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Tax perks aren’t everything: Established homes could deliver nearly $600k more
As recent tax reforms push investors towards new builds, those who continue to purchase established properties will see more returns, with modelling showing some could get nearly $600,000 ahead.
New data has shown that investors who purchase established properties could be at a bigger advantage than those who opt for new builds, with some making as much as $592,000 more in the long-run.
According to recent Get RARE research, despite new builds offering attractive tax benefits, the stronger long-term capital growth from established properties could see a much larger advantage.
The report came after the government’s recent policies barred properties from being negatively geared from 1 July next year, with new builds exempt.
Get RARE founder, Rasti Vaibhav, used modelling comparing two $700,000 properties, a new build and an established home, bought with $560,000 loan and held for 20 years.
The data showed a new build owner would receive about $231,000 from negative gearing and depreciation over that period, while the older property would have to pay around $445,000 more in capital gains tax (CGT).
However, the established home would achieve about $1.17 million more capital growth over the same period, and ultimately finish about $592,000 better off overall, despite the new build’s tax advantages.
Vaibhav said that established properties typically achieved better capital growth, with Property Investment Professionals of Australia (PIPA)’s long-run analysis showing established growth at 6 to 8 per cent and new builds at 3 to 5 per cent.
“The mechanism is land share. Land appreciates and buildings depreciate, and established homes hold roughly 65 per cent of their value in land compared with 35 per cent for fringe new builds,” Vaibhav said.
According to Vaibhav, many investors didn’t consider that new developments needed land cheap enough to build on, which sat on the urban fringe.
“So the property class the Budget just made tax-favoured is, almost by definition, the property class furthest from the jobs, the infrastructure, and the demand,” he said.
On the other hand, he said established suburbs were the opposite, as they were closer to the CBD, and had features that made a prime location.
“That is why established stock grew faster historically, and why it keeps growing faster.”
“In practice, this means the tax break is being offered to you in the geography with the weakest structural demand.”
Vaibhav said the data didn’t instantly prove that a new-build strategy was wrong, as it can work in a proven middle-ring suburb, prices correctly, with strong land content.
“Plenty of investors hold both new and established properties for sound reasons. The right mix depends on individual circumstances, the stage you are at, and what the rest of the portfolio already owns.”
However, he said it was wrong to use "new build" as shorthand for "fringe house and land package", and then assume the tax benefits made the maths automatically work.
“The budget did not break property investment. It made the structural question more important than the tax question.”
“That favours investors who make investment decisions inside a framework rather than inside a five-year window. It rewards the order of your decisions, not the speed of them.”
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