Episode 117: Who Really Benefits When Tax Policy Picks Winners In Housing?

We react to the Federal Budget’s big property moves and explain why the headline promise of helping first home buyers may actually tighten rentals and lift prices in new stock. We break down how the negative gearing reset and capital gains tax changes could reshape investor behaviour, developer margins, and the next few years of the Sydney property market.

• the budget framing on property policy and broken promises 
• negative gearing restricted to brand new dwellings and what that shifts in demand 
• why a premium can form in new builds and how off-the-plan buyers get caught 
• the longer-run path to higher rents as established-market investors exit 
• why price falls are unlikely to be fast or dramatic despite investor pullback 
• capital gains tax basics plus the move to inflation indexing and marginal rates 
• pre-1985 assets and the fairness argument around untaxed gains 
• winners and losers across big developers mid-sized developers flippers and rentvestors 
• the curveball view that New Zealand property may look more attractive for investors 
• practical caution on overseas buying and leasehold risks

As always if there is a specific topic you would like for us to cover, please reach out and let us know!    

Transcript

Welcome And The Budget Lens

SPEAKER_02 0:31

Hello and welcome to another edition of Current Market Insights. I'm your host, Kieran O'Brien, and with me as always is Mr. Peter O'Malley. Peter. Kieran, good evening to you. Good evening, friend. It um there are very few podcasts that we record that I'm super excited about. I always love doing the show, but there are some that I get, you know, pretty worked up about. And uh one of them most certainly is the post-budget podcast where we get to talk about not only the budget, we get to uh rib a little bit on the government of the day, but we also get to talk about what in the budget is going to have an impact for our listeners. Now, I won't pretend this evening that we are going to break down the budget in its entirety. There's websites and newspapers and other podcasts for that. Uh what I want to talk about tonight is there's been a lot of discussion around proposed changes to the property sector in this budget, many of them aimed or under the guise of uh facilitating home ownership for those less uh able to purchase in our society. Given that we've been talking a little bit about some of these changes for a while, now the budget is out. I thought tonight, let's break down what are the recommended or proposed changes to the property sector in particular. And then once we've talked through those, we can get a little bit more detail, a little bit more granular around what the impacts of some of these suggestions or changes are going to be for you know the various people that operate within the market.

SPEAKER_03 1:51

Yeah, uh thank thanks, Kieran. The budget was as significant as it was tipped to be leading into it. Uh, there's no doubt about that. Uh, and there's no doubt that politically speaking, it's a broken promise by the government. Yeah. Um, I think uh in time the government are going to have to acknowledge that themselves. Um the the issue that I have is that um uh it's a broken promise predicated on a lie at worst or false information at best. And what I mean by that is when we do talk, which is the the part of all of this that I'm passionate about, is the impacts that these changes will have in the marketplace. Um, this is not going to help first home buyers.

SPEAKER_02 2:33

No. And you always say this about government policy, right? There is so many decisions made at the executive level that look good on a spreadsheet, they look good in a think tank, they you know, the focus group that's three or six or eight or sporadically chosen people suggest might be an idea, never inevitably flow down in the direction that the government of the day thinks it will.

Broken Promises And Who Pays

SPEAKER_03 2:54

Ever. And particular particularly this one, and we'll we'll unpack it here tonight um as to who the winners and losers are um uh from the negative gearing and the capital gains tax. But uh um lots of commentary today, and everyone has a different view. But I I like this one from Noel Whitaker, and I've always liked Noel Whitaker because when I was a furniture removalist when I first left school, the first sort of self-help book I ever read was was a Noel Whitaker book, the red one with all of the the the dollar coins on it. Most people um who've read that will always remember what a great, great book it was written by Noel. But he said this morning uh intergenerational inequality is a social construct invented by Labour to give them another class of victim to help. And um this uh policy that we've seen in the budget is Labour purporting to help first home buyers, where really what they're looking to do is have the uh the government benefit of negative gearing that they give to private households for established housing. They want that redirected towards new stock, uh towards developers to build properties for people that they're gonna keep inviting into the country. So, what became clear out of the budget for me is that the immigration levels are not gonna be peeled back. Um, the government um is hellbent on building more properties to house more people in this country.

SPEAKER_02 4:23

One of the uh well said, I think it it's um I often get the the sense from Labour, you know, and as we've talked about before, I'm someone who has always kind of been more traditionally aligned with the centre and the centre left. But I've often always thought that Labour love this concept in their policies of creating, yeah, creating someone to assist, right? And it's not to say that there isn't social justice issues, there certainly are. There is a, you know, there are people that require government support, there always is under every government. Uh, but as we've talked about previously, and as this budget shows, they are always finding a way to create someone else who's marginalized or create a situation where people become dependent on the government for uh, you know, some kind of facility, resource, whatever it might be, uh, and then put policy that looks like it's assisting that group, but inevitably never is. And you know, we see it all the time with the first homeowners grants, with the the 5% deposit schemes. I mean, it looks, you know, on paper, they can say, look at this amazing thing we're doing. But the the benefit ends up downstream. Of course, well, upstream in this case, right? Because it doesn't flow down to the the 90% at the bottom, it flows to the ones that own the property already.

