Stock take Author: By Alex May Date: April 17 2004 Publication: Sydney Morning Herald (subscribe)
Domain considers the real impact of the mini-budget tax changes.
Treasurer Michael Egan's tax bombshell in the April 6 mini-budget seems to have created more whingeing than a genuine outcry from property investors. And there aren't any first-home buyers complaining that they won't have to pay stamp duty for properties under $500,000.
Rather, the general response has been to "wait and see" as investors watch what will happen to their rental returns and capital gains, and first-home buyers wait to see if prices will come back to more realistic levels.
Real estate agents across Sydney have expressed diverse reactions some say they expect a rush of listings before July 1 and others see no change to local market conditions.
CPM Realty's Sam Elbanna, who sells in the Green Square area, says four contracts for apartments fell over within 48 hours of the tax announcements. Raine & Horne Marrickville's Luke Smith says confused landlords have been asking about the impact of the taxes, while first-home buyers have expressed strong interest in apartments and small semis.
Raine & Horne Drummoyne's Adam Gilchrist says there has not been "a single phone call" about the changes.
WHAT ABOUT PRICE FALLS? The reality is that apartment prices across Sydney have been falling since 2003 in areas where demand is weak and supply is strong. The Real Estate Institute's Rowen Kelly says prices especially for generic investment-style apartments have been softening for at least 12 months.
Green Square Waterloo, Alexandria and Zetland has the largest numbers of new apartments available in Sydney and has been a haven for investors looking to buy off-the-plan to reap capital gains and rental incomes. Sam Elbanna says 84.5 per cent of his sales in 2002 were to investors, before falling back to 62 per cent in 2003 and even further this year.
Kelly says there needs to be a rush of first-home buyers to the market just to maintain "equilibrium", otherwise further price falls will probably be on the cards.
Sydney Property Finders buyers' agent Dennis Kalofonos says the Green Square area will not be a bargain until apartment prices return to what they were three years ago. "I would suggest another 30 per cent fall in prices would make them attractive," he says.
The point is that no one really knows what prices across Sydney will do, but most commentators and agents are certain that the new tax announcements have created a slide in sentiment that will force property investors to think about investing in better performing assets.
WHAT SHOULD INVESTORS DO? BIS Shrapnel's Robert Mellor says any property investor who bought in 2000 or earlier should logically look at selling now to take the huge capital gain.
"It doesn't matter if they don't get what they expect to get, because they have still made a profit and over the next five years there won't be huge capital gains in Sydney," he says. "It logically makes more sense to invest in equities or the Queensland market than in Sydney."
Mellor says investors are kidding themselves that they can jack up rents, and he doesn't see that rents in Sydney will rise for three or four years.
Kalofonos says long-term property investors should look to buy in established areas where demand is always strong, and should only hold apartments that have high quality design, good use of space, and parking.
Kelly says the real casualties of the new tax laws and current market conditions will be small investors holding generic apartments that don't appeal to owner-occupiers or have opportunities for rental increases.
AGENTS AND DEVELOPERS The other casualties of the tax changes and the current market conditions will be the developers and real estate agents who rode the wave of the property boom. "Back in the boom you could put a shoebox on the side of the road and get $300,000 for it," says CPM Realty's Elbanna.
Rowen Kelly anticipates a "sorting out" of the estate agent population over the next 12 months, with the less experienced operators moving out of the industry.
Dennis Kalofonos says developers have already started moving out of the local market, with a flood of DA-approved development sites on the market. "It's just too hard for the small developer and the risk profile is too high," he says.
While Meriton, Sydney's biggest developer, is still not commenting, one competitor, Austcorp, says established developers were expecting a slowdown and would adjust their business.
"We will be working to meet the market and that means creating well-designed apartments that appeal to owner-occupiers," says Austcorp's Greg Thompson.
THE CHANGES Land tax It will be subject to all properties except principal places of residence or farms, although the rates will be lower.
Exit stamp duty A levy of 2.25 per cent will apply to all investment properties sold after July 1, provided there has been a gain of at least 12 per cent over the purchase price.
Stamp duty waived All first- home buyers purchasing a house or unit for less than $500,000 will not have to pay any stamp duty, saving up to $18,000.
What it means for tenants Most investors will be trying to increase rents as soon as they can but sensible investors won't risk exposing their property to the rental market in a time of medium to high vacancy rates. If you are a good tenant, a landlord won't risk losing you if vacancy rates in the local area are high.
What it means for buyers No one really knows if prices will soften further in some areas they might, but other areas will hold up. What is a bargain property today may well be a better bargain in six months. "Wait and see" periods such as this can create good buying opportunities.
What it means for sellers There may be some immediate pricesoftening for generic apartments with low demand from owner-occupiers, especially before July 1. Not many commentators are predicting short-term capital gains for Sydney, so sellers may as well get rid of their properties now or be prepared to hold on for at least another three to five years.
Sellers who are owner-occupiers do not need to worry as buying andselling in the same market will usually cancel the effect of any price softening.
LONG-TERM PERSPECTIVE Seasoned property investor Bob Scott says the new taxes on his investment properties won't deter him from investing in more property.
Scott who owns "a good number" of apartments in Waterloo, Rosebery, Cronulla and Surry Hills is selling one of the three apartments he bought off the plan in Sonoma, an award-winning development in Waterloo.
"I haven't made up my mind whether these new taxes are good or bad yet, but I think they may be good because there will be more first home buyers in the market looking to buy a good quality apartment," he says.
Scott's property is a 68 sq m one-bedroom apartment with a 35 sq m courtyard and a parking space. It has been on the market, at $385,000, through CPM Realty since before April 6 when the mini-budget was announced.
"I suppose I might be prepared to take 2 per cent less to sell before July 1," he says, "but I am not really prepared to compromise on price."
Scott says the down side of the new tax treatments is the exit tax, which will hurt his retirement plans. "But I will be putting my rents up $20 or $30 a week in 12 months [because] I am in this for the long term for me, the rental income is why I am doing it."
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