One of the peculiarities of the Australian taxation system is that any interest you earn on accumulated savings is taxed as part of your income. It doesn’t take too long before you find that after tax, your savings are actually diminishing once CPI is considered.
However, if you were to invest in a residential property, any difference between the rental income and the interest on the mortgage you are paying comes off your taxable income. So, at the beginning few years of a mortgage, if you’re at a (un)reasonable tax bracket, you will find that much of your mortgage is funded by your tenant and the Australian tax-payer.
The result? A persistently buoyant Australian residential property market which in the last couple of months (combined with a new low in interest rates) has started to once more lift up, registering a healthy %70 clearance rate – especially in the inner and middle belt suburbs of Melbourne, especially in properties below $1 million dollars, especially for anything that’s not an apartment.
I wouldn’t call myself a property bull, in fact by temperament, I’m much more of a bear but given Melbourne’s population growth, the state government’s inability to invest in transport and services infrastructure beyond the 15km zone of the city centre – almost any sturdy reasonably priced residential home with 3 or more bedrooms and a good backyard within the 9km zone with a low crime area within walking distance of public transport, schools, parks etc, is IMO a reasonably stable investment in the mid to long term.
So, after about 8 months of looking around, I’m once more in debt. It took a little longer than I expected to find the perfect place but it ticks all the boxes. Plus it is huge (850 square meters) for a place that’s 8 km from the city and the backyard is a nature reserve so from the back balcony, it feels like you’re out in the bush.
Too bad we won’t be moving into it for at least a couple of years: the negative gearing advantages are just too good to pass up.
EDIT: I should note that I’m actually not in favour of negative gearing of established residences. I would actually go further than the Henry review and abolish all negative gearing for existing housing stock. Negative gearing of new developments is probably fair enough given the shortfall between supply and demand. But I doubt that any government will have the political courage to get rid of this highly popular version of middle and upper income welfare even if in the end, it’s the banks that profit most and the taxpayer that pays.