Barely a day goes by in the media that there isn’t an article published discussing the challenges of the Australian housing market and how much prices have risen over recent years. The long held ‘Great Australian Dream’ of owning your own home is frequently trotted out to tug at the heart strings of TV viewers when trying to find a suitable scapegoat for sky high property prices. Throughout much of 2014, focus was being placed on foreign investors landing on our shores with suitcases full of money and pricing us locals out of the market. Currently the place for blame is on negative gearing. Whilst I’m happy to agree that negative gearing may have had some contribution to price rises, it’s important to take into account the huge amount for factors at play here. Although I’m no economist, it doesn’t take a genius to realise that the combination of negative gearing, foreign investment, historically low interest rates, ease of finance, ongoing agent under-quoting and the sense of urgency portrayed in the media all play a role. Not to mention the fact that almost 70% of Australians choose to live in capital cities and that there is only so much land available in these relatively tiny pockets of our enormous country. Geography and demographics certainly play a role.
Of course I’m biased…but while I do think that negative gearing has an important role to play in supporting investors and in turn the housing market in Australia, I agree with statements made regarding investors only investing in property simply for the tax advantages. To me, purely investing for the benefits of negative gearing is completely the wrong approach (although plenty do it). Following here are two videos worth a watch. The first is a clip from ‘The Project’ on Network 10 which aired last night and fired me up to write about this topic. Pay careful attention to the generalised statements and overall tone of the clip, it’s enough to make you go out and push the nearest property investor under a bus. The second clip by well known Australian property investing wunderkind Nathan Birch is intriguingly entitled Negative Gearing Sucks Balls. Nathan’s explanation about negative gearing and why people get caught out by it is spot on in my view. My thoughts? Negative gearing is a useful bonus for investors but certainly not a reason in itself to invest in property. Check out the clips below and make up your own mind!
So it’s been a while since I’ve posted a blog about what’s been happening in my world with regards to property. Whilst the major activity for 2014 may have appeared to be the renovation rescue, there was something else going on in the background that had started well before I signed on the dotted line for the reno property; a new place, built from scratch! In late 2013 a new and exciting part of the property journey commenced with contracts signed to build a new 2 bedroom townhouse in a suburb of Ballarat called Sebastopol. All of the properties purchased so far have all been established homes aged between 10 and 40 years old and although they have all been very successful there are certain benefits (and some drawbacks) to buying off the plan and building something new.
- Firstly, you get everything brand new and one would hope that it means things work, it looks modern, attracts good rent and requires minimal maintenance as it has new appliances and services.
- Secondly, a new property brings with it substantial depreciation benefits at tax time. With the older properties you can claim depreciation on the fixtures and fittings within the property (carpets, curtains, heaters etc) but if a property is built after July 1985 then you can also claim depreciation on the actual building itself. This can make a significant difference with your tax return and subsequently how you manage the cash flow on your investment. (Check out this previous post for an overview of depreciation).
- Thirdly, you can manage to save significant money with a reduction in the stamp duty that you pay on the purchase of the property. When purchasing off the plan the stamp duty is calculated on the property value when the contracts are signed. For a property such as this it’s based on a vacant block of land with nothing built on it so is a lot less than if it was an already established home.
- On the flip side, a major drawback with a new build is the amount of time that it takes. The contacts were finalised in December of 2013 for this property and with a scheduled start date of Feb 2014 for building it ended up being pushed into the second half of the year due to demolition issues with a house that was already on the land. The anticipated settlement is April/ May of this year (I’m expecting May).
- Another thing that would work for some and not others is that you have little (practically none at all) scope to make any alterations to the design of the property itself. I certainly don’t mind though as it’s a good design and a build for investment, not to live in. That said, you do get a selection of interior options regarding cabinetry, paint, carpets etc.
So activity started in the second half of 2014 and I’ve been regularly stalking the builders to track progress. Keep an eye on future posts to see how the build progressed and if it looks anything like the pictures above!
So it’s federal budget night in Australia and there have been rumblings for some time now that the government might be looking to reform their negative gearing policy for property investors. The most frequent suggestion that I have heard is regarding the possibility of introducing grandfathering arrangements for current property investors whilst restricting any future negative gearing to newly constructed properties. Whilst this has the potential to save the government billions of dollars, there is still plenty of debate as to the flow-on effects that it might have. Whilst on one hand there are those stating that negative gearing has done nothing but escalate property prices for those wanting to purchase their own home (Check out the beer coasters here that encourage abolishing negative gearing), others view it as a key strategy in encouraging investment and maintaining a healthy supply of rental properties on the market. Time will tell after the budget announcement tonight and you can rest assured that whatever happens it won’t please everyone. Check out the links below to read some of the recent commentary on the potential impact on negative gearing in the 2014 budget. Stay tuned!
