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“Sydney is very much a negative-gearing investment strategy market, or you’re taking a non-traditional model of cash flow like Airbnb, or you’re purchasing something that isn’t at the median-value level,” Owen said. “If you are getting positive cash flow in Sydney, it’s not off the median values or the traditional 20 per cent deposit home loan.”
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The analysis is based on median home values and rents in February and assumes investors purchased with a 20 per cent deposit and a variable mortgage rate of 6.52 per cent.
Investors who purchased with a larger deposit or were further along with repayments would face less of a shortfall.
Owen said the rising interest rate environment had only exacerbated the level of negative gearing.
“Cash flow returns have been eaten into by increased interest rates over the past two years,” she said. “Despite rampant rental increases in Sydney, it is still not enough to put rental properties in a positive cash flow position.”
AMP chief economist Dr Shane Oliver said it was harder for investors to negatively gear two years ago, given record low interest rates, but the market had changed markedly since.
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“The equation has changed dramatically since interest rates have risen and it’s really gone back to what it was in the past,” Oliver said.
Investors are hanging out for interest rates to fall, possibly later this year, for some relief from the rent-mortgage gap.
“If the RBA drags the chain and doesn’t do it until 2025, we could see more distressed sales from investors,” he said.
Oliver said property investing could become riskier in the future, given the federal government’s plan to build more homes and possibly cut immigration levels, which could push house prices lower.
Those relying on high capital gains when selling their investment property may not get them.
“The rise in enthusiasm for property investment comes from lower interest rates and higher prices – now people may look to keep their money in the bank instead.”
Negative gearing tax concessions were tipped to cost the public purse $6 billion by last financial year if the average variable rate hit 6 per cent, which it has now passed.
Equilibria Finance’s managing director and mortgage broker Anthony Landahl said while capital growth was critical to investment strategies, negative gearing was a common discussion among clients as the cost of funding and holding rental properties surged.
“For most of our clients, negative gearing is absolutely a consideration. Cash flow has been a much bigger concern in the last 12 to 18 months because of the rising rate environment,” Landahl said.
“The cost of holding and funding a property is outrunning the rent,” he said.
Loan Market Ryde’s James Keillor said it was increasingly difficult to have a positively geared investment property at the current median price.
“It would be almost impossible to see a property positively geared with today’s interest rates,” Keillor said.
He stressed that negative gearing should always be a secondary consideration when choosing to buy an investment property.
“It should be a good property to purchase regardless of tax benefits, and the tax benefits make it an additional incentive.”
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