New housing policy targets property investors

The government's much-anticipated housing policy announcement caught many commentators by surprise. The extension of the bright-line test was widely predicted. However, removing landlords' ability to offset their interest expenses against rental income caught everyone by surprise. 

So, what do the changes mean in practice? Will they have the desired cooling effect on house prices, and will the property market become more accessible for first-home buyers? 

This article provides an overview of the changes and what they mean for those most affected: investors, renters, and first-home buyers.  

What the changes mean for investors

The extension of the bright-line test from five to 10 years has been described as a capital gains tax by the back door. It means that investors selling rental properties within 10 years will be taxed on any house sale profits. 

However, it’s the change to tax deductions on rental property mortgage payments that will hurt investors the most. Say, for example, an investor bought a property for $800,000. Even with current low-interest rates that means $20,000 of interest per year. Losing the ability to offset the interest will cost the investor an additional $6,500 per year in tax. 

What the changes mean for renters 

The government also announced a $3.8bn infrastructure fund designed to boost new housing by funding services, including roads and pipes. 

The boost to housing supply may lead to an increase in rental properties; however, this is likely to take some time. 

In the short term, we can expect to see some landlords sell up as investing in rental properties becomes less attractive. 

And the consensus among commentators is rents will increase as landlords face increased tax bills. 

What the changes mean for first-home buyers 

First-home buyers will welcome the proposed increase in new builds alongside the measures to make life harder for investors.

And there was more good news with changes announced to the First Home Grant and First Home Loan schemes. The caps on First Home Grants have increased from $85,000 to $95,000 for single buyers and from $130,000 to $150,000 for two or more buyers. The property value eligibility cap for the grant has also been lifted by as much as $100,000 in some parts of the country. 

Furthermore, the First Home Loan allows scheme applicants to apply for a mortgage with only a five per cent deposit. By contrast, most home buyers need at least a 20 per cent deposit to get a mortgage.

Will the policy changes reduce house prices? 

Most commentators have already predicted that house price growth will slow down later this year as the anticipated mortgage rate rises impact the market. The government’s proposals seem set to increase that downward pressure even further. Whether that results in significant falls in house prices remains to be seen. Investor activity has been targeted in this package announcement. However, the issues around shortages in housing supply remain. 

Want to know more about how the changes affect you? Contact your Loan Market adviser for a discussion on the implications.