The group of young homebuyers set to lose out from budget changes

4 days ago 13

Young buyers hoping to use a popular strategy to get a foot on the property ladder have been dealt a major blow in the federal budget, with experts warning the controversial tax changes now deem it an unviable steppingstone to homeownership.

Rentvesting has become popular among young buyers that may not be able to afford to purchase in their local market, instead opting to rent where they want to live (or remain living at home with parents) while they buy an investment property elsewhere.

Rentvestors are more prominent in expensive capital cities like Sydney and Brisbane. Picture: realestate.com.au

Many rentvestors aim to eventually use the equity in their investment as a way to get into a home themselves, but the proposed tax changes could make that a much more expensive proposition.

With negative gearing abolished for investors purchasing an established property, they’ll no longer be able to offset rental losses against their income in the year the loss occurred, potentially increasing the cost of holding a property in the short term.

Changes to the capital gains tax discount also means new investors will no longer get a blanket 50% discount on gains when they sell the property, instead paying at least 30% tax on gains that outpace the annual inflation rate. While higher income earners will already exceed this tax bracket, younger, lower paid workers and non-earning spouses may now pay more.

Newly built homes that add to housing supply are exempt from these changes.

According to the Australian Bureau of Statistics, a small but consistent 5.5% of first-home buyers borrow for an investment property, rather than a home to live in.

Senior economist at realestate.com.au Anne Flaherty said for many, rentvesting is no longer an option.

“Particularly for a lot of younger Australians, their way to get onto the property ladder was rentvesting and that has now been taken away from them,” Ms Flaherty said.

“This is a big blow especially to lower income earners and single people who are looking to invest to get that first step on the ladder. Now this is essentially turned off.”

Melbourne buyer’s agent and president of the Property Investment Professionals of Australia (PIPA), Cate Bakos, said reduced borrowing power was another barrier facing prospective rentvestors.

“Lenders take into account negative gearing when they calculate servicing capacity,” Ms Bakos said.

“So they will absolutely take into account the fact that negative gearing is off the table for an established property, and what that will do is significantly reduce an investor's borrowing capacity.

“I think it goes without saying that we'll see far less investors in the established space. Rentvesting going forward is not going to be advantageous, because the tax deductions aren't there.”

Rentvesting has grown in popularity with young buyers who can't afford to purchase in their local area. Picture: Getty

Expanded government support such as the 5% Deposit Scheme will help some buy a first home instead, she said.

“For young people that thought rentvesting might have been a model for them, they've actually got to think about how they can utilise the incentives that are on offer and get into the market for themselves.”

But search data from realestate.com.au shows rentvesting is most prevalent in higher priced markets such as Sydney and Brisbane, where serviceability barriers mean purchasing a preferred home may still be out of reach.

Ray White chief economist Nerida Conisbee said in these markets, many cannot afford to buy where they want or need to live, particularly close to work, family, transport or lifestyle amenities.

“It is not perfect, but it has become a practical way for younger Australians to start building equity in a market where ownership is increasingly out of reach,” Ms Conisbee said.

“This is where the policy risks worsening intergenerational inequity.

“They are being asked to enter the market later, with higher prices, larger deposits and fewer investment options. A policy designed to improve fairness could end up narrowing one of the few remaining ways younger Australians can build housing wealth.”

Real Estate Buyers Agents Association of Australia president Melinda Jennison. Picture: Supplied.

Brisbane buyer’s agent and president of the Real Estate Buyers Agents Association of Australia, Melinda Jennison, said investors also face fewer options to build a house deposit outside of property, with the capital gains tax discount changes applying to all assets.

“Whilst first-home buyers benefit because of reduced competition, those that are still saving a deposit actually may find it a little bit harder to invest the cash that they're earning through wages and income in a way that has a material impact on increasing their savings,” Ms Jennison said.

“Regardless of whether they become rentvestors or invest their earnings into to the share market, everything's going to be taxed at a minimum of 30% so that's a big disincentive for people that are just starting out and really wanting to build the equity to enable them to have enough to purchase their first home.

“That's one of the areas where the budget’s really missed the mark in terms of helping the people that they had intended to help the most.”

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