Housing in Australia is crucial to the economy’s growth and the welfare of the people. Australia is always a matter of the moment relating to the Property Market.
The housing finance industry had influence significantly the global market in the past decades. It is because of the increase in demand for housing and homeownership. However, in recent years, Australia has experienced a sudden decrease in demand in the property market.
Before the Federal election that happened last May, this issue has been one of the main topics for discussion. If the Labor party have won the last election, they intend to reform negative gearing and capital gains tax arrangements. On the other side, the Coalition won’t change anything. But, what does negative gearing actually mean?
It is when you take out a loan to purchase an investment, which is usually property. However, instead of making money, the interest repayments and expenses on your investment exceed the cost for the rental income. Thus, the investor, in turn, is making a loss. To make it short, you are losing money in your investment.
Negative gearing is not limited to properties, but it also applies to any investment where expenses exceed income.
Let us say you are in this situation where there is a possibility that you can compensate your loss through a deduction on the taxes you are paying. It only means that if you own a negatively geared property investment, you will pay a lesser income tax. It is a way to inspire more people to invest in property and rent it out.
The underlying question here is; why would anyone invest in a negatively geared property when the actual purpose is to earn a profit?
With regard to the crucial question mentioned above, it can be because the loss was not foreseen. Another scenario is, it is possible that the investor hopes for an increase in the value of the property in the future. It can also be the idea of selling it so you will make a capital gain in the future once the appreciated value compensates for all the losses.
On the other hand, it will be considered as positively geared in the event that the value of the property will increase enough to make up the cost of investment. A positively geared investment will result in owners paying taxes for the income.
Housing affordability is one of the main issues in Australia in recent years. Some experts claimed that it is because of the investors who acquire more than the equitable allocation of properties, and this will result in higher prices.
Labor’s proposed change for negative gearing will prevent investors from covering the losses from their property investments with regards to the taxes they pay. As a result, it will hugely affect the people who invest in negatively geared properties.
The proposed plan is to limit negative gearing as well as lower the tax discount from your income. It is believed that in this way, it will result in a significant increase in the net income.
House prices will also be somewhat affected. Reducing tax incentives will reduce the investor’s demand for existing properties.
Negative gearing can act as a tax minimization scheme when property values are rapidly increasing. It is the reason why, in time of resurgence, the demand for housing increases. However, when the price is fixed or drops, the situation will be quite the contrary.
This policy scheme won’t produce a significant impact. Nevertheless, it would somewhat increase home ownership.
For young people and low-income earners, the cost of housing is one of their major issues. Especially in recent years, home ownership in Australia is falling behind.
It is not the deposit that the first-home buyers are dealing with but instead on how they would qualify for a mortgage. Usually, a bank will evaluate their ability to repay the loan much higher than the standard interest rate.
The main issue here is that it intends to modify the affordability problem of investment properties by increasing the demand for housing. On the political side, the first-home buyers might assume that the government will back them up.
However, the Coalition can’t carry out the most important thing that home buyers wish for, and that is for the housing prices to drop. On the other hand, Labor’s proposal is to change negative gearing and the removal of investor’s income tax discounts in the hope of equal opportunities for everyone else.
Now that the result of the election is in favor of the Morisson government, the proposed changes of the Labor party will obviously not push through. What will be implemented is the first home buyers scheme. However, this policy scheme doesn’t mean that the process will get easier, but rather, the normal process of securing repayments will still be followed. This scheme will attract first home buyers to enter the property market earlier. The impact may be small, but at least it is not considered insignificant.
While there may be a drop in the demand for housing finance in the recent news from The Adviser, it is believed that the post-election period is the best time to borrow for the first home buyers.
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