict lending criteria and, in my mind, the scheme creates potential risks around lending to households with a smaller deposit and no savings discipline.
Property Investors win
Many property investors rely on the tax benefits of negative gearing to subsidise their cash flow shortfall in the first years of owning a property investment.
The problem is that many people with only a hazy idea of what it actually is, blame negative gearing for virtually everything from locking first home buyers out of the market, to causing high property price rises, to ugly greedy investors rorting the tax system.
A property is negatively geared when the costs of owning it – interest on the loan, bank charges, maintenance, repairs and depreciation – exceed the income it produces.
Since the costs of producing an income are generally deductible against the taxpayer’s other income, property investors can effectively offset some of the interest expense against their wages.
I would argue that property investors provide an essential service to millions of Australians who chose to, or have to, rent their accommodation and as such these investors should be treated like all other business people.
In our modern society we pay taxes and expect the government to provide us with certain essential services.
These include hospitals, roads, schools, jails, public transport, aged care and public housing.
In Australia the government often shares the burden of providing these services with private enterprises that can often deliver them more efficiently and cheaper.
When the government can’t supply enough public hospital beds, private run hospitals step up to the mark and not only receive tax deductions for their business loans, but also allowances to subsidize them.
So do aged care providers, schools and public transport providers who provide services in tandem with the government.
Our government also provides public housing, but not enough for all those who can’t afford to buy their own property.
While government social and public housing programs are helpful, it is only the private rental market that can deliver rental accommodation at the rate and scale that is required at present.
Property investors save a deposit, buy a property, commit to a loan for 25 or 30 years and provide accommodation for others in our community.
In return we expect to get a reasonable return on our investment risk, just like other business people do.
We know that the rent won’t cover our expenses, accept that certain tax benefits plus the long0-term capital growth will make up for this.
Sometimes it does, and sometimes it doesn’t.
This has made some argue that other, less fortunate taxpayers help these property investors meet their costs.
People like you and me have chosen to run our own little property investment businesses.
If I set up a dog wash business or a restaurant, I’d be able to claim a tax deduction for legitimate business expenses including loans to set up our business or purchasing business equipment.
Why should it be different for property investors who take on a business risk?
The fact that negative gearing tax benefits remain and there is no increase in Capital Gains will encourage investors to return to the market and take on these business risks.
And the fact that investors will still be able to buy properties in their Self Managed Superannuation Funds will help some where this strategy is deemed appropriate by their financial planners.
While some homebuyers have been having difficulty getting finance, others have held off waiting for the uncertainty about the property markets to clear.
As our property markets turn later in the year and more good news appears in the media, homebuyers will regain confidence.
When this occurs, home sellers who have been putting off upgrading or downgrading their homes in fear of not being able to sell at a reasonable price, will return to the markets.
It looks like we’re in for some good times in property ahead.
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