New Property vs Re sales

NEW PROPERTY 

offers 

several advantages

 


Housing construction is an important injection into the circular flow of income in the Australian economy – it is an essential driver of employment.

 

 

 

Construction contributes approximately 8% of GDP and employs more than 1 million people.

Indirectly, many more workers are employed to provide the complementary goods and services that housing (both residential and commercial) necessitates.

 

To stimulate housing starts and the economy through the multiplier effect of construction, the government provides generous INCENTIVES and CONCESSIONS for those investing in a brand new property.

DEPRECIATION

A depreciating asset is one that has a limited effective life and can reasonably be expected to decline in value over time.

Property investors can claim depreciation as a non- cash deduction as a cost of owning the property and renting it to a tenant. Non- cash refers to the fact that the money doesn’t have to be paid out by the owner first, it is merely an allowance made by the Australian Tax Office for investors to reduce their taxable income.

There are two categories of depreciation allowances available to the property investor:

CAPITAL WORKS – (the constructed building) can be claimed as ‘losing value’ (even though market value increases) at a rate of 2.5% pa for 40 years. (2.5% x 40 years =100%) This concession applies to both new and resale property (under 40 years old)

FIXTURES & FITTINGS –

You can claim for new assets; not second-hand or previously used.

This allowance includes where you purchase a newly built or substantially renovated property, for which no one was previously entitled to a deduction for the decline in value of the depreciating assets, and either:

No one resided at the property before you acquired it, or the depreciating assets were installed for use, or used at this property, and you acquired the property within six months of it being newly built or substantially renovated. Following ATO guidelines on the ‘effective life’ of the asset, your accountant will typically claim depreciation of the fixtures and fittings in a new property such as carpets, window blinds, oven and hot water system etc. over 5-10 years.

This is a significant deduction and since 1 July 2017

is only available on new properties

or substantially renovated ones

 

This policy change is an example of a targeted change to the tax system to influence the allocation of resources and to encourage investment in new properties given the employment and welfare effects of new construction.

Think of how significant and beneficial new housing starts will be to the recovery of the economy post-COVID-19. The government will be encouraging new builds, which via the multiplier effect will contribute significantly to production, employment and incomes in the construction industry and the retail sectors.

 

 

Update as of 4 June: “The Federal Government will give eligible Australians $25,000 to build or substantially renovate their homes, in an effort to boost demand in the construction sector and keep builders employed.”       ABC News

 

Brand new properties are often part of master-planned estates with attention to open space and attractive streetscapes. Consistency of housing and covenants (building and design guidelines applicable to a new estate) means that it is unlikely you will end up next to an ‘eyesore’!

New property normally requires minimal maintenance with no renovation expenses. The building carries mandatory warranty periods as do the new appliances installed in the property.

A new property is appealing to tenants.

New properties are built with changing demographics and trends in mind, enhancing the market appeal for tenants and on resale. For example, the trend towards open-plan living is making outdated the formal living areas that don’t match changing lifestyles and preferences. Changing family compositions can be deliberately catered for in new designs. Duplex and dual-key designs are catering to the growing demand for accommodating elderly family members as an alternative to assisted living options.

Consider the impacts on the workforce as a result of work from home orders. Prior to the pandemic, only 5% of workers were in home offices. During COVID-19 it increased to 45% and the new normal is expected to settle at around 15%. This is an example of a structural change to the way we work. The suburbanisation of work will have flow-on effects for the demand for housing in middle to outer ring suburbs and well resourced regional areas. It will also influence the design of housing.

The home office space will be a priority for many. New builds afford the opportunity to meet the changing demands of work expectations and arrangements. Then consider the rise in homeschooling and the need for separation and quiet. Some new multi-dwelling constructions are providing dedicated, communal workspaces for residents to access away from interruptions and the demands of family or other cohabitors.

If the property is a house and land contract to be built, stamp duty is only paid on the value of the land and not on the contract price. This offers the investor a considerable saving. There is, however, interest to be paid on the loan during construction. This, combined with the stamp duty on the land, can equate to stamp duty on a completed package. Both of these costs can be offset against any capital gains tax liability when the property is eventually sold.

https://www.ato.gov.au/uploadedFiles/Content/IND/downloads/Rental-properties-2020.pdf

 

 

 

 

Property Cycles

The property cycle is divided into 4 phases

The property cycle is a recurring pattern of upturns and downturns in the market for housing influenced by economic, political, social and psychological factors.

Periods of growth are inevitably followed by periods of reduced growth and market ‘corrections’.

While property cycles can vary in length, pace and the height of the peaks and the depths of the troughs, they follow the same long term positive trajectory. Variations around the trend line are to be expected, but it is the overall direction of the trend that is important.

This is why a property is not considered a short term investment or a ‘get rich quick scheme.’

It is worthwhile noting too that while recovery periods typically match the length of time, it takes to go from peak to trough, it is not always the case.

Investors need to commit to sustainable levels of debt that will allow them to ride out the downturns.

Investment in real estate like any other asset class is subject to market sentiment and the performance and management of the economy as a whole. Returns may fluctuate depending on factors such as supply and demand for housing, population growth, interest rate changes by the RBA and government incentives and exogenous shocks to the economy.

Influences on the demand side include:

The business cycle – if the economy is growing, unemployment is low, and consumer confidence is high, as incomes rise more people buy their own homes and more people are in a position to invest. If the economy is slowing and unemployment or underemployment is growing, and consumers are pessimistic about the future they will hold off and wait for conditions to improve, leading to a decline in demand.

 

 

Government incentives through fiscal measures encourage owner-occupiers and investors via grants and stamp duty concessions, negative gearing allowances and capital gains tax discounts. Removal of the same inducements will have a reverse effect. Political uncertainty and imminent elections also inhibit consumer confidence.

 

 

The RBA’s manipulation of the cash rate influences the cost and availability of credit in the economy, and more people are likely to borrow and purchase property either for owner occupier or investment purposes when rates are eased and less so when the policy is tightened.

Prudential regulators such as the Australian Prudential Regulation Authority (APRA) can encourage or discourage borrowing by relaxing or toughening the guidelines for financial institution’s lending criteria.

 

 

Demographic trends such as population growth and the divorce rate will increase or decrease the demand for housing (and the type of housing)

 

 

Media coverage intensifies consumer perceptions and ‘fear of missing out’, and it can also drive ‘doom and gloom’. Consumer confidence and emotion govern many decisions.

 

 

 

Influences on the supply side include:

The availability and cost of development sites and materials: vendors will assess the profitability of entering the market as a supplier and calculate the risk and return potential. If they expect costs to increase, they will seek a higher margin as insurance against future erosion of profits.

 

 

 

Bureaucratic red tape and compliance costs influence the profitability of ventures, including the approval process and mandatory infrastructure co-contributions

 

 

 

The cost and availability of finance for developers. If credit is limited and difficult to obtain, a smaller number of projects will get off the ground, typically by more substantial, corporate developers.

 

 

 

Builder expectations, confidence and perceptions of buyer demand influence their willingness to take risks and enter the market.

 

 

 

The property cycle is divided into 4 phases: