Property depreciation is one of the largest tax deductions for homeowners in Australia. But did you know that you can backdate your property’s depreciation? Doing so could save you thousands of dollars every year.
As an investor, you need to take advantage of all the tax deductions Australia has to offer. Property depreciation deductions allow you to control your cash flow from your property. As a result, you can use them to enhance your property’s profitability.
Many who own an investment property in Australia claim depreciation yearly.
Unfortunately, some overlook these deductions entirely. Happily, you can backdate your depreciation claims. Firstly, let’s look at what property depreciation means.
What is Property Depreciation?
So, what counts as depreciation for your investment property in Australia?
You can claim for any loss of value resulting from the wear and tear of the property as it ages. Capital works are the building’s structural elements, and you can claim for all of them, including the roof tiles and the concrete used throughout the building.
You can also claim for the wear and tear of any equipment in the property. This includes things like the property’s fixtures, but extends to things like carpets and ceiling fans. (Deductions for these plant and equipment items may only apply if you bought the property prior to May 9, 2017 – Read about the Budget changes here).
Claiming for your property’s depreciation is one of the most effective tax deductions in Australia. It allows you to reduce your yearly taxable income, which means your tax bill also decreases. When used correctly, depreciation allows you to take home more money each year.
Behind the deductions you claim for interest expenses, depreciation is one of the largest tax deductions in Australia. However, many investors fail to claim for all their property depreciation. Some even forget about it entirely, which could result in the loss of thousands of dollars over the lifetime of your investment.
Using Backdating to Claim Depreciation
So, what can you do if you haven’t claimed for all of the depreciation you’re entitled to? This is where backdating can help you.
There are two key steps you must take to backdate depreciation properly:
- Work with a Quantity Surveyor to create a full depreciation schedule for your property. Your surveyor will inform you about every item you can make a claim for. They will also discuss rental property depreciation rates with you.
- Bring the surveyor’s depreciation schedule to your accountant. He or she will alter your tax returns so that you claim for all of the depreciation you’re entitled to.
In most cases, you can only backdate depreciation for two years.
What is a Tax Depreciation Schedule?
If you’ve never claimed for your property’s depreciation, you may not know what a tax depreciation schedule is.
The schedule your Quantity Surveyor creates, offers a summary of every item in your property that depreciates in value. Think of it as an investment property tax deductions calculator focused solely on depreciation. The schedule notes every item, and informs you of how much you can claim for each over the course of the next 40 years.
As noted, your accountant can use this schedule to backdate your tax returns for the previous two years. However, they will also use it to help them to complete your future tax returns. This ensures you claim properly for all future depreciation of your property’s capital works and equipment.
Can I Backdate for More Than Two Years?
In most cases, you can’t backdate your tax returns for over two years. The Australian Taxation Office (ATO) has strict guidelines in place. These usually prevent you from exceeding the two-year limit.
However, that isn’t to say it is impossible. The ATO has different rules for companies than it does for individual investors. There are also different rules for those using a self-managed superannuation fund (SMSF), or a trust.
As a result, it’s worth speaking to your accountant to find out if your situation allows you to backdate for more than two years. It’s unlikely, but you may strike it lucky and be able to claim for even more depreciation than you expected.
Is Backdating Worth It?
Yes, it is. If you don’t account for your investment property depreciation, you could lose out on thousands of dollars every year. In fact, claiming for depreciation can turn a negatively geared property into a positive one.
On top of that, you can also claim the cost of your Quantity Surveyor as a tax deduction.
The Final Word
That’s everything you need to know about backdating depreciation. Speak to your accountant today to find out how far you can backdate your claims.
Washington Brown is here to help if you need a quality Quantity Surveyor. Contact us today to get a full depreciation schedule for your investment property.
You Can Claim Tax Deductions in Australia for Previous Renovations
When considering tax deductions in Australia, most investors only take their own renovations into account. It does make sense. After all, why should you be eligible to claim deductions on your investment property in Australia if you didn’t pay for the work?
Perhaps surprisingly, you can claim deductions for the previous owner’s renovations. However, there are several things you need to consider. For example, how much you can claim depends on when you purchased the property. The effects of the 2017 Budget play a role here, as what you can claim differs depending on if you made your purchase before or after the budget. Let’s look at what tax deductions in Australia you can claim in both scenarios.
