Land tax implications on Sydney

By Alex May

Treasurer Michael Egan’s bombshell tax announcements in the April 6 mini budget seem to have created more whinging then 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.
The real impact of the new tax announcements is a “wait and see” attitude 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 a more realistic level.
Real estate agents across Sydney have diverse reactions to the changes - some say they expect a rush of listings before July 1 and others report 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 and Horne Marrickville’s Luke Smith says confused landlords have been ringing asking about the impact of the taxes while first home buyers have created strong enquiry for apartments and small semis.
Raine and Horne Drummoyne’s Adam Gilchrist says there has not been a “single phone call” about the changes.

BUT WHAT ABOUT PRICE FALLS

The reality is that apartment prices across Sydney have been falling back since 2003 in areas where demand is weak and supply is strong.
Real Estate Insitute’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 and reap capital gains and rental incomes.
CPM Realty’s Sam Elbanna says 84.5 per cent of his sales in 2002 were to investors, with that number falling back to 62 per cent in 2003 and falling even further this year.
Kelly says there needs to be a rush of first home buyers to the market just to keep “equilibrium” - if that doesn’t happen, then 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 are 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 and 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 hike up rents, and he doesn’t see that rents in Sydney will rise for three to 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 style 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 that 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 Sam Elbanna.
Kelly says there will be a “sorting out” of the agent population over the next 12 months, with less experienced sales agents moving out of the industry.
“A lot of new sales positions were created during the last three or four years with people attracted by the boom and those people have already been experiencing a softer market and will now have to start looking after buyers as well as sellers,” he says.
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.
Sydney’s biggest developer Meriton is still not commenting on the changes, although Austcorp says established developers were expecting a slowdown and will adjust their business accordingly.
“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.

CASE STUDY:

Seasoned property investor Bob Scott is annoyed at the new state government taxes on his investment properties – but it 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 architect designed apartment in Waterloo.
“I haven’t made up my mind whether these new taxes are good or bad yet, but I think it could be good because there will be more first home buyers in the market looking to buy a good quality apartment.”
Scott’s apartment is a 68 square metre one-bedroom with a 35 square metre courtyard and a parking space and it has been on the market for $385,000 since before the mini-budget tax announcements on April 6.
“I suppose I might be prepared to take 2 per cent less to sell before July 1, but I am not really prepared to compromise on price,” he says.
Scott says the down side of the new tax treatments is the exit tax which will hurt his retirement plans – although not enough to force him to dump property for shares.
“The exit tax on this unit would be close to $10,000 and if I have 11 units to sell over the next ten years, then that will cost me $110,000 in today’s money which is a serious dent in my retirement income,” he says.
“But I am in a position where I will be putting my rents up $20 or $30 a week in 12 months and I am in this for the long term – for me, the rental income is why I am doing it.”

THE MINI BUDGET TAX 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 % over the purchase price. The detail of this tax will not be available until legislation is brought in May.

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 RENTERS:

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 others areas will hold up. What is a bargain property today may well be a better bargain in six months time. The other point is that people who move against the crowd tend to snare the best real estate bargains and times like this when the market is “waiting and seeing” often create good buying opportunities.

WHAT IT MEANS FOR SELLERS:

There may be some immediate price softening 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 and selling in the same market usually cancels the effect of any price softening.