Negative gearing changes: Why buying established homes may outperform new builds despite tax incentives
Property investors rushing to negatively gear new build homes in light of the looming budget changes have been warned they could be making a huge mistake, with modelling suggesting buyers of older, established homes will be far better off.
Research by Get Rare Properties found that, when comparing two $700,000 properties held for 20 years, the owner of the established build will be $592,000 ahead, even after all the tax advantages given to the new build.
Founder Rasti Vaibhav, who previously spent 15 years managing $2 billion of institutional portfolios at Westpac and AMP Capital, said there’s no situation here where a new build ends up the better option.
As part of a sweeping range of new tax measures revealed in this year’s Federal Budget, investors will no longer be able to negatively gear properties bought after July 1 next year, unless they are new builds. Existing properties that are already owned and negatively geared will be unaffected.
Vaibhav crunched the figures considering the tax benefit of a new build of about $231,000 over 20 years, from both negative gearing and depreciation. Against that, however, he used data from long-run analysis from the Property Investment Professionals of Australia that found capital growth from new builds averaged 3 to 5 per cent, against that of established properties of 5 to 8 per cent, leaving a growth shortfall of around $1.17 million.
Then there was the capital gains tax (CGT) with the older property paying $445,000 more. The net outcome, however, was still that the established wins by $592,000, while, at CoreLogic’s actual decade growth rates – 3.4 versus 5.8 per cent – it comes out top by $430,000.
“The reality is, if you want to avoid tax, then lose money,” Vaibhav says. “But a tax strategy isn’t as good as one that concentrates on building wealth. The government wanted to keep negative gearing for new property to encourage demand and then the supply.”
“The consumer should really be concentrating more on making their money work harder long-term than on saving tax short-term. They should instead be buying established property in good locations, close to job hubs and shopping centres where people want to live rather than new builds on the city fringes, and as their equity grows quicker, they can reinvest that to create exponential compounding benefits.”
That’s a view that’s supported by a number of buyers’ agents. Kane Dury, principal of Discover Buyers Agency, for instance, says the Government has created a powerful tax incentive that should still not override sound investment judgement.
“It puts us at risk of the tail wagging the dog,” Dury said. “What makes a good investment is where demand is greater than supply and so much of the value of an investment lies in the scarcity of land, which appreciates while the building on it depreciates.”
[Tax breaks are] not so attractive if the property underperforms for a long period.
Kane Dury, principal of Discover Buyers Agency
“So you want more land and less house, or an older house, rather than a new build where you’re paying more for the dwelling on less land. And tax benefits and depreciation – for which you can substitute the word ‘loss’ – aren’t going to fix that.”
One problem with some new builds too, Dury says, is that the area in which they’re constructed is often, as a result, saturated with supply, making it difficult to sell the property when it comes time to get out. As a result, established properties in popular locations are usually a much better bet.
“Tax is a big pain point, so if someone says we’re going to minimise it for you, that’s very attractive,” Dury said. “But it’s not so attractive if the property underperforms for a long period.”
Of course, the investment in an established property needs to be sound in order for it to work, Vaibhav points out. “You always want less risk and better returns and not every market is good,” he said.
“There might be another reason you want to save on tax, too. But for most people, the aim is to build wealth for their retirement years, to support their kids with education and live off passive income. So it’s critical they make sound judgements now.”
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Sue Williams is a Sydney-based freelance travel writer, author and journalist who’s filed for newspapers, magazines, radio and TV stations around the world.Connect via email.