You Bought Before the 2017 Budget
Things are simpler if you bought the property before the 2017 Budget. If this is the case, you can make claims under both Division 43 and Division 40 of the Income Tax Assessment Act (ITAA).
Division 43 relates to any capital works that the previous owner undertook on the property. This includes any renovations, such as the building of some extensions or remodelling a bathroom or kitchen. It also covers any work done to the building’s structure. For example, you’d be able to claim for a new roof or for some of the walls that the previous owner built.
Division 40 relates to the equipment installed in the property. Your investment property in Australia may have an air conditioning unit or some other piece of equipment that the previous owner installed. If that’s the case, you should be able to claim for it.
The only real barrier is that you may not know the completion date for the work or the cost. Not all sellers will provide you with this information. If that’s the case, you need to employ the services of a quantity surveyor. Your surveyor will provide you with a cost estimate, which you can use when claiming tax deductions in Australia. The Australian Taxation Office (ATO) does not accept estimates from other professionals. For example, you can’t get an estimate from your accountant for the work. It has to come from a quantity surveyor.
You Bought After the 2017 Budget
This is where things get more complicated. You have to consider the extent of the renovation work, as well as whether any was carried out in the first place.
The new budget introduced the term “new residential premises” into the equation. To understand what this phrase means, we need to look at the Goods and Services Tax (GST) Act.
What Does the GST Act Say
You’ll find references to “new residential premises” in sections 40 to 75 in the GST Act. Generally, such a premises is one that has not been rented out or sold as a residential home before your purchase. This won’t usually present a problem. After all, that language basically covers new properties.
However, there’s more. The Act also defines these premises as those that have undergone “substantial renovation” work. The GST Act also provides a description for “substantial renovations”. They are any renovations through which the entire building has either been replaced or removed. As a result, the installation of a new bathroom is not considered as a substantial renovation on its own.
What Does This Mean for Me?
If your investment property in Australia does not fall into the substantial renovations category, you may not be able to claim the same deductions that you could on a property built before the 2017 Budget. In particular, you won’t be able to claim Division 40 depreciation. New equipment on its own is not enough to constitute a substantial renovation.
However, this changes if the building has undergone enough renovation to become a “new residential premises”. In such cases, you can claim for both Division 43 and Division 40 work.
You’ll need the help of a quantity surveyor to work out the extent of the work undertaken on your building. Your surveyor will create a timeline for the building. This will estimate the work carried out, its cost and its extent. You can use this information to figure out if your building falls into the “new residential premises” category.
Don’t fret if it doesn’t. You can still claim for Division 43 work. Your quantity surveyor will be able to provide more exact information detailing exactly what you can claim for.
You’ll need the services of a quantity surveyor, regardless of when your property was built. They will be able to tell you what previous renovations you can claim for.
We can help you if you’re looking for a quantity surveyor. Contact us today to maximise the depreciation on your property’s previous owner’s renovations.
Don’t Be Put Off Because You Can’t Explore The Property
There are many things you need to consider when buying an investment property in Australia. While the process may be exciting, it can also be confusing.
One of the main choices you need to make relates to the type of property you buy. Do you purchase an older property that has a track record of generating income, or a brand new property that may stand a better chance of meeting the demands of tenants?
What if we told you there’s another way? Instead of buying a property that already exists, you can buy one that’s under construction. This idea may stray away from the property investment basics that you’ve read about while working out the complexities of investing in property for beginners. However, we can offer six reasons for why an off-the-plan property could prove to be a wise investment.
Reason #1 – Earn Early Capital Growth
What’s one of the first investment property tips for beginners that you’ve heard? It’s probably to buy low now so you can make a profit later. Buying an off-the-plan property allows you to do just that. So how does it work? It’s simple. You pay a deposit to the developer, and this secures your ownership of the property.
However, the construction settlement date may be several years in the future. As a result, you can earn capital growth for the home, even during the period prior to construction. You won’t even have paid the full price of the property before it starts making money for you.
Reason #2 – Stamp Duty Savings
Buying an investment property in Australia comes with a lot of added fees. The largest of these is often stamp duty. In most states, you will have to pay thousands of dollars in stamp duty before you can take ownership of the property. Take Victoria as an example. For a property worth $500,000, you’ll have to pay almost $20,000 in stamp duty.
