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NSW property investors targeted in $1.5 billion move, and they’re not alone

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Kirsten Craze

Updated 8 Jul 2024, 12:07pm

First published 8 Jul 2024, 12:00pm

Property investors across Australia’s east coast are navigating greater uncertainty about their rental homes, as state governments increase taxes or shake up the rules in the midst of the rental crisis.

The latest move is from the Minns government that has announced plans to increase the land tax threshold in NSW to $1.075m and then maintain it at that level, regardless of future property value rises.

It comes after the Queensland government announced plans to review housing taxes after the next state election in October, and the introduction of land tax changes in Victoria which have led to investment activity softening in the state.

The change, which is estimated will deliver a $1.5 billion boost to NSW state government coffers over four years, coincides with the foreign owner land tax surcharge also increasing from 4 per cent to 5 per cent and a jump in the foreign purchaser duty surcharge from 8 per cent to 9 per cent.

“These are modest adjustments against the backdrop of a generational housing crisis,” said Treasurer Daniel Mookhey who added in a statement that the move will “build better, stronger communities for NSW.”

“The government has been upfront with the people of NSW. We intend to pull every lever we can to confront the housing crisis and build the homes the people of NSW need. The Minns Labor Government is building a future to ensure our children and grandchildren can continue to call NSW home.”

The adjustment brings NSW in line with most other Australian states with South Australia being the only other state to index land tax thresholds, according to the announcement.

The NSW tax-free threshold will remain around 50 per cent higher than the next nearest state, the state government claimed.

In January, the Victorian Government also made a dramatic move, dropping its land tax-free threshold from $300,000 down to $50,000.

With principal places of residence and working farms exempt from the tax, the augmented levies are seen as a hit to holiday homeowners and long-term landlords.

Missing the mark

Eleanor Creagh, senior economist with PropTrack, said it remains to be seen how NSW investors will accept the changes.

“Certainly freezing the land tax threshold could have repercussions in terms of reducing investment and repercussions on the rental market. We know that by increasing the number of owners who pay land tax means already tight rental supply could be further constrained if those investors are prompted to reassess their investments,” she said.

“It’s about seeing the bigger picture. It’s fine if you want to disincentivise private investment in the rental market, but you need to incentivise something else to take its place. It’s ‘mum and dad’ investors that are the backbone of rental supply and if you want to make conditions less attractive for those private investors, you need to have something else to fill that void.”

Lloyd Edge, buyer’s agent and investing expert from Aus Property Professionals said savvy investors should look at the tax with a long-term lens.

“This is a tax grab, but I tend to look at the bigger picture and take the view that property is an investment asset that works for you over the long term, rather than getting too worked up on taxes today,” he said.

Although the move is said to “confront the housing crisis” Edge points out that because the tax does not apply to apartments and lower-priced properties, there is unlikely to be a flood of affordable homes coming back into the market as a result of the changes.

“They’re trying to hold back the amount of investors and make it a more even playing field for home buyers. At least that’s the spin they’re putting on it. However, most struggling first-home buyers will be buying under the threshold, so I think the government’s probably missed the mark on that.”

“Add to that, investment-grade properties are generally cheaper so to avoid the tax future investors could be looking in the same category as a typical first-home buyer,” he said.

James Kirkland, general manager of sales and marketing with Little Real Estate said there was no helping the housing problem with the State Government’s latest move.

“It’s a long bow to draw if they’re saying this move will free up homes or help with the crisis, I struggle to see that. These costs are going to go straight through to renters,” he said.

“If you really want to free up the housing market then let’s look at stamp duty. We’ve got many clients sitting on large homes and assets and they’re not selling because of the buying costs on the other side. That’s just a no-brainer.”

NSW is not alone

Victoria is six months into a changed land tax system, which has led to significant impacts on the property market.

“We’ve seen reduced activity from investors in Victoria relative to other states since the changes to property taxes last year, and New South Wales could essentially follow suit to a degree,” Ms Creagh explained.

“In contrast, we know the value of new lending to investors has hit record highs in Queensland, South Australia and Western Australia. With strong growth in rents, and increasing property prices, investors are being attracted to those markets.”

“There is potential that these tax changes could impact investor confidence in NSW. Considering we’re already in the midst of a rental crisis with a chronic shortage of available rentals in Sydney driving weekly rents higher, anything that diminishes the relative attractiveness of investing in NSW is a concern against that backdrop.”

Victoria’s investor market could be a precursor to what NSW might experience, said Mr Kirkland.

“At Little we’re seeing an increase in investors deciding to sell. We’ve got over 14,000 properties under management at Little and we’ve never seen this amount of investors listing in the market,” Mr Kirkland said.

“Victoria has been the leading state percentage [wise] of investors coming to market with NSW second and Queensland third.”

Although the land tax threshold in Queensland has not changed since 2007, the swift rise in property values across the state has meant the number of properties subject to land tax jumped by more than 10 per cent in the past financial year.

The Real Estate Institute of Queensland (REIQ) has called for the $600,000 land tax threshold to increase with inflation, however the state government claims indexing would cost the budget $200 million per year in lost revenue.

Queensland Treasurer Cameron Dick has also flagged a major overhaul of housing taxes planned for after the next state election in October.

The deputy premier, treasurer and minister for trade and investment said the review’s aim was to find a way to bring about “long-term improvement of economically sustainable housing supply”.

But the REIQ has warned that such ambiguous announcements could rattle the confidence of the investment community and destabilise the property market.

Mr Edge said Victorian investors are now second guessing their investment strategies, and he anticipates those from NSW will also reevaluate their financial future.

“We’re seeing Victoria slow down, more investors are trying to sell and new investors aren’t buying. On the other hand, I’ve had some clients wanting to buy in Melbourne because they see an opportunity as the market has been down. They feel the laws could get overturned when the government changes and that’s when they think the market will boom.”

With NSW and Victoria imposing heavier taxes on investors, Mr Kirkland said investors will start looking beyond the two states.

“If there are other states to invest in with less outgoings, then you’d think they would now be a more attractive option,” he said.

Preparing for the future

For new investors looking to get into the market, Mr Edge said a cool, calm and collected strategy will reveal how tax changes will impact a property portfolio.

“Definitely don’t panic. This will potentially create more competition but there are so many other things that can create competition. There’s the question of supply and demand and then what interest rates are doing,” he explained.

“Leave your options open. As an investor, you might need to consider buying somewhere else that might be easier for you to get into. Buying in Queensland or South Australia might work out better for you than buying in NSW or Victoria.”

Mr Kirkland said although the announcement has been a blow to current and potential investors, Australia’s love of property remains.

“I don’t think this will deter people completely. Property investment is still a very good strategy for many, but new investors will have to really look at their yield and ensure they have forecasted for in the coming years to see if they meet the new thresholds.”