If you’ve been paying attention to the upcoming federal election, you’ll have heard the words “changes to negative gearing” thrown around a lot. Don’t worry if you haven’t been keeping up. We’re here to give you the lowdown on what negative gearing changes mean for you.
How does this impact me as a BrickX investor?
The good news is that BrickX properties are not negatively geared. So these changes won’t impact what we earn on our properties today and therefore won’t change any monthly distributions you receive. Phew!
What exactly is negative gearing?
Negative gearing is where investors borrow money to purchase a property and the interest and other expenses are greater than the rental income received each month.
Since investors would be making a loss in this case, they negatively gear with the hopes that the long-term capital growth will increase to a point where they can still make a decent profit.
A major reason for people to negatively gear is that, under current tax laws, they can deduct these losses from their taxable income. This makes it more tax efficient for people to invest in property.
Read these helpful articles for more info on gearing
Labor’s proposed changes
If elected, Labor proposes to limit negative gearing to new housing only, meaning that investors can only deduct losses from their taxable income if the properties are newly constructed. Properties invested before 1 January 2020 will still remain negatively geared. (They’ll also halve the existing 50% capital gains tax discount for properties held for longer than 12 months to 25%)
What if these changes go ahead?
With this reform, the ALP aims to level the playing field for first home buyers competing with investors and improve housing affordability. However, depending on the scale of the change, there will be a few short and long term impacts to consider.
Impact on property price
First is property price. While there is contrasting commentary about how prices will shift, the general consensus backed by SQM Research’s latest report is that property prices will continue to fall nationally by between 5% and 12% by 2022 if these changes go ahead. In a way, this goes towards what the ALP is aiming for – to increase the affordability of property.
If you think about it, this price drop makes intuitive sense. With Australian property prices already falling, many negatively geared property owners may decide that it’s time to sell since capital returns no longer offset the loss they are making. If the ALP makes these changes, people who rely on the tax break and negatively gear simply for investment purposes will no longer have any incentive to do so. As the pool of property buyers consequently shrinks, so do property prices.
Impact on rental yield
Going hand in hand with this is rental yield. Obviously, it’s not plausible for all negatively geared investors to sell their property. So those who don’t sell are left with two choices – either keep losing money or try to breakeven. Not exactly a conundrum. And how will these investors break even? Well, previously they relied largely on the fact that their losses would be offset by capital growth. In the absence of this growth, investors may look to cover their losses by slowly increasing rents. As a result, rental yield is likely to grow across Australia. SQM’s research points to market rents initially remaining fairly stable but possibly having an accelerated rise of between 7 to 12% between 2020-2022. Great for BrickX members – not so great for millions of renters.
What should I do, as a BrickX investor?
For BrickX investors, these changes mean that the downward pressure on valuations we’ve seen in the last six months may continue in the short-to-mid term.
Our distributions will continue to be paid and your capital return may eventually recover when the cycle improves.
Fact or fiction?
Despite all this discussion, negative gearing changes remain speculation at this point. A lot needs to happen before any of these changes go ahead in the Australian market. We will keep you updated as changes emerge.
We’d love to hear what your thoughts are on these potential changes – comment below with your opinion
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Clearly written and with candour.
I’m enjoying the diversity across the Brickx properties to mitigate risk along with the capacity to average down over time.
Thanks Corian! We really appreciate your continual support.
Seeing nothing but opportunity. I see that some bricks are selling cheaply at the moment for many different reasons no doubt (maybe some anticipation of the election). I see rental yields a little more attractive and I will continue to dollar cost average in. Personally, I am sorry for those who bought in at the top but I am hoping for further drops in valuations in the mid term. I think it is a good time not to sell your bricks too quickly and look at a much longer time horizon. Happy to buy the cheaper bricks though. Happy investing all.
Thanks for the great comment Matthew! We’re glad that you see the potential and agree that our Bricks are certainly a mid-to-long term investment. Happy investing!