Negative gearing is on the chopping-block
Budget Night: What’s Going To Happen To Negative Gearing?
One of the most fascinating things that I’ve seen in the media recently regarding property development are the incredible ‘ghost cities’ that are being developed in China. The first I heard of this was in 2011 when Journalist Adrian Brown of the Australian Dateline program visited multiple new cities that had been built throughout China. The statistics are incredible with reports stating that there are over 64 million apartments vacant across the country. The background to why these cities have been built is intriguing and somewhat complicated. Many experts theorise that it has a lot to do with China’s tax policy. With no local property taxes, governments still need to make money so this is largely done through the development of land. With land sales being illegal in China this works by the government leasing large tracts of land for development of these massive estates, the scary thing is that this happens sometimes regardless of other services and infrastructure being there to support such large cities. Throw into this mix the emerging Chinese middle class with excellent savings records and a non-transparent stock market and investment in property is an attractive option for many, either as an investment for themselves or as a future home for a child. It’s reported that many people purchase their property with cash, and with no mortgage or property taxes to worry about it could be seen as a relatively easy investment to sit on. The results of this are evident however, just take some time and view the following footage, it’s astounding.
The first report is the original from 2011 whilst the second is a follow-up that was broadcast recently in 2013. The third report from 60 minutes Australia gives a slightly different view on the development of China from the perspective of an Australian architect employed to work on the redevelopment projects. The final clip from 60 minutes US is also really interesting. I find the entire thing absolutely amazing and I’m continuing to find more and more information regarding this unique situation an entire country finds itself in. I’ll be fascinated to see how this develops over the next 5, 10 or 20 years.
The start of July can begin a confusing time for property investors in Australia with the end of the financial year, particularly if you’re new to being an investor and this is your first tax return with an investment property involved. As with all things to do with investing you’ll find that every man and his dog will have advice for you on what you can and cannot claim and how to squeeze every cent out of your tax return. Whilst this advice can often be good, and I’d encourage everyone to try and learn from the experience of others, the ultimate decision of what you can claim against your tax return lies with the friendly folk at the Australian Taxation Office (ATO).
Whilst I was sitting in front of the computer recently pulling together the figures for this year’s tax return I happened to stumble across the 2013 guide for rental property owners published by the ATO. It’s a fairly big document but I found it to be a really useful guide and it had some great lists and examples of what you can claim and how you go about it. It also covers things that you would need to consider should you end up selling an investment time at any stage such as Capital Gains Tax.
Let me know what you think!
One of the things that has taken me a long time to understand when it comes to investing is property depreciation and how it works with your income and particularly around tax time. I just sat through a webinar this evening (note my previous post about being willing to learn and becoming a student again) and it reminded me how challenging it was for me to get my head around it but also how beneficial it was once I knew about being able to utilise property depreciation to claim ‘non-cash’ deductions on your investment property come tax time.
In a nutshell it basically means that the cost of the property itself (both the building and the fixtures inside it) decrease in value over time, essentially it’s talking about wear and tear over the years. In Australia (I’m not sure about other countries) the tax office allows for legitimate deductions taking into account this decrease in value of the property and it’s fixtures each year. In the webinar it was stated that as much as 80% of investors are not claiming as much as they could be on these non-cash deductions each year. I certainly realised this a few years ago when I had a full depreciation schedule done on one of my properties. I was pretty pleased when the report outlined the amount that I could claim. The thing is however that you need to get a qualified quantity surveyor to prepare the report as that is all the tax office will accept. You’ll need to spend some time looking around to find the right person to do this for you. Don’t hesitate to compare and ask several surveyors about what they can do and the costs associated.
I’d certainly encourage all investors new or old to learn more about depreciation and how it can apply to your own circumstances, it can make an amazing difference to what you can claim against your investments and potentially a nice improvement on your tax return. The YouTube video below is from an Australian company (the ones that conducted the webinar) and I’d say is worth a look. This company is just one of many and I’d encourage you to look around and find one that suits your own needs.