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Budget post-mortem: Tax reforms reshape investor opportunity
Investors have been hit with tougher borrowing conditions and major tax changes this year, but buyer uncertainty and a tighter rental market create opportunities for investors who act.
Following the May federal budget, investors have been hit with tightened borrowing capacity and limitations on tax benefits, but a silver lining exists for those who persevere.
According to InvestorKit founder Arjun Paliwal and Fouracre Financial CEO Jack Fouracre, the reforms have led to unintended ramifications despite being intended to aid first home buyers.
They said the measures had increased competition between investors and other purchasers, particularly in the lower end of the market, where prices were failing to decrease.
Meanwhile, the exodus of investors has put additional pressure on the rental market, causing prices to rise.
Paliwal said rather than only seeking to help first-time purchasers get into the market, the government reforms should have aimed to support investors as well.
“I don’t think it’s ever a great strategy to hurt one to help another. What happens for long-term success is to help them both,” he said on The Property Nerds podcast.
Ultimately, he argued that increased first home buyer hesitancy and higher yields presented an opportunity for investors to try to secure solid deals and reap the benefits of better returns.
Budget repercussions
According to Fouracre, many investors faced reduced borrowing capacity as a result of losing their tax benefits, and were now pushed towards the lower end of the market.
“They’re forced towards the 600, 700 range – this is where first home buyers are playing, and the data is showing that prices aren’t actually declining in that lower end of the market," he said.
As another effect of the budget, Fouracre said many investors were needing to rethink their strategies due to the negative gearing changes.
“For some people, they don’t care. For other people, they want to target high-yielding properties, typically at the cheaper end of the market,” he said.
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Further, many investors have been seeking out long-term growth opportunities, trying to minimise their debt as much as possible, and pivoting to new builds.
Additionally, some have also been shifting to commercial investments, with data showing investors were likely to pay less capital gains tax (CGT) in the sector than in residential.
Investor opportunities
Despite investors being heavily affected by the tax changes, Paliwal said they also had a golden opportunity to make the most of the current market.
He said the budget measures had done nothing to fix buyer hesitancy, with many first-time purchasers taking longer to make decisions and some even refusing to act.
At a recent Hobart open home his team had attended, there were no first home buyers, whereas before the budget he had lost to 12 first-time purchasers.
“Their behaviour has shifted completely in the opposite direction. Instead of taking action when all the investors disappeared, first home buyers are gone,” he said
With many first home buyers holding back, investors should take their chance to act and find good property deals, particularly in the lower end of the market.
“Someone else’s state of confusion is your time to act and purchase, and someone else going, ‘maybe I’ll hold back’ is your opportunity before they all decide they don’t want to miss out,” Paliwal said.
Paliwal said that first home buyers often made decisions in two different ways – acting swiftly out of a fear of missing out, or hesitating and not acting at all.
“If they’re in that ‘no I shouldn’t’ stage, and you’re an investor watching it, think about these signals that first-time buyers are displaying,” he said.
“That’s 15 to 30 per cent of the market, depending on certain confidence conditions that are in this retreat mode right now, even though this environment is meant for them.”
Paliwal urged investors to take advantage of the reduced competition in some markets, warning they could miss out on great buying opportunities.
Additionally, he said that some investors had been leaving the market, putting pressure on rental supply and causing rents to rise beyond Treasury’s initial forecast.
As a result, he said that investors were able to take advantage of higher yields.
“Despite someone else’s frustrations with the rent, yields have been rising whilst prices haven’t.”
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