SPEAKER_03 5:26

And then if we get if we go to uh if we go to say the Sydney Morning Herald home page today, and uh you were telling me earlier about the uh uh the um telegraph page's uh first home today, but uh the the the herald today is saying that charmers burst boomers bubble.

SPEAKER_04 5:45

Yeah.

SPEAKER_03 5:46

Well that's just not correct. Boomers have made their money, they're in the they're in the back end of their life. Yeah, negative gearing has worked for them. This is so obvious. Yeah. First, first home buyers or young adults or aspirationals that are working and trying to offset um uh uh tax and and and make it all work, they're the people that will now will not get the benefit of negative gearing in the established housing market that baby boomers got.

SPEAKER_02 6:14

Well, similar vein, and it's sorry to segue slightly, but it's unrelated to property directly. But the superannuation taxation changes, the pension class or the pension phase of superannuation will remain untaxed, which again benefits those boomers that are in that phase of their funds usage, which again, I I'm someone who thinks we probably shouldn't have touched super, but uh the people that are in the accumulation phase, younger people then get two taxable events that's going to further uh diminish their ability to save retirement. I mean, it it is it sounds like they're they're trying to target the boomers on paper, but in reality, they're the ones getting all of the breaks here, you know, and they've already made their money, as you say.

SPEAKER_03 6:53

Yeah. So I'll tell you something um that that was ironic about um the budget last night. Bill Shorten lost the 2019 election on these very policies, yeah.

SPEAKER_02 7:04

Which we talked about not that long ago, in fact.

SPEAKER_03 7:06

Yeah, yeah. Bill Shorten's birthday is May 12th. It was Bill Shorten's birthday on budget night. I did not know that. Yeah. There you go. That's okay. I have no idea what uh what Bill was thinking with a cold one watching that. Maybe celebrating the death of the Albanese government. Watching the uh the policies that uh cost him the prime ministership um you know being introduced to the parliament as as fact. It was just uh talk about an ironic moment, right?

SPEAKER_02 7:31

Yeah, I didn't I didn't realise it. I you know, I love that you opened the episode before we get into the brass tax, I guess. I'd love that you open the episode by talking about you know this being a budget that's a broken promise, because it's not, you know, not to dredge up the past, but it's not the first time we've heard a government go to an election, make a promise, you know, there'll be no GST under government I lead, etc., and then turn around and do precisely the opposite. I think though, in this case, it stings so much more because Labour has always touted themselves as the party of the working class, of the lower end, of the, you know, the underrepresented, the undervalued, the underappreciated in society. And in fact, as we will discuss and we have discussed, they're making it so much harder for that pocket to get anywhere and to ever pull themselves out of the ditch they're in.

Inflation Spending And Political Spin

SPEAKER_03 8:17

Yeah, look, I don't I don't want to get too political because I'm only interested in the budget as it as it relates to uh uh to property, that's for sure. Um, but I will say, in saying all of that, I I will say that uh right from the very beginning, I was just like, oh, this is not going to be a good night. Um Labor have not managed the economy um particularly well in their first four years of government. NDIS was out of control under the coalition in 2021, but under Labour's stewardship, um under their governance, the N NDIS has is just become outrageous. There's other rorts in in uh social welfare that's happening out there. So Labour have had four years to get the economy right. They were bringing inflation down, and then through too much government spending, um, have sent inflation uh rising again to be one of the highest inflationary economies in the world. And um Jim Chalmers spent the opening five minutes of his address blaming the war that started two months ago for Australia's economic woes. I I just found that hard to stomach, where it's like you're trying to wipe what's happened in the previous four years and blame everything that's bad uh on what's happened in in the war in the last two months, and that's just hard hard to stomach. And I think at parts of uh his address on budget night, he took us all for fools.

SPEAKER_02 9:48

To be fair, we only talked about this last week, week before. No, I think it was last week, actually, uh, that the RBA statement had set up the government for this position, though. To position and say, well, you know, obviously the war in Iran is the only thing that's impacting inflation and and we expect it will settle. I saw, you know, one article I read today.

SPEAKER_03 10:07

Yeah, but see, sorry, managing inflation and taxing the daylights out of uh, you know, successful management of the economy prior to are completely different events, right? Look, of course they are, but they've ripped up.

SPEAKER_02 10:20

I'm not surprised that was the the statement made by Chavez, though, given that we we'd only said a week ago that was the likely position and the RBO was set up to assist in that space. Um I read one article just before we we do get down to it uh today, and one of the key takeaways they were suggesting was that out of all of this with the proposals in the proposals in the budget, the uh kind of blind optimism that the war will just end tomorrow and the the uh barrel price of oil will drop so rapidly overnight uh that everything will go back to normal quite soon. This is the kind of optimism of the government. When in reality, you know, there are forces working together at the moment that uh combined with some of the spending in the budget, combined with the war, etc., there there's so many factors. We could be facing a 7% inflationary figure before too long if things don't slow down rapidly and quickly.

SPEAKER_03 11:11

Oh, that's highly conceivable.

SPEAKER_02 11:12

Which I can't even imagine the damage that does to households down the line.

SPEAKER_03 11:16

Well, that's what we said about the uh RBA statement last week, is their baseline case was for the war coming to a quick conclusion. Cross fingers. That's what that was. Closed eyes and crossfingers. Like, I'm not sure what they're watching, but I'm not seeing any quick conclusion to uh to that conflict, that's for sure.

