This newsletter comes with a disclaimer: there is still a lot to unpack from the Federal Budget, and probably a notable amount of “horse trading” to occur before we get to view the regulations. Saying that, I would like to make some observations, remembering this is an opinion piece only.

Firstly, taking a contrarian view, I don’t believe residential property is dead as an asset class. Firstly, investment decisions should never be about tax. The investment needs to stand on its own two feet and produce the two types of return common to all investments – income (rental) and capital growth. While its shine and attractiveness may have diminished, the general commentary has focused on the tax effect. Yet little has been said about the fact that residential property has always been a favoured investment class for Australians, and given the supply situation and Australia’s need to maintain immigration to support GDP growth, it will remain so.  

Aside from negative gearing remaining on new builds, existing residential property may well benefit from cashed-up investors in the marketplace who have a longer investment horizon for the asset class. Pre-COVID, most property investors bought the asset for ten years. The days of property flipping strategies, marketing groups, and associated fin influencers have really only come about since 2021, and hopefully, these Budget changes bring about the end of speculation. One of Warren Buffett’s quotes applies to residential property as much as it applies to shares: “If you aren’t thinking about owning a stock for 10 years, don’t think about owning it for 10 minutes.”

Further, I expect Landlords who lose access to negative gearing may well set about increasing rents, if they are able, to make up for income losses. Previously, a high-marginal-tax Landlord on the 47% marginal tax rate would save $4,700 in taxes on a $10,000 property loss. If this tax loss disappears, the logical response would be to increase the rents. So, while there may be opportunities for those who can afford to buy, I feel the growing pool of renters will face rising rents. (Where my argument fails is when interventionalist state governments intervene to set and mandate rental returns.) In that scenario, residential property would no longer be regarded as an asset class.

The Budget changes how you view residential property as an asset class. No longer can residential property be fuelled by short-term front-loaded tax losses. Investors (note the word investor, as opposed to speculator) will have to adopt a longer time horizon and seek greater profitability from their investment in the middle to later years of their ownership. Investment 101 teaches that the value of a security is the present value of its future cash flows. Therefore, applying this to investment properties, Landlords may logically seek to improve their rental performance in the medium to longer term by maintaining and improving the asset. The attitude of investors toward residential property may be more akin to commercial property owners, where the emphasis is very much on building rising income yields.

Cotality data confirms rentals increased by 80% over the past 17 years across Australian Capital Cities. The lion’s share of that rental increase has been since COVID in 2021. And the interesting aspect of the Cotality data is that rentals rarely go backwards, they have smaller increases. In summary, residential property investment is not dead. It may be more subdued in the light of these changes and the uncertainty of regulations, but accounts of it no longer being an asset class are grossly exaggerated.

Disclaimer – these are the opinions of the Author and should not be regarded as Advice or relied upon for investment decisions.