![Melbourne a surprise winner from budget changes to investors - for herald sun real estate](data:image/svg+xml,%3Csvg xmlns="http://www.w3.org/2000/svg" viewBox="0 0 1280 720"%3E%3C/svg%3E)
The Albanese government’s latest budget could deliver a surprise win for Melbourne’s wealthiest investors.
Victoria’s real estate market could wind up a surprise winner after the biggest budget shake up to Australia’s property market this century.
After years struggling with volatile interest rates, contentious state government policies, a now mostly eroded housing supply surplus and a cost of living crisis, experts believe the city is currently offering the best conditions to buy an investment since the 1990s.
But after the federal budget announced sweeping changes to negative gearing and capital gains tax (CGT) last week, it might only be the rich who can afford to make the most of the situation.
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Meanwhile, rentvestors hoping to invest before buying their first home, and lower-income investors including nurses and teachers, will be forced to pursue riskier property investments — or putting their money into alternatives like the share market, where they will be taxed at least 30 per cent on any gains.
The big changes announced include limiting negative gearing to new builds after July 1, 2027. And unless you buy a new home or purchased before the budget announcements, you will no longer receive a 50 per cent flat discount on CGT.
Instead you will need to rely on a more complicated tax regime that, for most residential investors, will leave you handing over more money to the government than you would have.
Empower Wealth founder Ben Kingsley said for 95 per cent of investors who owned a home before the budget was announced should keep their property — especially in Melbourne and in nearby major cities like Geelong.
Jim Chalmers’ May budget has raised concerns about the future of property investing in Australia, but there could still be opportunity. (Photo by Hilary Wardhaugh/Getty Images)
Those with multiple investment properties, which have offset accounts attached to them, could in theory move funds around so they could access negative gearing in its current format for years — though would be ultimately better off swapping to earning an income from their tenants instead of taking a loss.
However, that won’t be available to those using a redraw facility instead of off-set accounts.
The other 5 per cent, a mix of people who were looking to make risky short-term property plays and those who had bought into regional areas alongside waves of other investors, are now facing the risk of losing money — especially if others panic and try to sell quickly.
“They could watch their paper profit drop considerably, and they are the ones that probably will need to sell,” Mr Kingsley said.
For those still thinking about investing, The Property Investor Council of Australia chair said the new rules did not appear to be the death of the property market — but you would need to be earning more than $200,000 a year to have enough in your monthly budget to absorb investment loan costs without negative gearing.
Empower Wealth’s Ben Kingsley is advising investors Melbourne homes could be a very good buy in the aftermath of the budget.
“If you are in the fortunate position where you do have a really huge monthly surplus in your income, these opportunities come along once every 10 or 15 years where the buying opportunity is exceptional, especially for existing properties — though not for new, off-the-plan or house and land packages,” he said.
“Melbourne is fundamentally undervalued compared to other capitals … our property values should be 20 per cent higher than they are. We will regain out status as the second most expensive city in the country, it’s just how long it takes.
“But Melbourne is the best buy I have seen in 25 years.”
However, he warned that for lower-income households who needed negative gearing upfront to afford the cost of a loan, be they mum and dad investors or those hoping to build wealth through property as a way to get into their first home, “that strategy is dead”.
“Young Australians will have to invest in shares, et cetera, and the government will take a minimum of 30 per cent of their gains,” he said.
“And the nurse and the teacher investor, they won’t have that luxury now — they will have to chase yield.
“They will need to look for a property that will turn positively geared after seven or eight years.”
That will mean looking to more regional markets, but he stressed they should stick to cities like Geelong and Ballarat, where the economic benefits of Melbourne could help carry local wages.
Homes like 7 Chester Court, Fawkner, have benefited from remarkable price growth compared to the rest of the city. It’s gone from $500,000 to $1.246m in 15 years.
It might be slightly safer to buy a new townhouse, which could still be negatively geared and access the 50 per cent capital gains tax discount, in an established suburb of the capital city, but Mr Kingsley warned buyers needed to ensure 60 per cent of the value was in the land — not the building, and that the developer wasn’t pricing in the “privilege of negative gearing”.
Mr Kingsley added that for those who had a lot of equity in their own home, but not a lot of cash available, they would now be better off finding alternative investments to property.
While he noted it was likely offshore buying opportunities would be spruiked to Australian investors in the near future as a way to beat the tax changes, many would be off the plan or new builds and face the same issues as those in Australia do — but come with added complexity from exchange rates.
He added that he was, however, taking a closer look at New Zealand, where negative gearing had recently been reintroduced after being altered under the ex-Prime Minister’s Jacinda Ardern government a few years ago.
InvestorKit chief executive Arjun Paliwal said Melbourne was clearly undervalued compared to many other capitals, so long as buyers looked for the right areas to buy a home.
While Mr Paliwal said the city and some other Victorian regional centres like Geelong and Ballarat weren’t the only areas that had a future upside for investors, but they were demonstrating a rise in rental prices — which should be positive sign for investors.
In the shorter-term, Mr Paliwal said money was likely to flow into more affordable suburbs as investors looked to buy what they could now afford without negative gearing to supplement their income.
Investorkit boss Arjun Paliwal believes a trend of rising investor demand could continue to reach Victoria. Picture: John Gass.
“The result will be the investor who could buy $1m will now buy $550,000 to $750,000,” he said.