Buying off-the-plan can help to avoid this major fee. Most states don’t charge stamp duty on properties that don’t exist yet, which means you make thousands of dollars in savings from the beginning.
Reason #3 – Extra Saving Time
You only have to put down an initial deposit when you buy an off-the-plan property. As we mentioned before, you may have to wait for a couple of years before construction finishes.
This gives you plenty of time to save some money. Once construction ends, you could have thousands of dollars that you wouldn’t have had if you’d bought an existing house. You can then put this money toward your home loan, reducing the principal so that you pay less interest on the loan over time.
Reason #4 – You Can Claim Depreciation
You may be planning on renting out your off-the-plan property when construction ends. If so, you may be able to claim thousands of dollars in tax deductions in Australia on the property.
Make time to create a depreciation schedule with the help of a quantity surveyor. This will highlight all the things that you can claim as depreciation upon completion of the property. This may include the new furniture and fixtures that you add to the property before making it available to tenants. The higher the depreciation, the lower your holding costs.
Reason #5 – You Can Pick the Perfect Plot
Showing early interest in a new development comes with its own advantages. In addition to benefitting from the lower prices that developers often charge to their early investors, you also get to choose from the best plots of land.
This will benefit you monetarily when construction ends. Getting in early means you can pick the property that will have the best views or offers the amenities that your tenants will want. As a result, you can charge higher rents, so your property generates more income.
Reason #6 – Reductions in Other Costs
A brand new property does not come with the maintenance needs of an old property. That should go without saying. You won’t have to earmark thousands of dollars for repairs, as the property should be good to go from the moment construction ends.
However, did you know that off-the-plan properties could save you money in other areas? It’s all thanks to recent changes in the Australian Building Code. New properties must now meet several energy efficiency criteria. This means the cost of utilities falls, which benefits both you and your tenants.
The Final Word
Buying off-the-plan may seem scary at first. After all, you don’t have the opportunity to explore the property before you buy it.
However, it opens the door to savings that you wouldn’t have access to with an existing property. To find out more about buying an off-the-plan investment property in Australia, contact Washington Brown today.
On Friday 14th July, the Treasury Office released a draft bill regarding how depreciation deductions on a second-hand property can be claimed moving forward. They also invited interested parties to make submissions.
It’s complicated, to say the least, so I’ve tried to simplify this Bill and the key points. Here are my 9 Key Takeaways from the Legislation;
- If you acquire a second-hand residential property after May 10, 2017, which contains “previously used” depreciating assets, you will no longer be able to claim depreciation on those assets.
- Acquirers of brand new property will carry on claiming depreciation exactly the way they have done so to date. This is great news for the property industry and the way it should be.
We suspected this would be the case and I believe the property industry can collectively breathe a sigh of relief.
- The proposed changes only relate to residential property. Commercial, industrial, retail and other non-residential properties are not affected in the slightest.
- The building allowance or claims on the structure of the building has not changed at all. You will still need a Depreciation Schedule to calculate these deductions. This component typically represents approximately between 80 to 85 percent of the construction cost of a property.
- The proposed changes do not apply if you buy the property in a corporate tax entity, super fund (note Self-Managed Super Funds do not apply here) or a large unit trust.
This is interesting and I suspect a lot more people will start buying properties in company tax structures.
- If you engage a builder to build a house and it remains an investment property, you will still be able to claim depreciation on both the structure and the Plant and Equipment items.
- If you renovate a property that is being used as an investment, you will still be able to claim depreciation on it when you have finished the renovations.
- If you renovate a house, whilst living it in, then sell the property to an investor, the asset will be deemed to have been previously used and the new owner cannot claim depreciation.
- Perhaps the most interesting point: Whilst investors purchasing second-hand property can now no longer claim depreciation on the existing plant and equipment, they will have the benefit of paying less capital gains tax when they sell the property.
How? Well, in summary, what you would’ve been able to claim in depreciation under the previous legislation, now simply gets taken off the sale price in the event you sell the property in the future.
Here is an example of how this will work:
Peter buys a property in September 2017 for $600k, included within the property was $25k worth of previously used depreciating assets.
As they were previously used, Peter can’t claim depreciation on those items.
