Negative gearing: Are new units a good investment now or a real risk?
Key takeaways
- Investors are fleeing the property market thanks to tax changes, rising rates and falling values.
- Newly-built investment properties are exempt from negative gearing restrictions and look like a safer longer term investment.
- What's next: But getting finance for a new unit investment is tricky right now, and construction costs keep rising.
It's a bad time to be a property investor, as values fall, rates remain high and generous tax advantages are coming to an end.
But investing in newly-built units is the one area where investors can still negatively gear after mid-2027.
But the question of whether these properties are a good investment is a complicated one. The very factors that make it harder to finance and construct new unit developments also make them more attractive investments in the long term.
Falling property prices, rising rents
Australian property prices are falling nationwide. The Cotality Home Value Index fell 0.9% nationally in August.
And overall, house prices are falling faster than units. In some cities like Sydney and Melbourne, unit prices have been falling for quite some time, but in other cities like Brisbane, Perth, and Adelaide, units are still performing strongly.
So depending on where investors are looking, units can still represent good value. And rents are actually increasing.
The national rental vacancy rate remains very low at 1.9%, and rents are increasing, according to Cotality figures.
But rental yields are not high enough to offset high interest rates and falling values.
"Yields would need to rise substantially before rental income offsets holding costs, particularly while interest rates remain elevated," said Cotality research director Tim Lawless.
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Investing in new builds still has tax benefits
Tax changes in the May federal budget are also helping drive property prices down and keep investors away.
The lucrative 50% capital gains tax discount is no more, meaning property investors pay more tax when selling a profitable investment.
Negative gearing, which helps investors minimise their taxable income when an investment property loses money, is ending for most future investment properties.
But investors building new housing are exempt from the negative gearing restrictions. And they're able to choose to keep the CGT discount or apply the new cost-based indexation method depending on which is cheaper.
This makes new unit investments particularly attractive from a tax perspective.
But the reality is far more complicated.
3 risks for investing in new apartments right now
Getting a new unit development from approval to completion is very challenging right now for three reasons.
- Rising construction costs. As inflation bites every sector of the economy, constructing new apartments is getting more expensive too.
- Settlement risks. It's harder to get finance approved when rates are higher. And because loan approvals are finalised at settlement, investors in a falling market face the risk of a unit's final value being lower than initially expected.
- Construction companies going insolvent. A very high number of construction companies in Australia have entered insolvency in the last couple of years, including Sydney's high-profile Bathla Group.
The long-term upside of low supply
But there's an upside to the difficulties in actually getting a unit financed and built. At least for investors.
There's a major projected shortfall of new homes in the coming years, precisely because of the challenges involved in finance and construction.
This suggests that new units are a very viable long-term investment prospect. As long as you can get finance and see development through.
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