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Negative gearing: Time to re-evaluate your strategy?

April 17, 2023

In the space of a year – and 10 official interest rate rises – plenty of positively or neutrally geared investment properties have slipped into negative territory. After a significant 3.5% jump in the cash rate, savvy investors are now rethinking their medium to long term strategies.

While some property investors actively choose a negative gearing path, others have only recently found themselves navigating the oft-talked about mortgage method due to the fast-paced interest rate climate. There are tax-related perks that come with negative gearing, but the strategy doesn’t necessarily make sense for everyone. To work out if negative gearing is right for you, it might be time to give your property investment plan a ‘health check’.

Advantages of negative gearing

Put simply, negatively gearing your property investment means spending more on your mortgage interest payments and expenses than you’re getting in rental payments. In this case you’re effectively not earning an income from the property, but it does mean you can write off these losses at tax time. Although the investment property is costing you (rather than providing income), the negative gearing pay day hopefully comes in the form of capital growth.

Disadvantages of negative gearing

While some investors swear by the strategy, negative gearing does come with downsides. You’ll be making an ongoing loss and won’t generate a passive income to help pay for the property’s holding costs. Another drawback is the potential for a capital loss. Investors get into real estate to make money, but there are no guarantees.

What is positive gearing?

On the flip side of negative gearing, positive gearing takes the opposite approach, whereby the income you earn from your investment property is higher than your expenses. This tactic is ideal for investors looking for consistent returns and a passive income. And if the property increases in value there will be capital gains on top of your rental income when you come to sell. You will pay tax on your rental income and with rising rates, it can be more challenging to find suitable properties which fit the strategy.

Neutral gearing explained

If your investment property costs you nothing, but also earns you nothing, then it is neutrally geared. Essentially, you’re breaking even with no advantage or disadvantage when it comes to paying tax. It’s a rare approach because it’s difficult to perfectly align both the expenses and earnings but can work well for anyone investing through a self-managed super as it won’t eat into the fund’s wealth.

How it works on both sides of the “gearing” fence

Taking the positive approach

Let’s take a look at Anna’s story. She’s worked hard to save a $170,000 deposit to buy an investment property and after finding the right place, put that cash down as a healthy 40% deposit towards the $425,000 cost.

Now tenanted, the property makes $2,000 in rent a month and the mortgage along with other expenses adds up to $1,000 a month. That’s $1,000 of positive monthly income, or $12,000 a year. This $12,000 income will be included as part of your total taxable income come tax time.

Negative gearing in action

Henry owns an apartment which is generating $20,000 a year in rent. Because he started out with a 15% deposit, he is highly geared with a large mortgage interest bill of $25,000 a year. Then there’s $4,000 in annual expenses, so overall his investment property is costing him $9,000 a year.

This loss can now go towards reducing his taxable income, and ultimately his tax bill at the end of the financial year.

Since he is taxed at 33%, offsetting the $9,000 against his taxable income drops the final ATO bill by $3,000. Now Henry’s out-of-pocket costs are only $6,000 which he feels comfortable taking on in the expectation he’ll make significant long-term capital growth.

What to consider when negative gearing

It’s important to cover all your bases when working out whether negative gearing is the right strategy for your personal circumstances and the property in question. Prepare yourself by asking;

  • Can I realistically pay for the property while also losing money on it?
  • If interest rates continue to rise, can I still afford this strategy?
  • Is there scope to increase the rent to meet the mortgage demands?
  • Is the property going to appeal to a high number of potential renters so it never sits empty?
  • What happens if I can’t find a quality tenant, or even one at all?
  • Has the home got good capital growth potential?
  • When, if ever, will the property be positively geared?
  • Will the potential tax benefit, coupled with the profit I hope to make upon its sale, outweigh the negative gearing loses?

Is negative gearing still worth it?

As the cost of living – and the price of holding a mortgage – continues to increase, negative gearing will eat more and more into your monthly expenses. While it can be a highly effective strategy to reduce your tax bill and unlock capital gains, there are a lot of other things to consider. If your household budget is already tight in the current climate, then perhaps this isn’t a path for you. However, if you have crunched the numbers and are confident you can absorb the extra costs then negative gearing might just be the right fit.

Ultimately, you’ll need to consider your own financial circumstances and speak to us to find a loan that suits your ideal strategy.


Suite 2, 1 Railway Crescent
Croydon, Victoria 3136

Email: integrityone@iplan.com.au

Telephone : 03 9723 0522

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This information is of a general nature and does not take into consideration anyone’s individual circumstances or objectives. Financial Planning activities only are provided by Integrity One Planning Services Pty Ltd as a Corporate Authorised Representative No. 315000 of Integrity Financial Planners Pty Ltd ABN 71 069 537 855 AFSL 225051. Integrity One Planning Services Pty Ltd and Integrity One Accounting and Business Advisory Services Pty Ltd are not liable for any financial loss resulting from decisions made based on this information. Please consult your adviser, finance specialist, broker, and/or accountant before making decisions using this information.