Peter sells the property in 2022 for $800k, which included $15k worth of those depreciation assets.
Peter can now claim a capital loss of $10k ($25k-$15k) for the portion that Peter has not claimed in depreciation.
SUMMARY OF THE PROPOSED CHANGES
In my view, the Draft Bill could’ve been a lot worse for both the property industry and the Quantity Surveying professions.
It will certainly address the integrity measure concern of stopping “refreshed” valuations of plant and equipment by property investors.
It may, however, create a two-tier property market in relation to New and Second-hand property.
You can see the ads now “Buy Brand New – We’ve Got The Depreciation Allowances”.
It will still be just as critical for all property investors to get a breakdown of the building allowance & plant and equipment values so you can:
- Claim the building allowance (where applicable) and
- Reduce the CGT payable when selling the property by deducting the unclaimed Plant and Equipment allowances.
The Quantity Surveying industry, just like the property development industry just breathed a huge sigh of relief.
I believe this integrity measure could’ve been better addressed and will be making a submission accordingly.
But it wasn’t a bad ‘first run’ by the Government!
P.S. If you purchased an investment property prior to The Budget, and it’s been an investment property the whole time, you are not affected and you should get a depreciation schedule quote now.
Tax time is creeping up on us! So I thought I’d provide a simple list of some things that you can claim on. And that will help you save some money.
If you’ve been reading this blog, you’d know by now that some things cannot be claimed as an immediate deduction. However, there are some that can be.
So make sure you don’t miss out on claiming them!
So, what are these expenses that can be written off immediately?
Well here’s a list that will save you immediately. Make sure your accountant is able to claim these for you!
- Acquisition and Disposal Costs incurred to gain a tenant.
- Charges and fees such as body corporate charges and fees, council rates, lease document expenses, legal expenses, mortgage discharge expenses, tax related expenses, insurance, and interest on loans.
- Fees related to hired services such as property agents’ fees and commissions, quantity surveyor’s fees, pest control, cleaning, gardening and lawn mowing, and secretarial and bookkeeping fees.
- Expenses that cover utility bills such as water charges, electricity and gas, and telephone calls.
- Installation and activation charges for items in the property such as in-house audio and video service charges and servicing costs.
- Other miscellaneous expenses such as travel and car expenses, and stationery and postage.
Remember, these expenses can only be claimed if they were directly incurred by you and not the tenant.
So if you are renting out your property, now is the best time to go over your receipts and check which expenses fall under the list and before you know it, you’ll have more deductions than you bargained for!
If you need a depreciation schedule for your investment property – get a quote here or work out how much you can save using our free calculator.
The property market is currently in a state of limbo, particularly those involved in the selling of new property.
Because budget statement in relation to helping “reduce pressure on housing affordability” has potentially changed the game and announced dramatic changes to the way depreciation is claimed on property.
Let’s start with the good news:
- Any existing investment properties purchased (contract exchange date) prior to 7.30pm Tuesday, May 9th 2017 are not affected (unless they were not income producing in the 2016/2017 financial year – read more about the updated Budget changes here).
- Commercial, industrial and other non-residential properties are not affected.
- Capital works deductions have not been affected. This means you will still be able to claim depreciation on the structure of the building provided it was built after the 16th of September 1987. You will still need a Quantity Surveyor’s depreciation schedule to do so.
Now that we know what isn’t affected, let’s look at what has changed…
According to the budget statement
“From 1 July 2017, the Government will limit plant and equipment depreciation deductions to outlays actually incurred by investors in residential real estate properties. Plant and equipment items are usually mechanical fixtures or those which can be ‘easily’ removed from a property such as dishwashers and ceiling fans.”
Here’s the uncertainty….who actually acquired the plant of equipment?
Was it the builder/developer or was it the initial purchaser of the brand new residential property?
This is key.
Why is the government making these changes?
“This is an integrity measure to address concerns that some plant and equipment items are being depreciated by successive investors in excess of their actual value.
Acquisitions of existing plant and equipment items will be reflected in the cost base for capital gains tax purposes for subsequent investors.”
The industry needs urgent clarification on this matter! Why? Because many agents are currently advising potential buyers on the cashflow advantages of new property. This figures may prove to be inflated and put the developer or marketer at risk further down the line.
