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http://www.smh.com.au/business/property-is...90911-fkre.html

Property is no walk in the park

September 12, 2009

Those 1.5 million property investors around Australia who record tax losses in their tax returns must be hoping that when it comes time to sell there will be a big pay day. How else can the enormous losses racked up each year by property investors be explained?

The latest available data from the Australian Taxation Office shows those 1.5 million property investors claimed $19.4 billion in rent and $25 billion in deductions in 2006-07; a collective loss of $5.6 billion and an individual average loss of $3733. Running a loss-making investment is not a noted formula for success. The game plan of the typical baby-boomer landlord appears to be one where they are willing to book losses running into the tens of thousands over the life of the investment in the hope of recouping those losses, and more, when they sell.

Property ownership has a special place in the national psyche and receives favourable tax treatment, and property prices are higher than they should be given the paltry rent that comes in. But capital city property prices tend to bunch up in a few boom years and then stay flat, with inflation doing its bit to moderate prices in real terms.

The last property price boom in Sydney was the millennium (or Olympics) boom, when prices almost doubled between 1997 and 2003. This year there has been a strong increase in prices at the bottom end, driven by the first-home owners' incentives, following five years of flat prices.

Gross yields (annual rent divided by price) on most investment properties remain a little above 5 per cent, despite relatively strong growth in rents in recent years. And that is gross yield before the high costs are taken out, which is presumably why investors have always been more interested in property for the capital gains than for income.

For high-earners, those costs have been reduced by negatively gearing them against their main income. This is where the interest on the mortgage and other legitimate expenses are greater than the rent, and the shortfall is used to reduce the income from the investor's salary, on which income tax is paid.

But with the cuts in marginal tax rates and the lifting of the thresholds at which the rates come in, negative gearing has become less attractive. The highest tax rate of 45 per cent (excluding the Medicare levy) does not kick in until income reaches more than $180,000. The majority of people are on the 30 per cent tax rate and so negatively gearing an investment is much less tax-effective than it used to be.

With the next move in interest rates likely to be up, and mortgage rates likely to be close to their normal levels of 8 per cent in a year or two, from about 5.5 per cent now, anyone thinking of taking the plunge into property had better do the numbers carefully.

Many investors fix their mortgage rate because they like the certainty of the amount of their repayments. Because of the global financial crisis and the tightening of credit markets, those fixed rates are particularly high relative to variable rates. Three-year fixed rates are about 7 per cent and the discounted standard variable rate paid by most people is about 5.5 per cent. Fixed rate mortgages are likely to remain high until credit markets return to normal.

On top of the issues of low-yield, high fixed-mortgage rates and lower tax thresholds is the problem of high vacancy rates. What really puts a hole in the numbers for any property investor is if there is no rent coming in. One of the effects of having all of those renters now buying units because of the first-home-owner incentives is that vacancy rates in units are at their highest level in three years. Sydney units have a vacancy rate of about 2 per cent. That's better than the usual long-term rate of 3 per cent, but its creeping up again after being a very low 1 per cent for the past three years.

After doing nothing for five years, Sydney unit prices are up 5.4 per cent since the start of the year, according to property researcher RP Data. The main reason for this is surely the first-home owner incentives. After September 30, the $14,000 grant for established property reduces to $10,500 and the $21,000 grant for new property is lowered to $14,000.

There is an old adage in property investing that says how much an investor makes is mostly determined by how much they pay. Investors may be wise to wait it out and see what happens when the first-time buyers have had their fill. There will probably not be a boom in prices. Interest rates will be higher and first-timers are particularly sensitive to higher rates. Investors should be in no hurry to buy an investment unit.

Edited by Panda

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It's not different, only delayed. According to today's Brisbane Courier and Mail, prices in Brisbane are down 10.7% on the year, and on Friday I posted in another thread stats showing that while volumes had remained stable, unit prices have tumbled badly.

Negative gearing plus capital loss, does not riches make.

The report above was on page 2 of the paper, page 3 has a sad tale of pensioners in penury because of high rents - another downside to the great HPI bubble.

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