Property investors are entering ‘unchartered territory’ as they can finally ‘time the market’ to their own benefit.
RiskWise Property Research CEO Doron Peleg described an ‘extremely unusual’ set of circumstances which meant investors could enter the market at just the right time to minimise their risk and get better capital growth.
“What property investors who want to minimise the risk need to do is, firstly, wait for the results of the federal election, secondly, wait for a formal announcement on the implementation of changes to negative gearing and capital gains tax given the odds are in favour of Labor winning and, thirdly, wait until these changes are fully implemented, which will probably be in 2020,” Mr Peleg said.
“Then it is just a matter of waiting out the continuous price reductions that will occur due to their implementation. Basically, it’s about waiting for the dust to settle and for the price reductions to stop or decelerate significantly, and only then to start looking around to invest.
“This is a very unique situation because effectively we are getting very clear notification well in advance regarding those changes to negative gearing and capital gains tax that will increase the out-of-pocket expenses for investors and, therefore, are equivalent to a significant interest rate increase. Our Risks & Opportunities Report in June this year assessed that the changes would equate to a sudden 1.15 per cent interest rate increase for investors in the Sydney unit market.”
The ALP has proposed limiting negative gearing to new housing and reducing the discount on capital gains tax from the current 50 per cent to 25 per cent, however RiskWise research shows a blanket introduction of the reforms across Australia would have unintended consequences.
“It is absolutely proven that a capital growth strategy is significantly superior than a cash flow one and investors simply need to wait to get the best prices they can after the implementation of the changes,” he said.
“If investors buy prior to the changes their asset will depreciate as a result of the creation of primary and secondary markets. For investors who look for capital growth, an investment strategy without any reliance on the current taxation benefits is preferred.
“Especially as, if there is a need to refinance or an unexpected need to sell, this is highly likely to result in a loss. To minimise the risk, they need to time the market.”
Mr Peleg said the situation was “extremely unusual” because since the previous changes to negative gearing in the 1980s there hadn’t been any similar event which, in a single shot, made major increase to out-of-pocket expenses.
He said other increases to out-of-pocket expenses were largely based around gradual interest rate increases of 0.25 per cent by the RBA or out-of-cycle increases to discounted interest rates, which were gradual and relatively low.
“You certainly don’t see an announcement well in advance with a high level of certainty that the rates would go up by a full 1 per cent, on a specific date, within a year,” he said.
“It is also very unusual to make such changes to out-of-pocket expenses in the current market environment where there is combination of credit restrictions, the Banking Royal Commission results, limitations on borrowing against self-managed super funds (SMSF), restrictions on lending by foreign investors, a large supply of units and overall a very weak property market in a red zone territory for auction results … it’s simply not happened before.
“In the good old days, the perception, obviously not the reality, was property prices could only go up.
“But the majority of buyers have only one property which means most of the audience of “investors” are people who do not have an investment property. So, for them to take the plunge and buy one is a major decision because, generally, in order to provide a deposit they need to refinance their primary place of residence or take money from an offset account, savings or both.
“For them to jump into this ice cold pool is not a decision that is likely taken. So to be able to reduce the risk and to time the market, which they can do now, is a very positive move for them. Therefore, overall, until the market stabilises, following the implementation of the taxation changes, investor activity is highly likely to remain low.”
Mr Peleg added currently there remained a small number of areas that were still attractive to investors across the country, particularly in south-east Queensland and regional Victoria, however, with the continued weakness in the property market their numbers were shrinking.
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