Property investors are encouraged to adopt a capital growth strategy and ‘time the market’, as property prices are expected to tumble if the ALP’s proposed changes to negative gearing and capital gains tax are implemented after the next federal election.
RiskWise Property Research CEO Doron Peleg said the ALP had 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.
According to RiskWise research, a blanket introduction of the reforms across Australia would have unintended consequences.
“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.
“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.”
Mr Pelege said it was a very unique situation, which meant investors could enter the market at just the right time to minimise their risk and get better capital growth.
“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 the changes to negative gearing and capital gains tax would increase the out-of-pocket expenses for investors and thus were 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,” 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.”
He warns that if investors buy prior to the changes their asset will depreciate as a result of the creation of primary and secondary markets.
“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, (investors) need to time the market.
“Overall, until the market stabilises, following the implementation of the taxation changes, investor activity is highly likely to remain low.”