Negative gearing changes could steer property buyers towards substandard assets, expert warns

The Federal Government’s recent overhaul of negative gearing has sparked concerns among real estate experts, who warn that the changes could lead investors towards overpriced and underperforming assets. The new policy, which retains negative gearing for new builds only, has been criticised for potentially overriding sound investment judgement.

Kane Dury, principal of Discover Buyers Agency, expressed his apprehension regarding the changes, emphasising the risk of investors being drawn into poor investment decisions due to the tax incentives. “We are now at serious risk of the tax tail wagging the dog,” Mr Dury stated. “From 1 July 2027, negative gearing on established homes bought after Budget night is gone, but it’s been kept alive for new builds. That’s not a subtle nudge, but rather a tax system putting its thumb on the scale.”

The government’s decision, now backed by the Greens, seems set to come into full effect, potentially altering the landscape for property investors. Mr Dury is concerned that many under-informed investors may chase tax deductions into brand-new apartments or house-and-land packages on city fringes, paying significant developer premiums in the process. “A tax break doesn’t fix a bad asset. If you overpay on day one for stock that anyone else can also buy brand new, no deduction in the world turns that into a good investment,” he warned.

Supporting his argument, Mr Dury cited analysis from the Commonwealth Bank, which suggested that the removal of negative gearing on established properties equates to a 90-to-155 basis point increase in an investor’s mortgage rate in immediate cash-flow terms. “The headline numbers look frightening, and that’s exactly why the new-build carrot is so tempting,” he said.

Mr Dury advocates for a different strategy, advising investors to consider established homes in regional population centres rather than capital cities. He suggests that locations such as Geelong in Victoria, Maitland in New South Wales, and Toowoomba in Queensland offer better long-term outcomes. “In the right regional markets, strong rental demand and lower entry prices mean a lot of these properties are close to cash-flow neutral, or even positive, from day one,” he explained. “If you’re barely negatively geared, losing the ability to deduct a small loss against your salary is almost irrelevant.”

The fundamentals that protect regional investors, according to Mr Dury, remain unchanged. He emphasised the importance of choosing centres with diverse economic drivers, genuine population growth, and a high ratio of owner-occupiers to renters. “Pick a centre like Geelong over the capital it sits beside, buy established housing with real land value underneath it, and you own something a developer can’t replicate three streets over next year. That scarcity is what drives long-term capital growth, not a line on your tax return.”

Mr Dury also highlighted the potential for immediate upside when buying into these markets at the right time, which could offset the loss of negative gearing benefits. “It’s often said that time in the market beats timing the market, but why not do both and amplify the benefits?” he questioned. “If you buy into the right market at the right time, you get the benefit of capital gains in the near term. Then, as rents rise, the yield on your invested capital improves quickly.”

He urged investors to carefully model their numbers before reacting to the changes, stressing the importance of focusing on quality investments rather than tax deductions. “Don’t let the tax tail wag the investment dog. Run the figures on a quality established home in a strong regional market before you sign up for a shiny new build just to save tax. In five years, the fundamentals will matter far more than the deduction,” Mr Dury advised.

As the real estate market braces for the impact of these changes, investors are encouraged to consider the broader implications of their decisions, weighing the benefits of regional investments against the allure of tax incentives for new builds. With expert voices like Mr Dury’s cautioning against hasty decisions, the coming years may see a shift in investment strategies towards more sustainable and informed choices.