Tuesday's Property Bombshell... in Plain English - Leonie & Steve (REA's)

Tuesday 9am saw important and some surprising announcements on the property market from the Prime Minister and the Finance Minister. The bit that got all the attention is this ‘extension of the bright-line test’, READ: a pseudo capital gains tax. 

We'll break it down for you below - even though Stuff reported that REA's are having trouble working out what this means...

BUT the real star of the announcement, and the surprising bit, wasn’t the bright-line test at all. It's the removal of interest costs as a claimable expense for investment property mortgages.

READ: media reporting is likely to move away from the ‘heated property market’ and onto 'an emerging social housing and rental crisis’ and the societal problems which this throws up.  

Steve and I do all of our own research, this is not a copy and paste - these are our thoughts, in plain English. Let's begin...

What is a Bright-Line Test and Why Does it Exist?

• It’s a minimum period you have to hold a property (excluding the family home) before selling it otherwise any gain is taxable income.  
• The period was last increased to 5 years for purchases after 29 March 2018 and has now increased to 10 years for purchases from 27 March 21. 
• This intends to put-off short term property investors from purchasing an investment property. 

The Removal of not Being Able to Claim Mortgage Interest:

• The amount of interest paid on a mortgage for an investment property has been a business expense that is claimed for tax purposes.  
• This is now removed for purchases after 27 March 2021.
• Geek Alert - for purchases made prior to 27 March 2001, 25% of this is removed this coming tax year, then 50% the year after, 75% the year after that and 100% by 2025.  
• With the removal of claimable interest, being by far the largest expense in owning a rental property (especially with a large mortgage), investor returns will be drastically reduced and for many into negative territory creating losses.  
• This significantly alters the returns for investors who have mortgages. It will put investors off purchasing and encourage some into selling - the latter happening over the next few years as the above comes into effect.
• Those investors that don’t sell, are likely to increase rents to partially offset lower returns.  
• The government is consulting on this last part and has indicated that for investors purchasing new build properties these rule changes probably won't apply.

So, let's talk about the losers and winners. The LOSERS are likely to be:

• Investors who, trying to take responsibility for providing for their retirement, went out and got mortgages to buy an investment property. Some may not be able to afford to keep them and will need to sell.
• If prices fall it will be rough for any recent purchasers who find themselves needing to sell in the short to medium term.  
• Renters as it’s likely rents will increase as the rental stock falls (investors refraining from buying and some deciding or needing to sell), and rents will be increased by landlords staying in the game but having to offset their losses to stay viable.  

The WINNERS are likely to be:

First home buyers - it will draw to an end the frenzied and unsustainable rate of price increases and may see prices fall over time.

So... Where to Next?

At first glance, media reporting is likely to move away from the ‘heated property market’ and onto 'an emerging social housing and rental crisis’ and the societal problems which this throws up.  

There are parts of Tuesday’s announcement aimed to increase new building activity and property supply. While this is very positive, it's a long term lever with a lot more complexity, red tape and for which there has been limited success seen in the past. 

And, it’s clear that investors have had a bucket of cold water thrown over them and that frenzy is over. 

Most can probably agree that sorting the frenzy is a very good thing.

However, going this one step further and changing the game for non-recent investors may not prove to be all that good once rents begin their move upwards and the effects wash through.

As to the full effects, it's guesswork for all with an opinion and will play out over 2-4 years, but it will be interesting and we’ll keep you informed as always from the coalface! As always, if you would like further info – just email us at [email protected]