Is the cost of property investment in Australia rising?

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ichigomochi
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Joined: Wed Jun 24, 2009 4:06 pm

Is the cost of property investment in Australia rising?

Postby ichigomochi » Mon Sep 01, 2014 10:10 am

Hi Home Loan Experts!

I live in Sydney with my wife and a son. I and my wife have a combined income of about $150,000 per annum and my son is going to college next year. We bought a house in Sydney 2 years back and we still owe about $600,000 on that.

Since we have a decent income, we are thinking about investing in a property, but we want to put that plan on hold until our son goes to college. Some of my friends have been investing in the property market for quite some time, and they are telling me that investing in property is about to get more expensive so I should spend as soon as I can.

I do not have much knowledge in property investment. I would be extremely grateful if someone could give me some suggestions regarding my situation.

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Otto Dargan
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Re: Is the cost of property investment in Australia rising?

Postby Otto Dargan » Mon Sep 01, 2014 10:56 am

Hi ichigomochi,

Welcome to the forums.

It has been quite some time that the Reserve Bank of Australia (RBA) has been concerned about the growth of house prices in Australia. In order to address this trend, the Australian Prudential Regulation Authority (APRA) is proposing new lending policies for property investors. These policies may result in changes including:
  • Higher interest rate for investment loans
  • Limiting the Loan to Value Ratio (LVR) to 90%
  • Preventing the offsetting of losses through negative gearing
These changes in policy have been proposed since the APRA considers the following to be the main causes behind the growth in property prices:
  • Low interest rates
  • Proliferation of overseas investors
  • Growing acceptance of renting over buying
The federal government is concerned about the affordability of housing. There has been increased speculation and investor borrowing in the property sector which may have been the main causes behind the growth in housing prices. According to RP Data, 50 per cent of the new home loans are secured by investors and this has distorted the housing market.

One can never say when the federal government or the RBA will bring about the changes. However, it is reasonable to assume that the policy changes may come into effect in the imminent future. This means that property investment loans may cost much more in the future than now. More and more property investors are trying to secure a loan soon enough before the new changes are introduced in order to avoid the higher costs of the future.

Cheers,
Otto
Otto Dargan
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ichigomochi
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Joined: Wed Jun 24, 2009 4:06 pm

Re: Is the cost of property investment in Australia rising?

Postby ichigomochi » Mon Sep 01, 2014 11:37 am

Hi Otto,

Thanks for the reply. Could you explain me a bit more about negative gearing as I am quite oblivious to the investment jargon?

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Otto Dargan
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Re: Is the cost of property investment in Australia rising?

Postby Otto Dargan » Mon Sep 01, 2014 12:57 pm

Hi ichigomochi,

Negative gearing is where you make a loss on the cashflow of your investment property and then claim that loss as a deduction when you lodge your tax return. If the interest and the operating costs of your property are less than the income from the investment then you make a loss. For this loss you are able to receive a tax refund against your other income.

For example, let’s say that your income is $90,000. If your property makes a loss of $10,000 per annum then your taxable income would be $80,000. If the tax rate at the time was 40% then you would receive $4,000 as an additional tax refund.

Another thing that investors are able to offset some of their loss is through tax-deducting depreciation. Considering the same example as above, if you claim $5,000 as the depreciation on your property, your net rental loss for tax purposes would be $15,000. Your taxable income would then be $75,000, thereby enabling you to save $6,000 on taxes and your losses after tax would be reduced to $4,000.

The ultimate aim of negative gearing is getting into the market early and increasing your income from the investment over time to cover your past losses. The growth in the property value usually surpasses the holding costs of your property. You can use the Investment Property Cashflow Calculatorto predict the weekly cashflow of your investment.

If you would like more help with this then you can call us on 1300 889 743 or fill out our free assessment form.

Cheers,
Otto
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

ichigomochi
Posts: 50
Joined: Wed Jun 24, 2009 4:06 pm

Re: Is the cost of property investment in Australia rising?

Postby ichigomochi » Mon Sep 01, 2014 1:23 pm

Thanks for taking the time to explain things. I would definitely call you guys to discuss more about this.

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otea
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Re: Is the cost of property investment in Australia rising?

Postby otea » Tue Nov 25, 2014 12:54 pm

Hi Otto,

You have said that investors may be limited to borrowing 90% of LVR in the future. Can I borrow more as of now?

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Otto Dargan
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Re: Is the cost of property investment in Australia rising?

Postby Otto Dargan » Tue Nov 25, 2014 3:04 pm

Hi otea,

You may be able to receive a 95% investment loan. However, lenders consider investment loans to pose a higher risk to them than home loans. Therefore you need to be aware of the following while applying for such loan:
  • You have 5-10% of the property value in genuine savings.
  • You have a clear credit history and a high credit score.
  • You have equity in other properties when you are applying for a loan.
  • You have stable employment.
Cheers,
Otto
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

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otea
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Re: Is the cost of property investment in Australia rising?

Postby otea » Tue Nov 25, 2014 4:11 pm

Thanks for the response Otto. I will have to talk to my accountant and I will contact you if I need more information.


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