Filed Under: Blogs, News

Market movements & economic review – March 2023

March 6, 2023

Stay up to date with what’s happened in the Australian economy and markets over the past month.

The gloomy prospects for economic growth, both in Australia and overseas, are occupying the minds of investors, businesses and political leaders.

The early 2023 stock market rally appears to be fading as concerns about inflation and cash rate hikes are having an impact on investor sentiment.

Click here for our March update video.

Please get in touch on 03 9723 0522 if you’d like assistance with your personal financial situation.


Suite 2, 1 Railway Crescent
Croydon, Victoria 3136

Email: integrityone@iplan.com.au

Telephone : 03 9723 0522

Integrity One Facebook

This information is of a general nature and does not take into consideration anyone’s individual circumstances or objectives. Financial Planning activities only are provided by Integrity One Planning Services Pty Ltd as a Corporate Authorised Representative No. 315000 of Integrity Financial Planners Pty Ltd ABN 71 069 537 855 AFSL 225051. Integrity One Planning Services Pty Ltd and Integrity One Accounting and Business Advisory Services Pty Ltd are not liable for any financial loss resulting from decisions made based on this information. Please consult your adviser, finance specialist, broker, and/or accountant before making decisions using this information.

Filed Under: Blogs, News

Quarterly property update

March 6, 2023

The year in property has begun with some stabilisation in values

Australian property values appeared to stabilise with a 0.1% increase in national dwelling values for February. There was a –2.3% drop over the quarter according to CoreLogic’s national Home Value Index (HVI).

Although median property prices are still falling across the country there are signs some wind has come out of the housing downturn’s sails. While the 0.1% dip continues into negative territory, the February statistic was an improvement on the -1% fall seen in January, and was the smallest month-on-month decline since June.

All in all, CoreLogic’s Index is –9.1% off its April peak, making this the largest and fastest decline in values since 1980 when their record-keeping began. However, it pays to put this dwelling downturn in context. “Record declines in home values follow a record upswing, both in magnitude and speed. The national HVI was up a stunning 28.6% in the space of just 19 months,” said CoreLogic research director Tim Lawless.

“Despite the recent sharp drop in values, every capital city and rest-of-state region is still recording home values above pre-pandemic levels.

All eyes on interest rates

While they aren’t the only driver of the downturn, interest rates have played a major role in steering the ship. Once the Reserve Bank decides to hit the pause button – which is largely tipped to be in the first half of 2023 – economic experts predict housing values are likely to stabilise. Mr Lawless said there may be a few month’s lag before declines actually flatten out, but for a growth phase to begin the market needs to see some form of stimulation. “The most obvious stimulus would come from a drop in interest rates, but any cut to the cash rate probably won’t occur until late this year at the earliest.”

At its first meeting for 2023, the RBA increased the cash rate yet again by 0.25 percentage points on February 7, for the ninth time in a row, pushing the cash rate to a decade-high of 3.35%.

Top end price performance

The upper quartile of the combined capital city housing market drove this month’s stabilising trend, increasing by 0.1% in February.

This trend was most obvious across Sydney’s upper quartile, which recorded a 0.7% rise in values over the month, compared with a -0.2% fall in values across the lower quartile of the Sydney market. Upper quartile housing values have led the downturn to date, dropping -13.5% in value across the combined capital cities over the past 12 months, compared with a 1.7% rise in values across the lower quartile. Previous cycles have seen a similar trend, where the upper quartile tends to lead both the upswing and the downturn.

Regions still in favour

After extraordinary price growth in 2021, values in all regions are declining. Regional dwelling values were down -0.3% in February compared with a -0.1% fall across the combined capital cities. However, the weaker regional result relative to the combined capitals was mostly a factor of the monthly rise in Sydney housing values rather than a larger fall in regional market values.

Overall, CoreLogic recorded a combined regional market fall of -2.1% for the quarter to February 28. That’s a modest movement backwards after the combined non-capital city areas saw housing values surge 41.6% through the most recent upswing. Since peaking in June, the combined regionals index is only down -7.7%.

Melbourne

Melbourne’s median dwelling value is down –2.7% over the quarter. Data shows the Victorian capital has had a Covid trough to peak of 17.3%. After peaking in February 2022, the median dropped by -9.6%. Regionally, Victoria is –7.0% off its most recent peak in May 2022.

