Potential negative gearing changes

Thanks for the link,and this is a quote from that link..

Hockey has made claims that negative gearing reform would increase rents. This myth has been comprehensively debunked, in theory and in practice: it did not occur when negative gearing was wound back in 1985, and it won't occur today..

That's the problem when you have short super low term interest rates,and changes in banking regulations,which has induced property equities investors and the lenders to take more risks,and some over the next 18 months may or may not experience substantial loss, because once you have a liquidity mismatch as I think there is in several property hot spots in Australia all they are trying to do is stall a deep recession..

Call me a skeptic, but I think most of Australia will start to see below inflation growth in house prices continue for years - and that should mean rents as well. Negative gearing will stop on its own once people start seeing that they are throwing cash against the wall.

The idea that a house that doesn't make money will sell for more later - is crazy. It certainly won't sell to an investor.
Another thing to ponder...

The suggestion was made that NG should be changed to only apply to new builds. Sounds like a good idea.

This would imply that the Gubb is assuming that investors are going to help fund a supposed much needed increase in housing stock (hence the recent boom?), and leave existing stock for the FHB's and other PPoR buyers to fight over, or only seriously cashed-up investors who don't need NG to help them hold the property.

There are two areas where this new building will occur;

1. Outer Suburbs/new estates in outer suburbs and/or new suburbs -
2. Existing inner/middle ring suburbs (requiring demolishing of existing buildings).

Lets look at Area no.1 first;
If a Mum and Dad investor is requiring some form of NG to help them hold their investment, the factors for this investment to work would be;
a. prospect of future CG - which is governed by amenities, infrastructure, opportunity for employment or proximity to employment, schools etc.
b. transport options or accessibility to public transport close by,
c. prospect of securing a tenant
d. value for money/price
e. neg gearing.

The main problem I see is point C - getting tenants.

It would seem that many of the FHB's who can't buy a property (in their chosen suburb) are looking to also rent near their work, their cafes, their University, their work....near where they currently live and work.

So, these outlying areas are not really an area of choice for the current FHB for purchase or renting...if they were; we wouldn't be hearing this whinging about affordability all the time. ;)

The younger families may look to rent in these areas, but these areas are typically where a lot of younger family units look to buy...more affordable housing and a yard for the kids, etc.

I can see the problem occurring here for the Mum and Dad investors whereby there will be a lot more of them forced to look at these areas to buy and build (to get the NG), but there will be a limited amount of renters - an oversupply of rental properties and less than strong demand for them.

The result is rent yields will drop, higher vacancy rates; making the area less attractive for the M&D's.

The other problem is that for the FHB's and newer families who are willing to look at these areas fore their affordability, they are now competing with the M&D's - prices may well go up and out of range in the short term, but then drop down again as the M&D's find out that they can't get a decent rent yield and/or decent continuity of tenancy (higher vacancy rates), and the CG rates will be poor. They may look to sell off the poor performing property at a discount and thus drag the values of the surrounding similar properties down....many who stay might see themselves with a negative equity position even after 5 years in their home if this occurs..

Now let's look at Area no.2:
To build closer in, the M&D is faced with a higher entry level to acquire the property in the first place.

The rent yields are usually lower, and unless the investor is seriously cashed-up to decrease potential borrowing level, the neg cashflow to buy and then hold the property will be prohibitive.

Then you have the added costs of removing existing dwelling/s, plans and permits and time to get the new dwelling completed and available for rent, objections from neighbors and greenies, etc - easily 12 months or longer. Of course; the existing dwelling can be rented until all the plans and permits are organised, but then there is at least 6 months for the building to commence and finish for rental.

Most M&D's are not going to do all this for one dwelling on a block which will then return a poor rental yield given it is more inner/middle ring; it will need to be a townhouse complex etc to make it viable.

Or, they may do a simple buy/subdiv and build in the back yard; possibly live in the front house while the rear one is built, maybe reno the front one and then sell both, or move out when the townhouse complex is commenced and sell the lot, or keep one and sell the rest....

In all cases; you have an investor (and most likely a more cashed-up one who can pay more to get the development potential) competing again with the FHB's for that prospective development block in order to get the NG deductions and depreciation deductions..

I could be completely wrong on all of the above.