This could inspire new investors to buy into sprawling apartment developments or house-and-land packages on the outskirts of major cities – but these types of properties historically “underperform” as investments.
Property investment guru and Your Empire chief executive Chris Gray said the federal government’s new build exemption may “screw investors” who buy solely based on their freedom to apply negative gearing.
“It’s basic economics. If something’s in short supply and lots of people want it, the price goes up. Where you’ve got lots of supply, it won’t.”
First-time Australian investors who weren’t lucky enough to buy before 7.30pm on budget night now have two choices: buy a newly-built home for the negative gearing benefit, or lose the tax break and buy an existing property.
Gray, who has 30 years of experience buying and selling property, said seasoned investors will know to give new builds a wide berth.
He would still choose the option of buying a second-hand home in a high demand area, despite the chance it won’t be positively geared for at least a decade.
Some inexperienced buyers, however, could still be fooled by something called “manufactured capital growth”.
And it could take years before the reality of their bad investment sinks in.
“Developers might sell 20 at a time and slowly release them. They sell the first lot at say $500,000 and the next one at $525,000 and then $550,000,” Gray added.
“Everyone thinks that it’s rising, but it’s not.
“It’s not until you get someone selling it to another person in maybe five years’ time that you actually realise, potentially, the property hasn’t grown in value at all.”
Property experts previously criticised this decision as an “enormous injustice” to younger buyers who are still saving for a property.
The same younger investors will also be competing with foreign buyers in the new build market.
The federal government extended its ban on foreign purchases of established homes until 2029 in this year’s budget.
This could mean an influx of investors buying into this market artificially inflate prices, even pushing buyers into negative equity.
“If you get a whole bunch of people going out west to buy these house and land packages, it almost creates a false demand for it,” he added.
“Where property was, say, a million dollars, now because you’re getting the negative gearing, it might jump up to be a $1.025 million or $1.05 million.
“In the end, it’s actually not a realistic benefit.”
This advice is general and does not take into account your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances and seek advice from a broker or adviser before acting.
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