Sydney

The quarter to January’s close saw the median dwelling price in the Harbour City fall by –2.4%. Although In February Sydney was the only capital city to record an increase, gaining 0.3%. Sydney’s median peaked in January 2022 and has since experienced a -13.5% decline. The city’s trough to peak was 27.7%. After hitting its peak in May 2022, regional NSW closed the most recent quarter –10.1% off that high.

Brisbane

By February Brisbane’s median dwelling price was down –3.2% for the quarter. The capital of the Sunshine State had an exceptional trough to peak throughout the pandemic with the media skyrocketing 42.7%. Post peak in June 2022, the drop has been –11.0%. Across regional Queensland the median has come -7.3% off the June 2022 high.

Canberra

The ACT experienced a –2.7% decline of its median dwelling price during the three months to February’s end. Australia’s capital reached its price peak in June 2022 and has since come off the boil by –9.0%.

Perth

The Perth median appears to be plateauing with a modest quarterly move of just -0.2%. According to CoreLogic data the West Australian capital’s market only reached its peak in July 2022 and has come off just -0.9% since. The full trough to peak figure for Perth has been 25.9%. Regionally, the state is reportedly at its peak after experiencing a 32.4% increase through the recent growth phase.

Note: all figures in the city snapshots are sourced from: CoreLogic’s national Home Value Index (March 2023)

If you have any questions or need any information please give us a call on 039723 0522.

Nicholas Berry Credit Representative Number 472439 is a Credit Representative of Integrity Finance (Aust) Pty Ltd – Australian Credit Licence 392184.
This information is of a general nature and does not take into consideration anyone’s individual circumstances or objectives. Financial Planning activities only are provided by Integrity One Planning Services Pty Ltd as a Corporate Authorised Representative No. 315000 of Integrity Financial Planners Pty Ltd ABN 71 069 537 855 AFSL 225051. Integrity One Planning Services Pty Ltd and Integrity One Accounting and Business Advisory Services Pty Ltd are not liable for any financial loss resulting from decisions made based on this information. Please consult your adviser, finance specialist, broker, and/or accountant before making decisions using this information.

Filed Under: Blogs, News

Tick Tock: What’s the time on the property clock?

February 6, 2023

Property investors will tell you that succeeding in real estate is all about timing. Just like shares, buying at the bottom and selling at the top is easier said than done.

Unless you have a crystal ball, there really is no clear-cut way to know exactly when the property market is at its peak or trough.

Whether you’re an investor, or a homebuyer, the next best thing to a time machine is research and due diligence.

While many experts agree that “time” is a popular buzz word when it comes to real estate, savvy buyers who look at the big picture acknowledge that it’s more about “time in the market” rather than “timing the market”.

What is a property clock?

Everyone understands the principles of a clock, so some real estate analysts use this analogy to explain typical market cycles. If you were to think about an analogue clock, the hands move around the face in a clockwise direction representing where local markets are at, at any one point in time.

 

So many markets, so little time

While the idea of a property clock is logical, life rarely is. So, the notion of a top and a bottom should be taken at face value.

The media, economists, and property experts, talk about the performance of major capitals, sometimes breaking them down into “house” and “unit” markets. They might also refer to “regional” or “rest of state” figures which effectively lumps hundreds of regional cities, towns and villages into one collective data dump.

Cities and towns might be heading one way as a whole, but dig deeper and some suburbs within those locations – and even streets or property types in those suburbs – can be running their own individual races.

This is why sellers, and buyers, should narrow their research to fit their own personal circumstances. The big picture is great for background knowledge, but knowing exactly what is happening where you plan to buy or sell is more relevant.

Remember, what keeps a particular property’s value ticking – or not ticking – comes down to the laws of supply and demand.

It’s hard to time the trough

During the pandemic, there was a rush of people wanting to get out of the cramped quarters in our biggest cities and choosing to move to regional areas with more space and tranquility as they worked from home.

Interest rates were at record lows so people borrowed willingly to be able to secure their dream property. As a result, inner city apartments were out, bigger suburban (or country) homes were in and therefore houses and regional properties boomed.

By the beginning of 2022, the tables started turning and many locations (although not all) came off the “12 o’clock” spot and began to move clockwise, transitioning away from their market peak. Houses started to become unaffordable for many and in May 2022 interest rates started to increase so swiftly, the desire (and the ability) to pay top dollar for a property stopped.

Apartments (even inner-city ones) gradually started coming back into favour and less demand for high-priced houses saw values slip. But whether anywhere in the property market has reached the “6 o’clock bottom” is yet to be determined. Unfortunately, putting a pin in exactly when values hit a trough can often only been declared once the moment has passed.

It’s not timing the market, but time in the market

Australia is a huge country with a diverse property market and varying cycle. Although, as a population we might experience the same external economic factors – such as inflation pressures and multiple interest rate rises – how each of them impact each corner of the country, can vary greatly.

