The rising pressure on investors

As widely expected, the introduction of higher stamp duty rates for foreign investors and the Australian Prudential Regulation Authority's tightening of bank lending regulations on investment loans have reduced new investor housing demand especially for apartments. Market reports suggest that apartment prices have fallen by 10 per cent or more in several locations with growing concern about the impact on prices from projects yet to be completed.

It's too soon to assess just how much downward pressure there will be on apartment prices because of the latent demand from first home buyers not previously able to compete with investors. Apart from the reduction in overseas investment demand because of the additional stamp duty payable, uncertainty about price movements is proving a major deterrent to domestic investor purchasers.

Problems in apartment markets will reduce the Reserve Bank's scope to increase interest rates. For investors, the negative-gearing tax arrangements greatly reduce the effective after-tax cost of borrowing. But given the relatively low net rental yields available, achieving a profitable return from a new investment property is dependent on future price appreciation.

There are sound reasons for investors to delay purchases, including the difficulties facing many off-the-plan buyers in obtaining finance. The former easy option of on-selling the apartment before completion has now largely disappeared. APRA's crackdown has also made it harder to obtain finance especially through interest-only facilities and high loan valuation ratios. First home buyers now receive more favourable treatment from lenders.

The other uncertainty for new property investors is higher capital gains tax rates and changes to negative-gearing tax arrangements. Negative-gearing restrictions will target highly geared transactions forcing future investors to inject more capital to fund their purchases.

Capital gains tax increases could even have a bigger negative impact on the future demand for residential property investments. Without a negative-gearing subsidy, the after-tax capital gain component of the income will be a much more important factor in decisions to purchase. Fortunately, higher capital gains tax won't affect current investors unless the changes are retrospective, which is unlikely.

Depending on whether and, if so, how quickly property prices fall, the prospect of future tax changes adds to the attractions of purchasing new investment properties before the next election. Even then, there's the risk that major tax changes could kill the goose that laid the golden egg for many past investors by reducing the long run attractions of residential property investments.

The clear message is that the attractive easy returns from residential property investments are under threat from apartment oversupply and proposed major tax changes.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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