One dollar Australia

For the past two decades, Australians have been sold the dream to gain financial freedom through property wealth. One of the main financing tactics that has been promoted is negative gearing, where the cashflow that is received through investment properties is lower than the repayment amount. It has usually been sold in a pitch, similar to, “Own a $500,000 property for only $100 a week.” Many Australians are lured into the dream of becoming a property millionaire through asset ownership. Economics editor for The Age Peter Martin revealed that the Australian Treasury is considering making amends to the way negative gearing is being used.

Motives behind the move

Traditionally, Australian property owners have leveraged negatively geared properties to gain finance for homes whilst offsetting it against their income tax. The Treasury is now considering setting a cap on the amount of tax deductions that would apply to negative gearing. The United Kingdom implemented a similar strategy, setting caps at £50,000 or 25% of a person’s income. The Australian tax office has claimed that some deductions have exceeded 100% of a person’s income, resulting in 55 of Australia’s highest earners paying no tax, despite earning over $1 million. In a paper from the Tax Institute, the call for tax reform has been long overdue. Labour leader Bill Shorten plans to use the tax reform as a unique selling point for the Labour Party’s election campaign.

Interest rate forecasts

The Australian real estate market has increased slowly so far in 2016. Interest rates are currently at historical lows and there is speculation that the Treasury could cut them further to trigger activity in the property market. For property owners that have a flexi-rate mortgage, the time to leverage finance from the banks has never been sweeter. However, the slowing pace of growth in the property market has added some financial strain for those that have implemented a negatively geared property investment strategy.

Monopoly income tax

Other economic challenges that Australians are facing include the correlation between salary growth and property prices. Due to the high price of property, a negatively geared mortgage which may have only cost a person $100 a week in the early 2000s could easily set owners back upwards of $500 a week. The average Australian salary unfortunately hasn’t grown at the same rate.

The Australian real estate market can expect a shake-up

Real estate agent comparison website LocalAgentFinder expects to see the property market shift in its behaviour. Should the proposed changes go through, investors would be likely to use alternative financing methods to build their property portfolio. However, Bill Shorten has claimed that should the Labour party get into power, the new changes wouldn’t affect existing investors, which may give some investors some confidence. Channel 9 reported the news in the following video.

Real Estate orange black roofs

Negatively geared investors should still come out as winners

Regardless of the current industry metrics, property owners are still selling their properties and are coming out on top with big profits in excess of $100,000. Others such as those featured on the television show ‘The Block’, were able to come out $500,000 richer. Negative gearing done right can be life-changing for investors.

The dream of financial freedom through property ownership will continue to compel Australians to consider investing strategies such as negative gearing. The proposed changes could possibly leave current investors relatively unaffected. However if history has taught us any lessons, it’s that any tax reform or policy that has been rolled out will favour the needs of the government over the people. Like the element of chance in a casino, the house always wins. Whether it will be Parliament House or property owners is yet to be seen. If history repeats itself, then property owners will come out on top.