Property Values in Freefall

A negatively geared rental property is where borrowed funds are used to invest in property and the income generated (at least in the short term) is less than the tax-deductible expenses. This creates a taxable loss from the investment which may be offset against the taxpayer’s other income (normally salary and wage income).

This is a profitable strategy if the investment grows in value (capital appreciation) each year, by an amount that is greater than the net cash out-flow (the taxable loss less the tax refund received, less the building write-off claimed). Historically this strategy has worked well in Australia with property values doubling every 7-10 years.

Over the last ten years this strategy has been tested. Home values have plunged by up to 25 per cent in real terms across five of Australia’s eight capital cities in the past decade, with Perth values most savagely hit (down 25.4% in real terms). CoreLogic’s report applied the latest Consumer Price Index data, which shows the rate of inflation, to national dwelling values over the past 10 years.

Although Sydney values soared by 44.1% and Melbourne by 39.1% over the last decade, these two markets are now in freefall. Both markets have now fallen by over 10% from their peak in August 2017, and are expected to fall another 10-20% before bottoming out.