You see investors rely on these figures in assessing the merits of the investment.
Here is why I think this is dumb policy.
The proposed changes are being made to “reduce pressure on housing affordability”. In my opinion, it will have the opposite effect for 3 reasons:
- Property investors may now feel they need to hang on to their existing properties in order to continue claiming depreciation. With these new changes, if they sell this property, they won’t be able to get anywhere near as many deductions on the next one.
- Developers rely on high depreciation figures in the early years to show investors how affordable an investment property can be. If the allowances are taken away, they will struggle to get the pre-sales which are required by banks to fund the deal.
- These budget measures are forecast to save $260 million over a 3 year period. I suspect far more will be lost if developers can no longer get new projects off the ground.
Whilst I believe housing affordability is a major issue, this truly appears to be an example of policy on the run…
Here’s the solution:
Plant and Equipment in residential property needs to run it’s natural course.
The ability to re-value and re-assess the item after it’s initial effective life has run it’s course should be squashed.
Put simply, if you a buy a property that is say, 11 years old, and it has a dishwasher installed that had an initial effective life of say 10 years you can’t claim it, revalue or re-assess it.
That would alleviate the government’s concern that:
“….that some plant and equipment items are being depreciated by successive investors in excess of their actual value. “
This would make a lot more sense in my opinion
I am looking forward to providing a further update once the legislation is finalised and I will give more details regarding the specifics of these changes when they come to light.
Having been in this industry for more than two decades now, I’ve met all sorts of property developers and investors. Many of the calls and inquiries I receive are from frustrated investors who could not get depreciation reports (or schedules) from their accountants or real estate agents. However, what most investors don’t know, is that there is an ethical and practical reason behind this method.
The main reason accountants and real estate agents are not qualified to create these reports boils down to one issue. Essentially, if your residential property was built after 1985 your accountant is not legally allowed to estimate the construction costs. It is important to note that the Tax Ruling 97/25, issued by the Australian Taxation Office (ATO) has identified quantity surveyors as properly qualified to make the appropriate estimate of the construction costs, where those costs are unknown.
Qualified quantity surveyors-
Based on this ruling, this means accountants can offer advice around other aspects of tax depreciation. But construction costs and property depreciation are highly technical domains and must be calculated or estimated by qualified quantity surveyors in order for the report to be legally acceptable.
In nearly all cases, you will gain a larger benefit using a quantity surveyor to prepare your depreciation schedule. This is simple due to the fact that the quantity surveyor will physically visit the property. This can only be of benefit to you, the property investor, as the quantity surveyor will discover items that can only be seen from a visit to the property, and could have otherwise been missed and left out of the report.
Work out how much you save using our free property depreciation calculator or make it happen and get an obligation free quote for a depreciation schedule now.
This blog is an extract from CLAIM IT! – grab your copy now!
What does the future of depreciation look like?
*UPDATE – Read about the Budget changes here*.
Often I’m asked by investors who are about to purchase an investment property “what should I look for in order to maximise my future depreciation claim?”
People seem surprised when I respond by saying whilst depreciation is an important part of the property investment equation, I recommend that it should not be part of your initial decision-making process.
Prospective investors should first be asking questions like:
Where will I get the most capital growth? What’s the yield of the property? What’s the population growth of the suburb?
Once you’re satisfied on these fronts, THEN consider how to make depreciation work for you.
Here are four things to consider to increase the return on your investment property for the future:
- Carpet and floating floors will depreciate at a greater rate than, say, a tiled floor which is only depreciable at 2.5% per annum.
- Blinds and light fittings are highly depreciable and can often be written off immediately.
- Split-system air conditioning systems provide higher depreciation compared to ducted ones. As the ducting itself is part of the building and only claimable at 2.5% per annum.
- If built after 1987, can claim the building allowance component significantly increasing your claim.
When Mike Baird announced he was resigning as Premier of New South Wales in January there was a lot of commentary around his legacy. Most of this focused on infrastructure in the state.
Contrary to his predecessor, Bob Carr, who once said Sydney was full and couldn’t cater for any more growth. Baird believed building was very important for NSW to forge ahead. He knew it was the key to facilitating further growth.
In fact, one of the reasons the former investment banker entered politics was to remedy how far the state has fallen behind in infrastructure, making it a less attractive place to live.
