Federal government plans to restrict negative gearing to newly built properties are expected to drive more investors into the new homes market, but experts say there’s a big factor that could catch many out.
When it comes time to sell the home, property professionals warn the buyer pool may be significantly smaller as it will no longer be considered new.
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Budget carve-outs are expected to drive investors towards the new homes market, but experts say the resale market must be considered in the purchase price. Picture: Getty
Senior economist at realestate.com.au, Anne Flaherty, likened the concept to a new car leaving a showroom.
“When you buy a new car, the moment you drive it out of the dealership it goes down in value, and with investor stock, that’s kind of the same boat we’re in,” Ms Flaherty said.
In last week’s budget, the Albanese government announced it would scrap negative gearing for investors purchasing an established property, and change the capital gains tax discount from a blanket 50% to a new inflation indexation model.
New homes are exempt from both changes.
“A home is only new once, so an investor is going to want to buy something that is going to be desirable by an owner occupier down the track,” Ms Flaherty said.
The changes are designed to entice more investors to purchase new, rather than existing stock, to access the tax benefits – a move buyer’s agents and investment professionals say could cause many to overpay.
Buyer’s agent and president of the Real Estate Buyers Agents Association of Australia, Melinda Jennison, said investors were already being targeted by opportunistic ‘spruikers’.
“The property spruikers are already out there advertising the fact that they’re selling brand new properties – with lots of hidden commissions built into them – and that they’re going to be the most tax effective way to invest in property,” Ms Jennison said.
“But unfortunately it’s an inferior asset that’s not going to deliver the returns that most investors would be looking for.
“When you’re purchasing brand new, you’re paying a lot more for the dwelling itself rather than the land component, and it’s the land component that ultimately increases in value over time.”
New homes must add to housing supply to qualify for the tax change exemptions. Picture: Getty
She said investors should consider the resale market when considering a new build or off-the-plan purchase.
“Once you purchase that brand new property, your subsequent market to which you are able to sell diminishes rapidly, because that property becomes an established property.
“The same tax benefits that you hold will no longer be applicable to a subsequent market.”
Buyer’s agent and president of the Property Investment Professionals of Australia, Cate Bakos, said ultimately, this means a lower selling price.
“The intrinsic value of that property only exists while the first buyer owns it. When you want to sell it, you’re selling a secondhand property that will not come with the same benefit for the next buyer, so you can’t expect to get the same price for it,” Ms Bakos said.
“I’d say to anyone who’s going down that path, be mindful of what your value should be. Don’t pay a premium.”
Politically ‘neat’ but reality is more complex
Responding to the budget measures, Nerida Conisbee, the chief economist of Australia’s largest real estate agency, Ray White, said renters will ultimately be hit the hardest.
“The intent is clear: reduce investor competition for existing homes and redirect capital into new housing. But while this may be politically neat, the housing market is more complicated,” Ms Conisbee said.
“Some investor demand will shift into new housing, but this does not automatically translate into more construction, particularly if investors are worried about resale value or if projects still do not stack up.”
Ray White chief economist Nerida Conisbee.
She said investor activity would be pushed toward outer growth corridors, apartment precincts and masterplanned communities, leaving fewer options for renters within established inner- and middle-ring city suburbs.
In the regions, where there are fewer new developments in the pipeline, renters could be particularly exposed to a lack of new investors entering the market.
“Limiting negative gearing to new builds may work better in markets where new housing is being delivered at scale,” she said.
“In regional areas where development is limited, it risks reducing rental availability without creating a realistic replacement source of supply.
“Housing affordability is not just about the total number of dwellings; it is also about whether homes are available in the right locations, at the right price points and in the right dwelling types.”
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One more point of warning for prospective investors considering purchasing a new property lies in the definition of a ‘new home.’
According to the budget papers, new builds are residential properties which genuinely add to supply – that is, a development must increase the number of dwellings. Adding a granny flat to an established property does not qualify.
Investors purchasing into a new apartment development are urged to investigate whether the complex has increased the number of dwellings, or risk getting caught out come tax time.
Read more on our budget coverage: