07 May Be careful how you read the smoke signals – Rich Harvey
We give you a warning about delaying your buying or selling decision until after the Federal Election. Rich Harvey says many investors are reading the smoke signals incorrectly.
Kevin: Well, we’re now only a matter of weeks away from the federal election. What quite often amazes me, and I’ve been in real estate for decades, just how many people will either put off buying or selling because of an election coming up, whether it’s state or federal, so a timely warning from Australia’s largest professional body representing independent buyers’ agents warning home buyers and investors not to delay buying property based on the outcome of the upcoming federal election. It’s quite critical right now, and I think there’s a lot of discussion, mainly centred around what the Labour Party have suggested with negative gearing, those changes, and also changes to capital gains tax.
Kevin: I’m talking now to the president of the Real Estate Buyers Agents Association, Rich Harvey. El presidente, hello, and welcome to the show.
Rich: Thanks very much, Kevin, always a pleasure to be with you.
Kevin: Yeah, this is a bit of a troubling trend here, isn’t it? A number of people would say, “Well, that’s what we would expect buyers’ agents to say.” But there’s a lot of foundation behind that statement. Let’s dig into it, because some of the facts that are floated by the Labour Party are false.
Rich: Absolutely. I think, Kevin, one of the things that we’ve got to look at is the modelling that was done by the Labour Party to suggest that removing negative gearing and only leaving it applied to brand new housing would bring in an incredible amount of savings for tax revenue. But they used a figure of saying that only 7% of new properties are bought by investors, where in fact it’s been shown it’s at least 22%, if not higher. So there’s a lot of flawed modelling in their negative gearing analysis. So I think that’s something that needs to be highlighted to the voters out there.
Kevin: Yeah, and also the fact that if they do go ahead with what they’re suggesting, it’s going to leave a shortfall of not millions, but billions of dollars.
Rich: Yeah, absolutely, exactly. So if you’re basing a certain tax policy and saying we’re going to make X billion dollars worth of savings, but that’s all based on flawed modelling, it’s not going to achieve its outcome.
Rich: I think even more than that, Kevin, we’ve got to look at what the impact of this is on the economy, and particularly on renters. It has been shown before that if you abolish negative gearing it is going to create, potentially, another shortfall for the private sector to create housing because there’s no incentive for mum and dads and Joe Public to go and produce investment properties to provide for the rental market. And that will then see rents go up. So that’s the definite by-product of removing negative gearing on existing property.
Rich: And I think a second thing, Kevin, that negative gearing will do, or removing negative gearing and only applying it to brand new properties, is it’s going to skew investment decisions to certain areas that only have new properties. And it may not necessarily … these new properties, it will not, possibly, in the areas where they’re going to grow and deliver the capital growth that the investors are looking for in the first place, and bring the spruikers out of the woodwork.
Kevin: Yeah, well, we’ve seen that happen already in a different case, different scenario, in different states around Australia, where the First Home Owners Grant was actually skewed toward new properties … I’m thinking here of Queensland … which was totally useless in the areas where existing stock needed to be turned over, in some of the regional areas where new stock is not even available.
Rich: That’s right. Well, certainly new stock is needed in certain regional areas. I was even talking to a lady yesterday who’s wanting to buy something in the Southern Highlands and there’s just no townhouses available in that certain area.
Rich: So I think any investor listening to this should just consider, don’t just make decisions to buy a property purely on the basis of tax. You’ve got to consider the fundamentals of the area. Look at: is the population increasing, is there good job prospects, and is there good transport and education opportunities? That’s fundamental.
Rich: And the other thing to think about is that investment’s a long term gain. Any investor’s got to aim to buy quality and think about the long term fundamentals, not just the short term cash flow. It’s all about the long term growth and the long term cash flow.
Kevin: Very good advice. And I’ve heard you say, too, in the past that if an investor is relying wholly on negative gearing to prop up their investment, then they have a problem with their portfolio, not the policy.
Rich: Yeah, that’s right, exactly. So it’s about doing your numbers before you go and buy any property, because you don’t ever want to hold a negative gearing property forever, Kevin. Negative gearing enables the investor to prop up that investment for the early years, a bit like nurturing a baby. You’ve got to feed it milk before you can feed it milk. And the investment property needs to stand its on it two feet. So after a number of years, hopefully after three or four years, it should start, with the rent increases, start to show a positive return, because there’s no point having an investment that shows an infinite loss. There’s just no point. Sure, the negative gearing investors are doing it to make a capital gain, but there comes a point which you may not be able to hold that property to realise that gain in the future.
Kevin: And irrespective of all of that, worst case scenario if Labour do win and they do fulfil their promises to go ahead and play with negative gearing and capital gains tax, it is going to be grandfathered, so it shouldn’t really stop any purchases right now.
Rich: No, well this is the thing, Kevin. It opens up a huge opportunity for the savvy investors to buy now in the midst of the uncertainty. I think buying a property on election day is the best time to buy, when everyone’s distracted. I mean, I’m hearing all the time from so many agents, “Oh, Rich, have you got a buyer for this, because the vendor’s willing to drop it by $150,000?” We’re just seeing buying opportunities left, right, and centre. So the next seven or eight months, if Labour does get in, and mind you it’d have to get through the Senate too, but if it does get in there’s going to be seven or eight months of opportunity for investors and home buyers to get into the market while the market’s softer and vendors are more negotiable and get a negatively geared property in your portfolio.
Kevin: Rich Harvey, president of the Real Estate Buyers Agents Association of Australia. Thank you so much for your time, Rich.
Rich: That’s great, Kevin. Thank you.