He says infrastructure investment is a crucial way in which state governments can not only create better services, but drive economic growth.
So after years of inaction Baird took action, funding many projects through public asset sales. Now, NSW has plenty of infrastructure both under way and planned.
Upon announcing his resignation, Baird himself said he had “unleashed an infrastructure boom in Sydney and the regions”.
Infrastructure in the pipeline
Infrastructure basically refers to the structures enabling the effective operation of a society. This includes transport and communications systems, water supply, sewers and power plants. It also includes services such as schools and hospitals, and facilities including public parks.
When it comes to property, one of the most important types of infrastructure is transport. The majority of projects in the NSW pipeline fit into this category.
While more are mooted, here’s a quick rundown of some of the projects in the current infrastructure pipeline for NSW:
- WestConnex – A 33-kilometre motorway linking Western Sydney to the airport and Port Botany.
- NorthConnex – A 9-kilometre tunnel linking the M1 Pacific Motorway at Wahroonga to the Hills M2 Motorway at West Pennant Hills.
- Sydney Metro Northwest – This is Australia’s largest public transport project. It will provide an automated rapid transit system running from Bankstown in Sydney’s southwest to Rouse Hill in the northwest.
- Light rail – Sydney’s tram network is being extended with the CBD and South East Light Rail project. There’s also a light rail project for Newcastle and a proposal for more light rail in Parramatta.
- Badgerys Creek Airport – This is a second airport for Sydney. It will be built at Badgerys Creek in the city’s west.
- Parramatta Square – An urban renewal project designed to transform Parramatta into a vibrant mixed-use hub.
- Barangaroo – A waterfront redevelopment project on the western edge of the Sydney CBD. This includes James Packer’s new Crown Casino.
Why is infrastructure needed?
Building enables cities to cope with population growth. It’s needed for citizens to have access to services and amenities, and employment.
If there isn’t adequate provision of building there can be major disruptions affecting productivity and day-to-day life, such as traffic gridlock. People will flock to areas with infrastructure, choking them up and putting pressure on existing services and amenities, while shying away from other areas.
Sydney has already experienced strong growth in population. It surpassed 5 million people last year, and there’s no sign of growth slowing. Recent projections show 6.42 million people are expected to call Sydney home in 20 years. And the NSW population is expected to hit nearly 10 million by 2036.
Infrastructure is needed to cater for this growth to prevent putting further pressure on already-stretched resources.
Since Baird left the Premier’s office and the new Premier Gladys Berejiklian has been installed there have been calls for the focus on infrastructure to continue to provide adequately for future growth.
Chris Johnson, chief executive officer of the Urban Taskforce, said: “Sydney is Australia’s global city, and as a result, it must develop into a well-connected metropolis, with additional density, housing and services located around a metro rail network. It is crucial the new Premier continue this approach to ensure Sydney’s continued success as a growing, prosperous global city with a high standard of living.”
The Urban Taskforce also stressed the importance of providing infrastructure in growing regional areas of NSW, in addition to Sydney.
Infrastructure provision isn’t just something NSW should be concerned with. All state and territory governments – and the Federal Government – should be looking to provide both new infrastructure and update existing infrastructure to ‘future proof’ their cities.
Unfortunately though, many governments – especially in the modern day, where they seem to turn over so quickly – focus only on the short term rather than looking to provide long-term infrastructure solutions.
Australia’s population is set to rise from 24 million to 30 million in 2031. So if governments are not planning for this growth now they are going to run into significant problems down the track.
How does infrastructure impact upon property?
Building is a key growth driver of property, and specifically prices and rents.
As an investor you want your property to be in close proximity to existing infrastructure so people want to live there. People want to be close to schools, major public transport routes and other amenity.
If it’s not close to existing infrastructure, you want your investment property to be in an area where major building projects are underway. That is, you buy in an area knowing there’ll be growth when the planned infrastructure is completed. This is because there will be higher demand to live in the area from both buyers and renters.
In these areas growth can actually explode, along with property prices and rents, meaning you have a great investment on your hands.
New transport projects in particular can have a huge impact on the appeal of a location.
While upgraded or new infrastructure is a great indicator of capital growth. On the other hand a lack of infrastructure can prevent an area from reaching its full potential.
Did the RBA’s last cash rate decision for 2016 affect property investors?
The Reserve Bank of Australia’s (RBA) last cash rate announcement for the year was published.
The first Tuesday of every month (except for January), causes a risen stress in property investors lives. All eyes are always on the RBA to see what they’ll do. Will the official interest rate go up, will it go down, will it stay on hold?
And the commentary isn’t limited to the implications of their decision on that day. It started well before, with ongoing predictions on the RBA’s pending decision not only for the current month, but also further down the track.
Then after the announcement of the cash rate decision for the month there’s endless analysis about why the RBA made that particular choice.
It then turns to what the banks will do in response – will they pass on a change in interest rates (and if so, by how much), or, if the cash rate has been kept on hold, will they up their rates independently of the central bank’s decision?
We clearly have a fascination with the cash rate, interest rates and movements up and down, but what impact does it actually have on the average property owner, or the market more generally?
How do interest rates impact upon the property market?
Let’s get into some property economics to examine the relationship between interest rates and property.
Theoretically, interest rates can be correlated to property prices as they impact upon confidence, affordability and demand.
High interest rates make money more expensive. Which means people are less likely to borrow and in turn, buy property. This reduced demand can restrict price growth.
On the flipside, when interest rates are low money is more affordable. So people are incentivised to borrow and buy property, and with greater demand, property prices can be pushed up.
While interest rates clearly influence the market in this sense, the impact is perhaps not as clear-cut as it may seem. There are a multitude of other factors that also impact upon the property market and prices. And they must all be considered in conjunction to determine the real impact.
These other factors include unemployment, government policies, inflation, population growth and location.
It’s also important to consider factors that impact upon confidence and sentiment, such as global economic and political volatility or even terrorism, as these can influence people’s decisions to act.
The state of play in Australia
We know a relationship exists between interest rates and property. But it must be looked at in the context of the Australian market.
Interest rates are historically low in Australia, with the cash rate sitting at just 1.5 per cent. The general consensus is that these low levels have increased demand for property. With more buyers, particularly investors, entering the market to take advantage of the cheap money on offer, which has pushed up prices, at least in some areas.
But since interest rates have now been low for some time – with the cash rate trending down for five years – there is an argument that they’re no longer having a great influence on market activity.
At this stage it seems an upward movement in the cash rate and/or interest rates may have more of an impact on property investment decisions than any further moves downwards.
There has also been a growing divergence between the cash rate set by the RBA and interest rates set by lenders. As such there’s an argument that the RBA’s cash rate decisions don’t have much of an impact on the property market anymore. This is since the banks don’t have to – and often don’t – follow suit.
The cash rate is basically the interest rate that every bank has to pay on the money it borrows.
As the central bank, the RBA changes the cash rate for a number of reasons; to encourage borrowing and spending, to keep inflation in check, or to make sure the Australian dollar is balanced.
While traditionally banks have raised or decreased the interest rates they charge customers in line with fluctuations in the cash rate. In recent times they have begun to act independently. Moving their interest rates outside of what the RBA does, or not passing on the full cut, if there is one.
Lenders cite higher funding costs for increases to interest rates. In more recent times they have increased their rates mainly for investor loans due to increased capital requirements as demanded by the Australian Prudential Regulation Authority.
We know that interest rates offered by the banks are still historically low. But there are reports they are now starting to trend upwards despite the cash rate staying on hold. So when we consider the impact of a low cash rate on the property market, we also need to consider what interest rates are actually being offered to would-be borrowers.
What will the next move be?
That’s the million-dollar question isn’t it? The one we debate every single month, or even on a much more regular basis in some circles.
Since Donald Trump’s election to the US presidency, the odds have gone up that the next cash rate move will be upwards. And indeed some lenders started increasing interest rates at the end of November.
Since the cash rate is currently so low there’s probably not much of an option for the direction it can go in. The question is when that will happen, and unless you have a crystal ball it’s impossible to know.
While predictions are that interest rates will rise, many experts believe they’ll never again reach the double-digits that previous generations saw, as this could have catastrophic impacts on borrowers, with lending amounts now being so high.
Only time will tell. And since there are so many factors that could impact upon interest rate levels anything can happen at any time, so what may look likely now may change down the track.
At least after this last decision in December, we’ll have a slight reprieve on the commentary until February!