Not even the most respected experts know exactly how long each cycle will be or the extent of the rises and falls. For example, when Covid hit many economists were signalling a property market crash – they couldn’t have been more wrong.

So, instead of having tunnel vision for timing the market, sophisticated property investors turn their attention to buying quality real estate in desirable locations that are traditionally more likely to hold their value and increase over time.

“Time” can also refer to the right time for you as a buyer because the best moment to dive into potentially the largest asset of your life is when you have your financial ducks in a row.

What lies ahead?

Experts are predicting that the market will continue to fall for the next few months, however, high-end properties in some areas have been bucking the trend and holding their value and continuing to sell quite well.

Economists are anticipating more cash rate hikes in 2023, with the possibility of rate cuts commencing in 2024 once inflation has stabilised.

While inflation is a concern for the RBA and given that there are still talks of a recession on the horizon, economic uncertainty will continue to affect buyer’s and seller’s confidence.

Whether you’re an investor or a homebuyer, holding out to buy at the bottom means you risk missing out on time in the market because as history has shown us – the longer you hold a home, the more valuable it may become.

To talk about the right time for you to make your next step onto the property ladder, speak to us today.


Suite 2, 1 Railway Crescent
Croydon, Victoria 3136

Telephone : 03 9723 0522

Email: integrityone@iplan.com.au

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Nicholas Berry Credit Representative Number 472439 is a Credit Representative of Integrity Finance (Aust) Pty Ltd – Australian Credit Licence 392184.
This information is of a general nature and does not take into consideration anyone’s individual circumstances or objectives. Financial Planning activities only are provided by Integrity One Planning Services Pty Ltd as a Corporate Authorised Representative No. 315000 of Integrity Financial Planners Pty Ltd ABN 71 069 537 855 AFSL 225051. Integrity One Planning Services Pty Ltd and Integrity One Accounting and Business Advisory Services Pty Ltd are not liable for any financial loss resulting from decisions made based on this information. Please consult your adviser, finance specialist, broker, and/or accountant before making decisions using this information.

Filed Under: Blogs, News

Market movements & economic review – February 2023

February 6, 2023

Stay up to date with what’s happened in the Australian economy and markets over the past month.

China’s plans to kickstart its economy after the pandemic shutdown have been dominating the news this month and will have worldwide implications, not the least for Australia.

Australian shares were up nearly 8% in January while US stocks climbed by about 5% but the markets are nervously waiting for expected increases in interest rates by major central banks this month to help curb inflation.

Click here for our February update video.

Please get in touch on 03 9723 0522 if you’d like assistance with your personal financial situation.


Suite 2, 1 Railway Crescent
Croydon, Victoria 3136

Email: integrityone@iplan.com.au

Telephone : 03 9723 0522

Integrity One Facebook

This information is of a general nature and does not take into consideration anyone’s individual circumstances or objectives. Financial Planning activities only are provided by Integrity One Planning Services Pty Ltd as a Corporate Authorised Representative No. 315000 of Integrity Financial Planners Pty Ltd ABN 71 069 537 855 AFSL 225051. Integrity One Planning Services Pty Ltd and Integrity One Accounting and Business Advisory Services Pty Ltd are not liable for any financial loss resulting from decisions made based on this information. Please consult your adviser, finance specialist, broker, and/or accountant before making decisions using this information.

Filed Under: Blogs, News

Farewell Maddie!

January 30, 2023

Today it is with heavy hearts that we say farewell to much loved staff member Maddie Dodd.

After 11 years with Integrity One Maddie has decided to focus her attention on her nursing career.

Maddie, on behalf of everyone at Integrity One (past and present) and our clients we wish you all the best and thank you for your many years of superb service, as well as your support & friendship!


Suite 2, 1 Railway Crescent
Croydon, Victoria 3136

Email: integrityone@iplan.com.au

Telephone: 03 9723 0522

Integrity One Facebook

This information is of a general nature and does not take into consideration anyone’s individual circumstances or objectives. Financial Planning activities only are provided by Integrity One Planning Services Pty Ltd as a Corporate Authorised Representative No. 315000 of Integrity Financial Planners Pty Ltd ABN 71 069 537 855 AFSL 225051. Integrity One Planning Services Pty Ltd and Integrity One Accounting and Business Advisory Services Pty Ltd are not liable for any financial loss resulting from decisions made based on this information. Please consult your adviser, finance specialist, broker, and/or accountant before making decisions using this information.

Filed Under: Blogs, News

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Integrity One Planning Services Pty Ltd (ABN 59 125 846 933) is a Corporate Representative (315000) of Integrity Financial Planners Pty Ltd (AFSL No. 225051).