SPEAKER_02 11:32

Oh, look, who knows? It may end, who knows? That's not what we're here to talk about. Let's get into so we're focusing tonight on the key changes in the budget that affected the property market. Let's begin, if you can, taking our listeners through the major proposals put forward, and then we can break down a little bit about what the likely consequences are.

Off The Plan Premium Trap

SPEAKER_03 11:51

So negative gearing on existing properties is essentially banned now or it's not permissible. Yep. And uh to get negative gearing um on a dwelling going forward, uh, it'll have to be a brand new brand new dwelling. Yep. Now, the concept there is um we don't want to create a housing bubble in the established market uh on on the one hand, and on the other hand, we want to stimulate um uh building um from developers at a time that they're struggling to make projects feasible. So what the government is essentially trying to do is send the investment community, if you like, or the you know, the the the investment pool of buyers, redirect them from established dwellings and send them straight at developers. So the larger the developer, the more they'll benefit from this. So some developers have come out and touched on elements of the uh the budget that they don't like, but by and large, of all of the commentary today, you'll notice that property developers were fairly quiet because it's like we were competing with uh established stock for the investor market for so long and now it's a hundred and it's a hundred percent exclusively ours. Yeah. Oh, absolutely. Now, what that's going to do is create a price bubble or a premium in brand new stock as investors over time value those properties higher than what they do existing stock because of the tax breaks they get. Yeah. And you're gonna get what um you can probably call the new property syndrome instead of the new car syndrome. The new car syndrome, as you know, and I looked at it on the internet before discussing things with you tonight. As soon as you drive it off the parking lot and it's it goes, its status goes from a brand new car to to an existing used car, it drops about 10% in value. Most people accept that, yeah? I don't know what in percentage terms what premium will will be in place for these new properties. It might be 5%, 10% or 15%, who knows? But there will be a premium the market finds itself building into brand new properties, and that will be the investor premium for the negative gearing on on new properties. And as soon as the buyer settles on that property and it loses its status as a brand new property and becomes an effectively an existing property or an established property, it'll drop back to market price. Yeah, true market price. And whenever someone's buying off the plan, they'll always tell me about what the unit upstairs sold for and what the unit downstairs sold for. So the one they're looking at must be worth X. And it's like, no, no, no, no, no. What you must do is the property you're looking at buying off the plan, you must judge that value-wise against all the other listings in the broader market. Because if you put a deposit down and you can't reverse the contract on this off-the-plan purchase, and you decide to sell it as settlement gets close or shortly after settlement, you're not you're you're not going to be able to sell it based on what's unit nine floor nine sold for and floor seven sold for, therefore, floor eight is worth X. Buyers are just going to assess what you're selling with every other listing in the broader market. And that's why this is flawed from a real estate perspective. It might be good politics, others will have their view on that, um, about making negative gearing on brand new properties only, but you will see an element of demand drop back on existing properties, and you will see a bubble, a price bubble forming in brand new stock.

SPEAKER_02 15:21

Is the government's hope here that by pushing the negative gearing, not only do we get more dwellings, that's the the theory, but is the hope that the potential investor is willing to offset the sky-high cost of construction? And uh, you know, one of the limiting factors in housing supply at the moment is the fact that it's so expensive for developers to build that they're not building some of the stock. There's all the other red tape and issues behind the scenes as well. But one of the issues is it's quite expensive, so the premiums are high. Is the government's hope to hear that investors just pick up the slack and then say, well, I can offset the cost anyway through negative gearing?

Why Rents Rise From Here

SPEAKER_03 15:55

It's one way for government to subsidize building on mass. Yeah. Yeah. So what people are going to realize in the next um uh one to two years, it won't be this Saturday, but what people are gonna realise in the next to one, two years, what role negative gearing the way we had it, played on keeping rents down.

SPEAKER_04 16:15

Yeah.

SPEAKER_03 16:16

So what was happening is the government it wasn't through social housing, it was by aiding and abetting the open market, but the government through negative gearing was inadvertently subsidizing rents. Yeah. And over time that is going to be washed off as negative gearing investors are not negative gearing in the established market, yeah. Yeah, well, they're not just gonna take a loss for the sake of it. That's right. Now, what's gonna what's going to happen um with the brand new market is the government are gonna um find themselves through negative gearing subsidizing because a price bubble will form, they will inadvertently find themselves subsidizing developers building at a time that's expensive, and they're prepared to do that because of the amount of people coming into the country, what a big issue immigration is um in in this country at the moment, and housing, and and they're clearly prepared to do that.

SPEAKER_02 17:11

So, my question for you is given that it's only for new builds, and let's say you know, Sydney as a uh I guess as a metropolis is somewhat over overpopulated centrally. We know that, you know, there's urban sprawl occurring, but it's not occurring at a rate that we need. Given that the negative gearing, i.e. future rental pool is gonna be concentrated outside of those areas where the new builds are occurring, what's this, I mean, what is this gonna do for the market more broadly, other than just line the pockets of developers and push housing up for you know those that could use new housing near where they may work or they may live and school, etc. I mean it's not to me it's not gonna do anything for supply in the majority areas that actually require it.

