By Victor Kumar
With less than two weeks until the Federal Election, it is clear that Labor’s negative gearing policy will either make or break its chances of winning office.
Industry experts have always considered the policy to be based on incorrect modelling, which may cause significant damage to our economy at a time when it seems to be just treading water.
There has also been recent industry research showing that the policy won’t raise the expected billions of dollars in revenue nor will it impact only a “small proportion” of investors.
As well as the financial consequences, however, restricting negative gearing to new property will likely see the market flooded with spruikers.
Whenever you financially motivate people to buy a specific product, there will always be dodgy operators not far behind, keen to make money from the unwary and then disappear just as quickly.
It’s happened before and it will happen again.
Savvy investors don’t buy new
We never buy new property for our clients because we know that established properties achieve the greatest capital growth over the medium-to-long-term… unless, of course, we can get the brand new at a substantial discount, and there are direct comparables.
The thing is, like any industry, there is a small proportion of operators who aren’t as discerning and are more concerned with the commissions on offer from developers than anything else.
Developers are already trying to offload stock because of the constrained lending environment and are offering a pretty penny to anyone who can help them achieve their goal.
In fact, just yesterday I was approached by a marketing agent offering a six per cent commission, which of course I rebuked immediately.
I explained that we don’t ever buy new property for our clients, regardless of the commissions on the table.
Do you know what he said in reply?
Well, he said, I’ll leave the door open for when Labor wins and changes the negative gearing policy because you might change your tune.
Clearly, that won’t be happening because our clients invest for capital growth and not negative gearing, I told him.
The point I’m trying to make is that those types of financial incentives will only sky-rocket if novice investors are financially bribed by the government to only buy new property.
How to spot a spruiker
Unfortunately, plenty of people will be caught out by spruikers promising property returns that have no bearing to reality, which is why it’s vital to understand how to spot one from a mile away.
You see, the key to identifying a spruiker is how they are paid.
If they are paid a fee by the developer, then they are working for them, and not the buyer, especially if they do not disclose their commissions up front.
Their job is solely to offload stock to buyers, regardless of the quality of the product or its investment fundamentals.
These marketing agents also often work with others in the property sector, such as accountants, who get a cut of the commission as well if one of their clients buys a property for “taxation reasons”.
As you can see, it’s a never-ending trail of money that the unwitting buyer ultimately pays heavily for.
If Labor wins the election, spruikers will be most active in the medium-sized development space of about 15 to 20 units as well as new house and land packages on the outskirts of our cities.
Novice investors will have almost been scared into buying new because of the negative gearing policy restrictions.
Plus, they will probably have been “enticed” by the offer of a new TV or a holiday, so they will duly purchase a property that could soon be their financial undoing.
If we project five years in the future, they will be left with a property that is worth less than what they paid for it.
Why is that?
Well, most of the depreciation deductions would have disappeared, plus the majority of the “new home smell” has gone away, and they’re left with a second-hand property, which won’t command a premium.
You see, statistically, most people sell within three to five years of buying a property, so what they will find is their buyer pool has disintegrated because it is no longer a “new” property which is able to be negatively geared.
Plus, its value will have fallen massively because it was bought in an area that is probably over-supplied and they paid too much for it to start off with because of the hidden commissions involved in selling it.
A tale of property price woe
It really will be a triple whammy of price woe if you ask me.
The first one will be the poor market conditions for that dwelling type because of over-supply issues.
The second will be the over-inflated price they paid for the property because of the various financial kick-backs that were paid to secure the sale.
Finally, because negative gearing will only be available for new properties, there will be a significant reduction in the number of people willing to buy it, which will reduce its price even further.
In fact, I wouldn’t be surprised if a new property bought for about $600,000 or $700,000 in an inferior location or area at risk of oversupply today will only be worth about $500,000 in five years’ time because of these factors.
That is potentially a $100,000 or $200,000 financial hit that most people would struggle to ever recover from.
At the end of the day, our national economy is underpinned by the property sector, and at the moment neither is doing overly well.
In fact, inflation hit zero recently, which is a concern for our nation’s financial future.
So, even if Labor was to win the election, let’s hope that they recognise the folly of their policy and at the very least delay until the market and economy are in better shape.
However, the very best outcome would be that the policy is shelved indefinitely because it was never a sound, or even necessary, proposal to begin with.
Negative gearing is merely a taxation deduction that is available for anyone who invests in income-producing assets.
It has never been a property investment strategy.