Rising interest rates had already created a similar funnelling effect that had boosted home values in Frankston and Pakenham, Hoppers Crossing and Craigieburn, and even Fawkner in recent months.
“It won’t completely concentrate activity here, but every year since 2024 there’s been more activity from interstate investors in Melbourne and regional Victorian markets,” Mr Paliwal said.
“And I don’t expect that trend will massively change.”
One aspect of the changes he believes investors might be underestimating is that they will potentially be paying almost no capital gains tax if they are making losses but not claiming them as negative gearing early on, as they will be able to deduct those losses when they sell.
In a 10-year-hold period, Mr Paliwal said with inflation being deducted from the tax burden, they had modelling showing there could be near zero capital gains tax paid after the deductions were made.
“So it’s not a loss, you just do need to make the payments in the short-term,” he said.
He added that today was virtually the “worst case” scenario for buying a home with interest rates rising, sentiment poor, controversial policy changes inbound and a cost-of-living crisis.
In the span of six years 37 Branton Rd, Hoppers Crossing, has gone from $360,000 to $675,000.
“But in three or four years, you will look back and you will be glad you bought today,” he said.
Not everyone is advising buyers to rush in.
Rising Tide financial planner Matt Hale said he had watched most people considering buying an investment property in the immediate term put that decision on the back burner, and he would be advising people to hold off investing for potentially for a year or more.
“The rules are going to change, though we don’t know exactly where that will land, and in the interim not knowing is pretty scary for people.”
As a minimum he advised understanding your goals before investing.
“If it’s an investment property that’s only there to grow capital, then people need to look at what the alternatives are,” Mr Hale said.
Other options might be Australian or international shares, or even investing in your own business or super fund.
While self-managed super funds might still be able to invest with access to negative gearing, Mr Hale said that wasn’t an option that would suit most people.
However, for those who wanted to invest in a property that would become their sea or treechange in the future, and who could afford the interest payments beyond what they could get in rent for the interim, that would be an investment worth pursuing.
But there was only one category of person that would likely have to give up on investment property entirely in the long term.
Inner-Melbourne houses could be among the best buys for investors who can afford to hold them without negative gearing.
“Future rentvestors are the people that really have to go back to the drawing board … negative gearing was a key part of getting there,” he said.
Knight Frank economist Ben Burston said commercial property might be one of the few areas investors could still reliably pursue.
Mr Burston said that due to the higher reliance on rental returns than capital growth, it was a sector that was more likely to shrug off capital gains tax changes.
“The tipping point is 4.5 per cent annual growth,” Mr Burston said.
For properties that gained less than this, once inflation was deducted the portion of growth subject to capital gains could be quite minimal — and potentially would leave investors in a better situation than under the old 50 per cent flat deduction, especially once the gains from higher rental returns were factored in.
Over the past 30 years, the annualised average for commercial property capital growth across the country has been about 2.2 per cent.
On the flip side, Melbourne’s rental returns for high quality and well-located office space on St Kilda Rd had been around 8 per cent of the purchase price a year in rent — more than double what residential property achieves in the city.
5 Partridge Cres, Frankston, has more than doubled in value since 2011.
At 8 per cent, without increasing rent or facing any costs along the way such as mortgage fees and not including obligations like land tax, the tenant would effective pay their landlord the full value of the property in 12.5 years.
Mr Burston said that historically, mum and dad level investors were more likely to target petrol stations, medical centres and child care spaces.
The trade off is that such sites are often worth $1m and up and unlikely to get significant loans against them, meaning investors would need six-figure deposits to buy in.
Mr Burston added that after a rough few years, office and retail properties in Melbourne and Sydney were starting to look like they could be good value.
The Budget’s Big Changes For Property Investors
Negative Gearing
– From July 1, 2027, negative gearing is limited to income you are drawing from rental properties, and you can’t deduct against your full income;
– Losses that are not claimed can be rolled forward into future tax years, up to and including when you sell the home, then deducted against future rental income or against the capital gains tax at the time of sale;
– Homes bought after 7.30pm, May 12, can only claim negative gearing until July 1, 2027;
– Homes bought before 7.30pm, May 12, will have negative gearing grandfathered;
– Exemptions: commercial property, new builds, off-the-plan purchases, homes bought as part of a Self Managed Super Fund;
26 Huntingfield St, Craigieburn, recently sold for $713,000 and last changed hands for $485,000 in 2018.
Capital Gains Tax
– From July 1, 2027, the 50 per cent capital gains tax discount for investment properties owned for more than a year will be replaced by indexation and a minimum 30 per cent tax rate;
– Inflation will be deducted from the capital gain, then any real gains left over will be taxed at your marginal tax rate — though not less than 30 per cent;
– The major change is that under the older system 50 per cent of the capital gain was not taxed;
– It is believed homes bought after 7.30pm, May 12, and sold more than a year after that date, but before July 1 will be able to claim the old 50 per cent discount — however this may yet be clarified differently by the government;
– 100 per cent of any gains made for a home owned less than a year are subject to taxation;
– Homes bought before 7.30pm, May 12, will have capital gain fixed on July 1, 2027, with the home valued at that time and the new tax setting applied for any future gains thereafter;
– Exemptions: Your primary residence (100 per cent tax discount applies), buyers will be able to choose the old system or the new one when they purchase new builds and off-the-plan properties, superannuation funds are exempt from the changes;
– Experts believe properties that achieve annual growth below 4.5 per cent a year will likely be better off under the new system, which is fairly common for commercial investments;
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