SPEAKER_03 17:51

Look, great question. Let's narrow the geography of it though. Yeah. Let's just make it a market that people can sort of wrap their head around rather than saying all of Sydney, which is a a city of uh what, five million now? Yeah, maybe probably more, I don't know. Yeah. Um so I I was with a group on budget night and they said, What is your take on what these changes will do to the property market? And I said, Well, look, um, just look at where we are in the inner west. There's only one mass project taking place at the inner west at the moment, and that is tigers. Oh, yeah.

SPEAKER_02 18:27

Okay, there's proposed ones, but nothing else actually building.

SPEAKER_03 18:30

Nothing actually building that an uh an investor who wants the negative gear can go out and say that that property there is the one I want to buy.

SPEAKER_04 18:38

Yeah.

SPEAKER_03 18:39

So um investors who do want to invest in the inner west now must find a brand new property, and there's you know, isolated duplex sites dotted around the place. There might be a medium rise, um, uh a medium rise apartment block or set of townhouses going up here and there, but essentially there's nothing.

SPEAKER_02 18:59

Yeah, well that's that's my point.

SPEAKER_03 19:00

Yeah, yeah, yeah. That's right. But there's tigers.

SPEAKER_04 19:03

Yeah.

SPEAKER_03 19:03

Now, prices in tigers, depending on what floor you want to be on and what size you need, are ranging somewhere between two and seven million, I believe, the ones that are left.

unknown 19:13

What?

SPEAKER_03 19:14

That's insane. Okay, so think about this. Those apartments between two and seven million is meant to be the rental market of tomorrow in the inner west under the Albanese government in Albanese's own seat.

SPEAKER_04 19:30

Yeah. Yeah.

SPEAKER_03 19:31

And I said to people, who thinks that is a plausible plan? I was like, well, of course it's not. It's like, well, show me where the next project in the inner west is that is going to appeal en masse to investors who then create rental stock for tenants. Yeah. So this is why people are saying a few things coming out of the budget. First and foremost, rents are going to go up.

SPEAKER_04 19:54

Yeah.

SPEAKER_03 19:55

Because investors were subsidizing those investors that were negative geared. And a negative geared is a fancy word for a weekly loss. Yeah. That was one of the first lessons I learned when I came into real estate. You want to be positively geared, not negatively geared. But people have had this fascination with negative gearing and they've all and the Sydney market uh has been kind over a long time where I'll take a small weekly loss in the form of negative gearing, I'll split that loss with the government and I'll get a payday, you know, in terms of the sale price at the end, which justifies the totality of the investment.

SPEAKER_04 20:31

Yeah.

SPEAKER_03 20:31

Yeah. But those investors are now out of the market. And if those investors don't all want to buy in tigers and create rental stock, there's no rental stock.

SPEAKER_02 20:39

Well, and let's be honest, who's buying a two, three, four, five million dollar apartment and leasing it for an affordable value anyway? I mean, it's just not practical. That's my point. Yeah. Even with negative gearing, it's not practical to make that kind of loss.

SPEAKER_03 20:51

So the reason this won't show up on Saturday, but you'll start to notice it uh accelerating in six, twelve, eighteen, twenty-four months, and that'll give the government enough time to say, no, it's not our negative gearing, it's it's something else that they'll come up with. Um, is that landlords will begin to sell out and will come to capital gains tax in pre-1985, but landlords will begin to sell out, and as they sell out, they'll be exclusively appealing to owner occupiers, so it's not replaced by investors, by investors, and the rental pool is shrinking, and there's nowhere for incoming investors to come in and ease the burden. So, what you're going to see is um rents go up strongly in existing stock, and only when rents get to a point where investors are positively geared will they come back into play.

SPEAKER_02 21:44

Yeah. And I in my time that's not a short-term play. It's like it's it's not a it's not a 10-year plan either, but it's not gonna happen overnight.

SPEAKER_03 21:53

It's not gonna happen overnight. I don't pretend to know how long it'll take for the market to recalibrate. So my first Three investment properties were two in Adelaide and one in Perth. And they were positively geared off the bat. I've never, in my 27 years, seen a positively geared property of any credibility. Obviously, there's compromise properties, but for whatever reason. But I've never seen a run-of-the-mill quality property in Sydney that's positively geared in my 27 years of selling real estate.

SPEAKER_04 22:23

Yeah.

SPEAKER_03 22:23

But I believe the market could recalibrate to that point where investors are just not interested unless the rent covers the mortgage.

SPEAKER_02 22:33

Which is the logical way, you know. That's the logical way to invest from the outset. But of course, this has never been that way.

SPEAKER_03 22:40

Uh it's the logical way to invest in the absence of negative gearing. Correct. And that's why I say the government were inadvertently subsidizing rents in the property market, and they've now torn that away, and that will become obvious.

SPEAKER_02 22:55

Yeah. Yeah, and I don't see, you know, the government talk big, and I think a lot of the commentators, whether they be, you know, uh, I guess reasonable or respected people commentating in the space, or whether they're just, you know, social media pundits having a conversation, many people are excited about this because their viewpoint is, again, uh, if that's the case and investors leave the established market, then naturally prices will come down and and the owner-occupiers will be able to buy into the market, which again, you know, may happen with a recalibration in time, as you say. Uh, but it's not going to mean that, you know, if the the budget passes the houses, pardon me, in the Senate, uh, it's not going to be two weeks later that all of a sudden that three-bedroom house in Roselle that was five million is all of a sudden 1.5. Uh the market's not going to calibrate to an extreme level. And if it does do so, it's going to take time. And it's certainly not going to impact supply, which is the major issue to begin with.

