by Luke Graham, 15 February 2016

I can visualise it now…

‘benefit from negative gearing available only to new property, call us today’.

This is what we risk if we adopt a policy of negative gearing only serving the purchase of brand new property.

We have discussed many times that the property industry is forever changing, and one significant part of our due diligence is ‘politics’ – the environment controlled by the ‘four tier government system’ of federal, state, local and informally, ‘strata’.

A couple of years back, I was speaking about the Sydney property market with a mentor of mine. He told me that many friends and associates suggested he would be loving the ‘boom’ Sydney market and the business opportunities it would be delivering.

‘No’ he said. ‘Because when things get too easy, it isn’t just the strong that survive; all of a sudden the butcher, the baker and the candlestick maker become property investment experts’.

As a metaphor-loving analyst with a somewhat unhealthy intrigue in the ‘Game of Thrones’ series, I likened this to those who had not yet weathered a long winter. Forgive me if you are unfamiliar with the symbolism.

So as a property investment professional that recommends new Australian property to investors around the country and globe; why is it that I wouldn’t embrace the idea of negative gearing applying only to new property?

1) New property already represents an opportunity for a much stronger cash-flow position because of lower maintenance costs, the opportunity for rental premiums and depreciation offsets. Adding the proposed negative gearing changes would be the equivalent of giving Usain Bolt (an already superior specimen) a 10 metre head start.

2) The above would cause demand for new property to increase to a level where the price would be determined even more by the vendor than the purchaser, causing a two-tiered property market. I recall a university essay where I analysed the real winners of government policy like first home buyer grants. It turns out it was the vendor and sales agent, more so than the purchaser.

3) As a result of the higher demand in new property, substandard developers and builders would have a field day delivering property with inferior design and finishes, catering only to the cash-flow opportunities of this newly defined two-tiered property market.

The last time a government introduced policy to stimulate the supply of housing without considering all aspects, it lead to the greatest economic crisis in a generation.

Let’s try to avoid that here in Australia.