Negative Gearing, Property and SMSF

With continual media speculation, contradictory property reports, widely varying expert opinions and viewpoints, data inconsistencies, legislation changes, policy changes, borrowing restrictions for investors, special taxes and lending constraints for FIRB purchasers, the construction price squeeze.

It is no wonder that buyers in today’s market are tentative and confused about what, where and when to purchase…

Writes Lachlan Walker of Place Projects Brisbane

A perfect storm of doubt and uncertainty has been created around the residential market — contracting sales rates and slowing buyer decision making processes.

Property, and in particular residential property, was put under the national spotlight following contentious announcements, particularly surrounding the opposition’s proposal to limit negative gearing to new housing from 1 July 2017 and decrease the capital gains tax discount from a 50% discount to just a 25% discount.

Neither side of politics can absolutely determine what the actual net result will be across the market, however we can predict that it will be detrimental to prices and investment — a change of such a substantial calibre, could see ramifications across the property market, causing wide scale market softening and rental rises, repeating results seen during the Hawke/Keating government of 1985 to 1987 — a decision which was subsequently reversed following a considerable market backlash.

So what is negative gearing and how is it predicted to impact the property industry?

With the property industry overtaking the mining industry as the largest combined contributor to economic growth in Australia, any changes could have a disastrous effect on the industry and the nation as a whole. [adrotate group=”16"]

If any of the proposed negative gearing changes are implemented, millions of Australians will be affected.

It is important to understand that this will apply, not only to the individuals, but also to the millions of Australian’s who have a stake in property through their superannuation fund.

In general, it has been accepted that for most Australians, their superannuation will not be enough to cover their retirement and therefore they need to invest in alternative assets in order to fund their retirement.

Total Asset Values of Self-Managed Superannuation Funds

Prepared by Place Advisory. Source APRA.

Australia’s superannuation funds currently hold approximately $1.8 trillion worth of assets across a total of 559,547 different fund types.

Of these, Self-Managed Superannuation Funds (SMSF) accounted for a total of 556,998 funds for the June 2015 financial year.

This equates to 26% growth in the number of SMSF’s over the past five years ending June 2015.

The amount of money invested in SMSF’s across both Australian and overseas assets currently totals $589.9 billion.

A growth of 45% over the past five years.

Residential property is an asset class that most Australians choose for investment as it is simple to understand and has provided financial security, longer term, for the future.

As a result, investment in residential property within Self-Managed Superannuation Funds has increased by 62% over the past five years ending June 2015 and now totals over $24 billion worth of assets held.

Today, the property industry, which for the purpose of this report includes construction, rental, hiring and real estate services as well as ownership of dwellings, has become Australia’s leading industry, contributing an estimated $315 billion to Australian Gross Domestic Product (GDP) over the past 12 months ending December 2015, (19.2% of total GDP).

In addition to the direct contributions that property has on the Australian economy, the property industry further contributes via flow on effects for goods and services needed, which is much harder to categorise yet still contributes to the industry.

That is, the furniture needed to make your house a home, TV’s, computers and IT equipment to stream your favourite shows at night, cookware required for the family roast, right down to the flowers on the kitchen table each week.

Before any Tax Reform to CGT or negative gearing is implemented, the loss of productive contributions to the economy should first be quantified, particularly given the fragile state of the market overall.

Large scale change at this stage is likely to see market sentiment plummet overnight, and do large scale damage to associated employment, turnover, rents, prices and most importantly, investment and economic growth in Australia’s biggest ongoing contributor to the economy.

Direct Property Investment in Self-Managed Superannuation Funds

Prepared by Place Advisory. Source APRA.

Source: State of Place

Originally published at Property Update.