SPEAKER_03 23:49

Yeah, well, just on that point, further, that point, Kieran. Um in 2019, um, I did a radio interview with Chris Smith about the Bill Shorten plan and the negative gearing. And um I went back to my computer and printed my notes out this week to look at what we discussed, you know, what I was saying about this issue then, because it's it's essentially the same issue. And I was on uh Chris's show earlier this week discussing this again, and what I said in 2019, which holds equally true today, is that part of the recalibration is yields need to jump sharply, property prices need to fall sharply, or a bit of both.

SPEAKER_02 24:30

Yeah. Which which may happen in this scenario.

SPEAKER_03 24:33

But again, in 2019, a bit of both was plausible because the market was in a different space. There's an undersupply element here at the moment with rising interest rates. So it's a little bit harder to know are yields going to jump, are prices going to fall, or is it a bit of both? I think yields are gonna jump more than prices fall on this one, this at this point.

SPEAKER_02 24:53

Oh, look, I agree, and that's kind of the point I'm making, is that those out there that are expecting there'll be some incredible property correction off the back of all these changes, and that all of a sudden those people that have been renting will be able to say, oh, well, it doesn't matter that rents are gonna go up because now we'll be able to buy the house we want. It's just not a reality. And it, you know, if it does happen, it's not happening in the the short term. You know, this is a long-term plan. To me, it this kind of rings as uh Albany's in his government laying the groundwork for this Homebush 2050 project, that kind of you know, ambitious project of building 200,000 units in Homebush, which sounds amazing for meeting supply, except it's 25 years away from supposed completion. Uh and you know, seeing no plans, no like it's it's amazing to have ideas. I encourage everyone to have ideas, but you've got to follow through and actually have some practical solutions.

SPEAKER_03 25:45

We're talking about tigers because it's well into construction. Yeah, the signs are up. It's not close, um, but it's well into construction in fairness. Yeah. Um it's not close to completion, but it's well into construction. Like I've had clients buy there in the last two weeks. You know, it's it's getting close and it's it's it's getting real. Um once you put a red pen through Tigers, uh as far as the Inner West goes, very difficult to see the next project of a similar size.

SPEAKER_02 26:12

No, well, I think the other well, the next proposal was you know, filling in the gaps on Parameter Road. But again, there's been no real uh kind of concrete plan, there's been no design that like Glebe Island, all of this.

SPEAKER_03 26:23

Like when they're bringing 450,000 people a year in, okay, you've got yeah, or more, you've got your plan, as you say, but where does everyone go and where does everyone live in the interim?

Capital Gains Tax Made Simple

SPEAKER_02 26:33

Yeah, well, this this is exactly my point. You know, they needed to start building Glebe Island 15 years ago, not now. They needed to build the Paramedic Parameter Corridor 25 years ago, not now. I mean, retail's been dead along there for a long time. There's been so much opportunity to do something, it's never been done. But it, you know, some could argue from the other side it's better doing something than nothing. But again, as you say, you could stop demand in the short term, would solve a lot of problems, and then you know, slowly fix all the other ones would make more sense. But, you know, we're in podcasts, not politics, that's for sure. Yeah. Let's uh let's move forward then. The negative gearing is not the only change, and uh, as we've discussed, you know, some people will likely benefit from it, some certainly won't. One of the other big changes is to capital gains tax. Now, uh, I think a lot of people are confused or don't fully understand what capital gains tax is, but um, if you can take us through just very, very briefly what it is and when it activates, and then what the changes are and why they're so consequential, and and you know, why the flow-on effects are going to be quite bad, I think, for the market more broadly.

SPEAKER_03 27:38

Yeah, well, look, I spoke to a few clients that that are on the market with investment properties at the moment, and they felt the new regime would suit them better.

SPEAKER_02 27:48

Right.

SPEAKER_03 27:49

Um, so as in the new capital gains tax. The new capital gains tax process would suit them better. And that was advice that they'd had from their accountants. Um so essentially, um uh capital gains tax um was at your rate of tax, say 47 cents in the dollar, and you got a 50% discount, meaning you paid 23 and a half cents. Yeah. Um the the government now are uh indexing that to inflation based on when you purchased it uh going forward, and people that make a quick killing will everyone will be paying at the marginal tax rate. Yep. Um, but people that make a quick killing um will feel more of their profit paid out in capital gains tax than those people that can offset more of it through inflation. Um that's the uh uh that that's the crux of it. Um there's one of the more interesting uh side effects of the capital gains discussion is that um if you purchased pre-capital gains tax, um the introduction of pre-capital gains tax, you didn't pay any capital gains tax when you sold your asset.

SPEAKER_04 28:58

Yeah.

SPEAKER_03 28:59

So a couple of years ago, only two years ago, we sold, say, a property for four million dollars for a client and they'd bought it in the late 70s. It was an investment the entire time, paid absolutely no tax on it.

SPEAKER_04 29:12

Yeah.

