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Investors becoming more savvy amid tough market conditions
As investors react to market conditions weighing on sentiment, home owners are beginning to consider turning their owner-occupier asset into an investment down the line to maintain tax benefits.
With consumer sentiment softening across the country after the budget, investors have been reevaluating their portfolio management strategies, with some opting to shift their debt for future tax benefits.
Fouracre Financial CEO Jack Fouracre said that in the wake of the property taxation changes, he had seen a drastic increase in inquiries from clients wanting to move their debt to interest-only.
He said they viewed their current owner-occupied home as a potential future investment, as it had maintained the tax benefits of being purchased ahead of the budget changes.
“Clients are wanting to put their owner-occupied debt on interest-only because they, at some point in the future, anticipate that they are going to retain that property and buy a new owner-occupied property,” he said in The Property Nerds podcast.
“Even though they’re turning it into an investment years later, that debt is going to be deductible against it, and they get that immediate benefit. Investors are being pretty savvy.”
InvestorKit founder Arjun Paliwal said that while more investors were considering shifting their debt, they needed to understand the strategy's pros and cons.
He said that while home owners typically wanted to become debt-free as fast as possible, some buyers were beginning to change their stances.
While it could be a viable strategy for investors who want to maintain a certain level of debt to leverage existing negative gearing benefits, Paliwal said they needed to ensure they were making portfolio moves on their own terms.
“That’s a lot of people who are going to become accidental investors. They’re going to build a portfolio that’s driven by the government’s decision-making and ‘wanting to keep this as an investment’, but it could be a dud that you shouldn’t be keeping,” Paliwal said.
“Had the government not made this change, you would have sold it and moved on.”
Fouracre said the biggest market impact of the government changes was the shift in buyer sentiment, as they reacted to the new state of affairs.
“I don’t think there was any major structural change. All they really did was tax you differently.”
“The fundamentals are still there. We are talking about single-digit price reductions, so it’s not Armageddon.”
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Paliwal said that buyer sentiment was heavily impacted by a range of factors, ranging from media influence to economic factors.
He said media influence on property markets had been at a peak since the COVID-19 pandemic.
Similarly, he said that government intervention in the property markets could significantly sway investors.
“The RBA changing their tune on rates could be another shifter, or it could also be government policies getting tweaked,” he said.
“Media, RBA, rental news on the rent crisis, all of these different things are little sentiment shifters.”
Markets providing a variety of outcomes
With investors searching for opportunities in an increasingly negative market, Paliwal said buyers should remember there was no one national property market.
He said that while property markets were often split by geography, they often also diverged by price points.
“The trend is clear, not everywhere is super hot, but not everywhere is declining like crazy either,” he said.
He said properties at the higher end of the market had suffered a bigger drop than their more affordable counterparts.
According to Paliwal, while high-end markets were more susceptible to the decline, they also benefited more from strong conditions.
“People forget that the highest-end markets, when they go, they go like crazy. What is not new is the higher ends having more volatility,” Paliwal said.
“What is new is how long the lower end has outperformed. I haven’t seen a history like this where, over 20-plus years of data, the lower end has been beating the higher end for this long.”
He said the past six years had been defined by more affordable properties beating more expensive homes.
Paliwal said investors with an appetite for large property purchases had the most to gain in the long term.
According to Paliwal, the price ranges with the most to gain were between $800,000 and $1 million.
“The rental yields are already juicy on them, the prices are starting to fade away a little bit, the deals are good, and the sentiment is good.”
“If you can squeeze in there, you’re in this kind of empty territory where you can pick something up and get a good deal, and then all it will take is that little recovery.”
“That market is where the magic is,” Paliwal said.
Listen to the full episode here
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