Better ideas for getting people into the property market than removing negative gearing

You know, our politicians have never been known for their creative thinking, but really, removing negative gearing as a panacea for prospective first homebuyers being unable to get into the property market is not only short-sighted but very limited. At Destiny, we’ve come up with some other strategies that would be far more helpful for people looking to buy their first property and stepping onto the property ladder.

Stamp duty relief

Let’s look at stamp duty first. Stamp duty is a state-based tax, the rate of which differs quite markedly. In NSW, stamp duty on a $600,000 property for first homebuyers would be: $12,370; in Victoria: $15,535; Qld $12,850; ACT $20,800; WA $22,515; SA $26,830; Tasmania $22,498; Northern Territory $22,700. There are grants and rebates in some states and in many areas, stamp duty is far less on lower priced properties. Despite this, it is an impost that adds further pressure on property purchasers struggling to save for a deposit, buying into an ever-increasing property market. Wouldn’t it be great if state governments offered larger up-front grants and the complete removal of stamp duty for first homebuyers?

Interest-free loans for a deposit

Saving for a deposit is often the biggest hurdle for first homebuyers. As soon as they have saved a certain amount, in hot markets, the property values have gone up and they find they have a shortfall. The banks could come to the party and offer interest-free loans to first homebuyers for their deposit. They would secure a lot of new business doing this and add new lenders to their books who will also borrow the balance of the value of the property.

GST could be removed off new property for first homebuyers

Coming up with a further 10% on the price of a new property to cover GST is a huge added financial commitment. Again this would be loss of revenue to state governments, but it would make new property more attractive to first homebuyers and perhaps encourage further development, creating greater supply, which in turn would cool overheated areas of the market where supply is a major issue.

An improved NRAS scheme

The current Federal government’s National Rental Affordability Scheme (NRAS) was introduced to make it easier for people to find and rent affordable property. It offers a financial incentive for investors to purchase NRAS property and for tenants to pay 20% below market value rent. The new scheme would provide tax incentives for developers to build first home-owner accommodation and selling it 20% below market value, but stricter controls around the scheme would be required to prevent a repeat of the dismal failure of the first attempt. Even better, offer the tax incentives to the actual first homebuyer to live in the property themselves.

Rent and buy elsewhere

At Destiny, we have long been proponents of buying an investment property first. This allows first property buyers to buy in areas where property is more affordable. Then, instead of living there, they continue to rent in locations that better suit their lifestyle and rent their property out.

When the Hawke government tried to phase out negative gearing in the 1990s, they reversed the decision 18 months later. It might raise $42 billion in revenue over the next 10 years but it adversely affects already tight rental markets, reducing the supply of rental properties. Seems to be a very short-sighted proposal indeed.

Housing is unaffordable? You really think so?

It seems to me that getting onto the property ladder is never easy – for any generation. Whether you are looking to buy your first home or you decide to continue to rent or live at home and purchase an investment property first, it is a big commitment that generally brings with it some sacrifices. You will need to be financially disciplined, particularly in the first couple of years of the loan.

It is easy to find excuses not to start investing in property. Your income might not be stable, your circumstances might change, you don’t have the deposit. These all sound acceptable to a certain degree (although be sure that you are not just procrastinating!).

One excuse that, according to many property experts is not acceptable, is that housing is unaffordable. I attended Margaret Lomas’s seminar a couple of months ago and she reminded the audience of the reasons why this “unaffordable” excuse really doesn’t hold up. Here are the reasons she gave:

Even if you don’t follow the business media closely, you would have to have been living under a rock not to realise that interest rates are at an all-time low. Every month the Reserve Bank of Australia meets to decide whether to increase the cash rate (which in turn affects the interest rate lenders charge for home loans). For the past 14 months, the decision has been made not to change this rate, which has stayed at a record low. This means that the cost of borrowing has never been cheaper. Even fixed term loans can currently be found under 5%.

Another factor that new investors fail to appreciate is that the cost of living in some areas of household spending has actually gone down. Margaret refers to this phenomenon as the “Broom Index”. She explains that when she bought her first home the cost of a broom was about $20! Today, with freer trade and cheap imports, you can probably pick up a basic broom from the discount shop for $5. It’s not just brooms, of course, electrical goods have come down in price, furniture and furnishings can be purchased very cheaply, if you are willing to accept a lower quality, just to get you started. Communication is cheaper and easy. When I moved to Australia from the UK 25 years ago, it would cost a fortune (or so it seemed) to phone home. Now I can chat to my friends and relatives all over the world for a couple of dollars. And so this means that there is more disposable income left over after buying basic necessities to put toward a mortgage repayment, and even if the average house costs more, the average person can actually afford more.

Finally, you get more bang for your buck! Previous generations had smaller properties. In recent years, the trend has been to build larger homes – two bathrooms, four bedrooms. So you might be paying more for property but you are also getting more property for your money!

What does all this mean? Well, it means that although property prices may have increased at a greater pace than incomes, other expenditure has reduced. This frees up more of your income to put towards investing in property (either as a principal place of residence or your own home).

After reading these arguments against the ‘unaffordability’ excuse, what else is stopping you from starting on your property investing journey? Perhaps you just need a hand from some professionals who know what they are doing and are able to train you too? Visit Destiny.com.au