SPEAKER_03 29:12

So um, when we talk about Jim Chalmers's um uh intergenerational inequality, um that was one area where I would give that a tick. I'd give the budget a tick, Kieran.

SPEAKER_04 29:25

Yep.

SPEAKER_03 29:25

Where that was just um here we are 40 years on, and people are still paying no tax from a policy that was introduced 40 years ago. And essentially from July 1, 2027, if if you purchase pre-capital gains tax uh in in 85, any gain that you make from July 1, 2027 is also taxable at the marginal rate. So you're not gonna pay tax on your first uh four million fourty-two years of ownership, so it's still a very, very big uh win for you, but at least it's something. Yeah. And um, you know, when you talk about fair and reasonable, why should someone who was fortunate enough to be of a working age and buy an asset in 1984, why should they pay no tax? Why, whereas if you go out there and you know work a couple of 80 hour weeks and get an investment property for yourself that cracks a profit, why do you then pay tax on that whereas that whereas they don't? So I thought that was pretty fair and reasonable when it comes to capital gains tax.

SPEAKER_02 30:28

Yeah, I look, I agree, and I'm I'm certainly again, I'm not completely at I'm not at all opposed to the government trying to do something about uh you know providing a better safety net for all of us. I think that's the goal of every budget, ideologically. Um, but you know, it is one of those things that's always difficult to balance. The capital gains is something that has been talked about alongside negative gearing as as really hot topics in the budget. Um, do you think that the changes will have a significant impact on investors in the market? You know, given that it's it's one of those things that is hoping to target those that sell off their non-primary place of residence. I mean, is it is it going to have an impact, or do you do you think it'll be more like your clients are suggesting that in fact, well, it actually may be slightly more beneficial for us or for a lot of investors?

SPEAKER_03 31:17

Um, look, those that have sort of ridden the uh the two-decade boom, you know, bought somewhere between uh 95 financial deregulation with the banking system and you know the Aussie Aussie home loans and wizard and all of that coming into the market. So from sort of 95 to 2005.

SPEAKER_02 31:35

Pre-Olympics, the golden era.

SPEAKER_03 31:37

Yeah, and and and even uh 2000 to 2010, people were buying for very good prices then compared to what properties worth now. Every investor that I've spoken to who's who's sitting on those really big paper gains, for example, um, they're really comfortable with the new capital gains tax um uh regime that's being introduced. They have no issue with it. Yeah. Um someone who um you know buys a bungalow in five doc, pushes it over, builds, builds duplexes, and flogs them off for a profit, they're gonna pay more tax.

SPEAKER_04 32:15

Yeah.

SPEAKER_03 32:16

Um, so I'm not sure if that's who the government was trying to capture um or whether it is just a blatant uh tax grab. I I must say um uh I have a bigger issue with what they've done with negative gear because they've misread the impact or they're lying about the impact that it's truly going to have on the property market. And as we're I've said since um May 2022, the Albanese government will end up hurting the people that have voted for them, young adults, yeah, because every policy they're touching is is making home ownership harder, not easier.

SPEAKER_04 32:52

Yeah.

SPEAKER_03 32:53

Um, whereas the capital gains tax that is trying to make it fairer without crashing the market, and it's giving people 12 months to to transition so there's not market shock.

SPEAKER_02 33:05

Do you think there is going to be any impact though? You know, you talk about the developer doing a duplex or let's say someone doing a very, you know, small four apartment development somewhere. Uh is it going to impact supply that again is already limited here? And you've got on one hand the government trying to subsidize and incentivize investors and developers to come in and make some of these builds and provide housing, and then at the same time saying, well, actually, we're also going to sting you with the, we're going to welcome you with the left arm and punch you with the right.

SPEAKER_03 33:32

And do you think that's what we say the big spending, big taxing government, isn't it?

SPEAKER_02 33:36

Well, yeah, but I mean, usually they can somewhat keep them separated in their budget alignment. But in this case, you know, they're making two policies in the same sector that are almost to it to some sectors of the market, obviously not all of it, but some little pockets that may benefit from it. They're actually hampering the development they're trying to promote, to my mind.

Developers Flippers And Rentvestors

SPEAKER_03 33:56

Uh look, I I think, and again, a lot of this, this is the card table's been tipped upside down. Yeah. And this is why I try not to come to the discussion with a political bent, even though, you know, you might not like the politics of the day or you might like it. It's hard not to. I'm just trying to stay rational. I I think um the smaller a developer is or the larger they they are, they'll both benefit from this new world that you know, this post-budget world that we're coming into. Yeah, it's probably the mid-sized guys that are going to find it hard. And the reason I say that is that um a small developer can and will um um put the name of the project in their 18-year-old son's name.

SPEAKER_04 34:41

Yeah.

SPEAKER_03 34:41

And so my 18-year-old son, this is his his primary residence, and then sell it off and say, look at that, he made a two million dollar gain. Um, isn't that fascinating? What a lucky boy. Um and and that'll be tax-free. Yeah. Um, there's only so many family members and so many times you can you can do that, but I I think that that will be a real play where they'll stop buying these sites in company names and they'll start buying them their own names and making them capital free. Because that is one of the winners out of the budget, the family home. Yeah, the primary residence. Yeah.

SPEAKER_02 35:14

Yeah, yeah.

SPEAKER_03 35:15

And and and one of the losers. If you already own one. And yes, and one of the losers out of the budget is rent vestors. Yeah. Yeah, uh hugely. Hugely. Yeah. Like you're on the wrong side of the trade as a rent vestor now.

SPEAKER_02 35:30

Especially if you're investing in, you know, any well, particularly New South Wales, but yeah, it's uh where yields are already low and all of a sudden you're going to get stung with increasing rents. It's a yeah, yeah. It was a popular thing in the last five years, but it's uh maybe not so popular.

SPEAKER_03 35:43

That's right. So um flippers who are you know doing a project uh you know every 12 months or every two years, um, moving from company structure to personal structure and using the benefit of primary residents might be able to duck and weave their way toward a profit. Um, big developers, as I said earlier, with the um investment market being sent exclusively to them, um, the bigger the better. Yeah. So the big guys, as I say, haven't been critical of this.

SPEAKER_02 36:12

They've just Harry's stayed mum knowing he's uh got the right few.

SPEAKER_03 36:15

Harry hasn't, but um um you know Harry Harry's different to you know the the publicly listed guys and um he's got his he's got his own agendas, which is fair enough too. So not not referring to to him in in that, but your your Murvax, your Len Leases, um uh multiplex, uh those guys, they're they're they're they're not gonna come out too critical here because they're on the right side of the trade. Yeah. Yeah. So it's that mid-size guy that uh they're under a tougher tax regime. Um they're gonna get some additional demand from the negative gearing, but is it enough to justify the the higher capital gains tax they're gonna be called upon to pay?

SPEAKER_02 36:58

Well, and as as we both know from working with developers over the years, one thing that they're big on is margin. And if there's no margin, they just won't they won't come to the table.

SPEAKER_03 37:07

You know that's why nothing's being built at the exactly.

SPEAKER_02 37:09

You know, materials are too high, labour's too high, costs, you know, it it's not worth it to go out there and renovate a site or rebuild a site. Yeah.

SPEAKER_03 37:16

As we know. Um and and if developers start building now, it's it's it's it's only because they think the um the retail in uh property investor is is going to pay a premium to what they should for the product.

SPEAKER_04 37:29

Yeah.

SPEAKER_03 37:30

Yeah. And and and are these properties. So when when I was saying I was talking to a group last night on budget night, there was a uh a former government minister there who was explaining that part of the problem in Sydney at the moment, as far as development goes, is that it costs essentially the same to build a block of units in Mosman as it does in Liverpool or Parramatta.

SPEAKER_04 37:53

Yeah.

SPEAKER_03 37:53

Now the block of land doesn't cost the same amount, but the construction is about the same. And as we all know, what you can sell uh, you know, an 85-95 square meter two-bedroom apartment with with views of Balmoral Beach in Mossman for slightly different to the back streets of Parramatta or Westmead.

SPEAKER_04 38:17

Yeah.

SPEAKER_03 38:17

And that's the problems in the city at the moment, is the feasibility to do these projects in the parts of the city that desperately need them don't stack up.

SPEAKER_02 38:25

Yeah, yeah, 100%. Uh look, as we move towards the end of the episode then, Peter, I would love to just get a bit of a wrap-up from you around out of the three major players in property, and I'm not talking about developers in this, I'm not talking about those that we've really kind of done a bit of a deep dive on, but I'm talking about your buyers, I'm talking about your sellers, and I'm talking about your renters in general. Who do you think is probably going to benefit the most out of the changes in the budget, out of those three primary groups? And I'm talking about just your average mum and dad, you know, selling a property in the inner west or buying a property or, you know, young family, whatever. Um, and of the three groups, you know, with say sellers, for example, is there anything that those groups can do to try and maximize or increase their uh their or the increase the the positivity of their outcomes off the back of this budget?

The Curveball Case For New Zealand

SPEAKER_03 39:15

Look, I think um nearly for all of those categories, it goes back to the points we just made. I think there's going to be a um flight to quality. Yep. So um really as an investor who wants to buy a uh um a buy and hold uh townhouse in Dremoyne. Yep. Um but it's established and they can't get negative gearing anymore on that. Are they really gonna find themselves buying a two-bedroom unit in Toongabi because they get negative gearing benefits from it? Yeah. Unlikely. Unlikely. That's never say never, but unlikely. So in uh one of the winners, and I I I said this to myself privately last night, and then it started coming through in social media. One of the one of the winners, if you're asking for winners out of the budget, I'll give you a curveball. It's New Zealand property.

SPEAKER_02 40:13

Interesting. I was talking about New Zealand property today.

SPEAKER_03 40:15

Okay. Yeah. The New Zealand market is currently depressed.

SPEAKER_02 40:20

It has far more relatively speaking, it's still expensive.

SPEAKER_03 40:24

Uh, but it is depressed, it is well off its peak. Yeah. Um there's there's no there's no there's no two ways about that. The exchange is reasonable at the moment, better than it has been Australian to the Kiwi, and it has far more favorable tax policies than Australia does.

SPEAKER_02 40:40

So what I'm interested in this because, as you know, uh, you know, I I spent some time in New Zealand. I really like the country. One of the issues with going there is salaries, despite the exchange, don't keep up with uh Australia, which is a concern for many sectors. Do you think that though the market that will benefit there is going to be the investor market? Is that what you're proposing?

