Demand and prices of recent new builds to fall after 2017 Budget depreciation negative gearing changes

Demand and prices of recent new builds to fall after 2017 Budget depreciation negative gearing changes
Demand and prices of recent new builds to fall after 2017 Budget depreciation negative gearing changes

The budget changes to negative gearing depreciation claim items will see investor demand for recently completed housing fall or flatline - and result in a cooling in the Sydney and Melbourne markets, according to SQM Research's Louis Christopher. 

Investors who own current properties, particularly newly built ones, will especially find it harder to buyers.

The new limits to the way expenses can be deducted against negative geared properties - which need to be legislated - will prove a turning point in the investment property market, he says.

The changes mean owners of any property not bought brand new will no longer be able to depreciate items like air-conditioners, cooktops and dishwashers, or shared equipment such as lifts in apartment complexes. 

Quantity surveyors and analysts said these form up to 50 per cent of depreciation deductions for investors.  

"I think there is enough in it here to slow the market down in the second half of the year," SQM Research's Louis Christopher said. 

"We will see a significant drop off in [investor demand] in the second half.

"I will be expecting there will be less investors in the market."

Christopher is changing his house price forecast with lower numbers to be released next week.  

The federal Treasurer Scott Morrison has confirmed the deduction benefits would be grandfathered but to prevent "double dipping" in depreciation, only the first investor of each new investment property can claim these deductions.

The federal government has also confirmed to The Australian Financial Review that subsequent investors of residential investment properties would not be able to claim depreciation to existing plant and equipment even if that equipment had not reached the end of its effective life. 

Investors could only claim depreciation on plant and equipment they had bought subsequent to their purchase.

Quantity surveyor Washington Brown fears the rules would affect off-the-plan investors who could potentially be unable to depreciate plant and equipment purchased originally by the developer. 

"I suspect that the legislation will be worded such that if the plant and equipment was in situ at the time of purchase, you can no longer claim it," director Tyron Hyde said in his note to clients. 

Christopher urged the federal government to make a swift clarification otherwise decisions would be made on "wrong information". 

"The Liberals have not intended for the policy to be draconian…and while saying they would leave negative gearing alone, have actually done the opposite."

Limiting previously generous plant and equipment depreciation deductions to only those expenses directly incurred by investors will impact on the Quantity Surveyor industry,

The blog of Pete Wargent noted data compiled by MCG Quantity Surveyors showed that their average claim for depreciation deductions was $9,138, up to half of which was typically for plant and equipment deductions. 

"For new individual Mum-and Dad investors - which is most of the landlord market - this is a fairly significant change to tax legislation," Wargent noted. 

"Overall, it may become more tax-efficient to purchase older style properties in order to renovate them, though for properties built before 1987 the building works component would already be fully depreciated over 40 years. 

"Some domestic investors may be inclined to steer clear of new properties for this reason, in turn hurting building approvals and dwelling starts, at least while the dust settles," Wargent advised.

Jonathan Chancellor

Jonathan Chancellor

Jonathan Chancellor is one of our authors. Jonathan has been writing about property since the early 1980s and is editor-at-large of Property Observer.

Tags: 
Dwelling Approvals Housing Prices

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