New negative gearing changes are supposed to make investors pay – and they will: an average $20,000 a year out of pocket for a unit and $65,000 a year for a freestanding house.
Sydney tenants are being told to brace for a nightmare as negative gearing restrictions announced in the May federal budget threaten to make owning a rental home so expensive that most investors will stop buying.
And that means fewer rentals coming onto the market a time when high migration is rapidly expanding the tenant pool, creating perfect conditions for more rent hikes.
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New analysis has revealed that, without the tax benefit, owning an established rental unit in Sydney will cost a new investor an average of $20,000 in annual out of pocket expenses.
That’s once factoring in current rents, prices and interest rates.
Those who want to invest in freestanding houses will need to shell out an average of nearly $65,000 in annual out of pocket expenses even after accounting for received rental payments.
Buyer’s agent Daniel Walsh, pictured with wife Sophie, said negative gearing reforms would not have the intended effect laid out in the federal budget.
These average costs are the result of extreme prices, interest rate hikes and the government’s decision this week to wind back negative gearing concessions, which allow landlords to offset their annual losses against their taxable income.
Landlords who bought homes before Budget night will retain these concessions because of grandfathering provisions, but new investors buying established homes will lose the benefit from July 2027.
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Experts said the changes have slammed the door on investors buying anything but new homes in Sydney because few investors can afford the extreme holding costs without the negative gearing support.
“Renters will feel the impact most because less rental stock will be added to the market,” said property analyst Kent Lardner of FoundIt.
Modelling of PropTrack figures showed that even owning a rental in some of the cheaper Sydney suburbs with better rental returns was a lofty expense.
Even cheaper units will require steep out of pocket expenses for investors that rents simply won’t cover.
Someone who invested in a unit in Lakemba or Punchbowl at the current median price using a 10 per cent deposit would need to spend nearly $7000 a year just for their mortgage costs if receiving market rent.
That’s not even factoring in the typical strata fees, insurance, council rates and money for repairs and maintenance.
The annual out of pocket mortgage expenses for units rose to $8000 in Bankstown, nearly $11,000 in Waterloo and about $15,000 in St Marys – all popular markets for landlords.
Investment houses, even in Western Sydney, were a different level of expense. Owning a rental house in Campbelltown would incur $33,000 a year in out of pocket expenses, while in Penrith it would be $39,000.
These net mortgage cost figures assumed the investor used a 30-year mortgage and paid principal and interest at current interest rates.
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Critics of the new reforms have argued they may be too effective in driving out investors to the point of strangling new rental supply.
Mr Lardner said he feared for renters stuck in this environment.
“The problem is that these changes have not been paired with any boost to the public housing sector,” he said.
“Negative gearing was put in place to subsidise the supply of private rental housing. Not every tenant is a potential home buyer, some will need to rent long-term.
“If we’re in a situation where the tenant pool continues to grow because of migration but little rental stock is added to the market, you have to ask: where are all these renters going to live?”
Investor and buyer’s agent Rasti Vaibhav said it was no longer feasible for mum and dad investors to buy rentals in Sydney.
“It doesn’t stack up,” he said, adding that the government’s drive to get investors to buy newly built homes by continuing negative gearing benefits for these properties “won’t work”.
Treasurer Jim Chalmers announced that negative gearing would be restricted to newly built homes from July 2027.
“It doesn’t make sense to build wealth through new properties,” Mr Vaibhav said.
“Newly built homes have historically been riskier purchases. There is less capital growth … (government) is trying to push investors to take on more risk by buying new.”
Owl Home Loans broker Aidan Hartley said there was a danger negative gearing restrictions and capital gains tax changes, coupled with rising interest rates, would work “too well” in discouraging investors.
“It makes investment less desirable, which is the intended purpose, but it may go too far,” he said.
“It is very hard to spend $20,000 a year of your after tax income on an investment property. That’s not feasible for most people.”
Buyer’s agent Daniel Walsh of Your Property Your Wealth said the changes would distort the market.
Negative gearing will be restricted to new builds from mid-2027.
The few remaining investors willing to purchase in Sydney will be funnelled into cheap outer areas, while activity in expensive inner markets and lifestyle suburbs would vanish, he said.
Mr Walsh pointed to the inner west, eastern suburbs, north shore and northern beaches as some of the areas where rents could spiral out of control.
“Rents in these areas would be in a cycle of continued rises because some people need to live there because of work, but investors will be buying in outer areas with more new houses,” he said.
Mr Walsh, who owns 25 properties with wife Sophie, said the irony of the changes is they affected people like him “very little” but would sting “middle-income” families.
“The people who use the most negative gearing are those who pay personal income tax. That’s middle-income people, mum and dad investors,” he said.
“Wealthy Aussies often own properties through company titles and trusts and they are not as affected.”
Nathan Birch, founder of property management firm Blink, said much of Sydney was not ideal for investment.
Nathan Birch, director of national property management firm Blink, said close to 95 per cent of all Sydney suburbs were now at the point where they were no longer suitable for investment.
“Sydney … It has a lot of markets that are cooked. They’re well overcooked,” he recently told investors.
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