SPEAKER_03 41:00

Yeah, that's right. Yeah, investors will start working out very quickly that going to some of the better parts of Auckland is is a smarter play than buying a two-bedroom unit in Toongabi with respect to Toongabi. I mean it's a good one. But the reason you're in Toongabi is because you're getting negative gearing and the price is loaded anyway. Because the day you sign the contract and and settle a contract on your Toongabi apartment, you might um settle on it for$9.90, you might buy it from the developer for$9.95. I don't know what a two-bedroom unit in Toongabi says, that's probably a bit high, but let's say it's$9.95, you sign the contract, it instantly drops to the broader market price of$8.95. Yeah.

SPEAKER_02 41:43

Yeah.

SPEAKER_03 41:44

But that's all right, because you save a few dollars on your income tax. Yeah. Yeah. And that's what the government wants people to buy into en masse.

SPEAKER_02 41:51

Which which is fine. Again, that's fine if there was It's fine, it was not my money. No, but it was fine if there was 500,000 new apartments for people to buy into. You know, but again, this is the issue. There is still nothing to buy. And those that you can buy, as you rightfully mentioned, in most areas are not affordable for the average investor to then flip and make a rental property. It just doesn't, it doesn't stack up.

SPEAKER_03 42:11

That as far as Sydney goes. That's right, yeah.

SPEAKER_02 42:14

Interestingly, you know, just talking about New Zealand, I got a the whole reason I was talking about New Zealand property with someone today is I got an ad uh sent to me just offering uh investment properties in Queenstown, which I I've I've had once before, but just unsolicited came through today, which I thought was a little bit unusual at the time, but prompted a discussion. Uh but it's interesting you say that. You know, that country that's very similar to ours, very similar economy, but slightly more progressive in many ways, uh, is is potentially a better place to send your money at the moment.

SPEAKER_03 42:45

When it comes to property, yes. So uh over the years, 2013, I had friends and family say, Where should I invest? Um uh I did say at that stage, Liverpool. Yep, might have been a bit earlier than 2013. I said Liverpool, actually. It was an ugly duckling, went really well. Yep. Hobart 2014. Um that was a win. Um you were working with us in 2021 when I said on Chris Smith's show, Brisbane, buying Brisbane. The median house price, if you can believe it during COVID, um, the median house price in Brisbane was in the 400s, wasn't it or something? No, five, five, five fifty-five, five sixty, something like that. Um, I remember reading the Core Logic report on air, and I was like that when Sydney was running at a median house price at the time of 1.3 or 1.4, yeah, and the Brisbane median house price was$550. It's like that market has been flat for 13 years, and that is going to boom, and that's what's happened. So I'll say to anyone who's uh listening to our episode today, where should I invest in property if I've got money to invest? Go and find, go and research, but go and find a good buy in New Zealand. That is the the best place to put your money when it comes to property at the moment.

SPEAKER_02 43:56

The only thing I'll say to that, it's it's good advice. The only caveat I'll add is something. Who spent a bit of time there? Be very careful because lots of Auckland is still under leasehold land. Uh, so there are some cracking deals if you look at them online, but you actually don't buy the land uh and you pay huge rents. So it's just do your research as all property investments should be. Absolutely.

SPEAKER_03 44:17

Look, during the GFC, Kieran, I bought a property in America and I didn't do it online.

SPEAKER_02 44:22

Yeah, of course.

SPEAKER_03 44:23

I flew in flew into America. Of course. Yeah, you've got to be on the ground. Yeah. Yeah. There's man, there's many people that have made a regretful decision by uh by buying properties online, that's for sure.

SPEAKER_02 44:35

100%. I always, as I you know, open the episode by saying, I love budget night, I love sitting down and seeing what the government have in store for me, which is often uh disappointing to be honest. But it's uh it's certainly one that is big on property for better or for worse. It's one that has really decided that the property sector is a source of uh great pain for many people and the government want to be seen to do something about it. So I really appreciate you taking the time to step through the changes and and walking our lists through what it really does mean for Sydney property as a as a whole.

What We’re Watching Next

SPEAKER_03 45:06

Yeah, thanks, Kieran. And look, I guess um some people won't like what we've said today, then it's not politically uh aligned or socially aligned with with who they are at. We've we've tried to be pragmatic here today, not emotional or come with a uh you know a bent or an agenda. Um and we're on the record now. Yeah, we're on the record with some of the things that we've said. So uh we'll we'll see what the next uh three uh three, four, six months bring. Um because I think uh you know people will be rearranging their chips at the table, um trying trying to find the right place for their money and and and their future with uh the you know this this new uh uh system that's but that's been introduced.

SPEAKER_02 45:50

They certainly will. And uh now that we are on the record, you know that I'm absolutely going to check in and get you to update me on the average housing price in Auckland as we move forward. As uh always, Peter, great to chat. Thanks for coming in and we look forward to talking with you next time. Thanks, Kieran. And thanks to everyone for listening to Current Market Insights. We look forward to speaking with you next time.

SPEAKER_01 46:08

Thanks for joining us on the Current Market Insights podcast. Brought to you by Harris Partners Real Estate, the podcast providing real estate insights you won't find anywhere else.