A string of pricey Melbourne suburbs are offering property investors the opportunity to claim sizeable tax deductions, as the gap between monthly mortgage repayments and rental income widens.
Experts say investors need deep pockets to stay in the market, and many are looking to offset losses by claiming tax deductions for negatively geared properties, or selling their investments for a large profit.
In Ashburton, where the median unit value is $1,334,739, monthly loan repayments would cost $6763 and the median rent received would be $2982, leaving new investors with a $3781 shortfall each month, new analysis of data by CoreLogic shows.
It was a similar story in Balwyn North, where investors would be left short $3307 a month, Brighton ($3086) and Beaumaris ($3054).
A property is negatively geared when the cost of mortgage interest and expenses linked to owning a rental is more than the income it generates each year. Landlords can claim this cost as a tax deduction against their wage income to pay less tax.
There were only four suburbs where Melbourne investors could find the rental return is greater than the expenses from the outset. Unit owners in Carlton could make a $505 profit each month, while those in Melbourne ($402), Notting Hill ($297) and Travancore ($214) would also be ahead.
Investors need deep pockets in suburbs like Brighton, data shows.Credit: Penny Stephens
The analysis is based on median home values and rents in February, and assumes investors bought with a 20 per cent deposit and have a variable mortgage rate of 6.52 per cent.
CoreLogic’s head of residential research, Eliza Owen, said most investors would need to buy with a larger deposit to see positive cash flow from the start. Even those in a positive position on the median data could be in the red when accounting for extra costs like council rates.
“For investors, the gap in cash flow is making some areas of Melbourne less attractive,” Owen said. “It’s really more about them having a long-term capital growth strategy.”
She said investor numbers were down across Victoria and also nationally. Loan application numbers bottomed out in February 2023 after a series of interest rate rises made investing more expensive, despite rents being at almost record highs.
Property investors’ tax concessions have been making headlines after Senate crossbenchers called on the major parties to scale back the use of negative gearing.
But Andrew Kostanski from Andine Mortgage Brokers said clients were looking for the best tax concessions or saving up larger deposits to lower mortgage stress.
For example, one client bought a house her father owned as an investment, taking on 75 per cent of the loan while her husband took on 25 per cent.
Investors are hoping to sell for more to offset the loss they make when renting out a home.Credit: Arsineh Houspian
“It gives them a better tax advantage,” Kostanski said. “Everyone is looking at the best way to have a tax advantage – there’s quite a shortfall for people who are borrowing now – so they are putting more into a deposit to cut the gap between the mortgage repayments and rent they’re getting.”
Investors were looking at higher-priced homes, hoping for a larger increase in their value when they sold, he said.
Some were also buying units in buildings less than six storeys high, as some lenders would not approve a mortgage for a high rise where unit prices had fallen or were unlikely to make much of a profit, Kostanksi said.
Con Stefanidis, director of Century 21 Property Group Clayton, Clarinda and Brighton, said investors were selling up to put their money in the bank and earn higher interest rates instead.
The rental demand is there, but investor numbers have fallen.Credit: Chris Hopkins
“True investors are looking at the rent they could be getting, and even though it’s high, the rises in land tax [introduced by the Victorian government on second homes] and interest rates means they’re staying away from the market,” Stefanidis said.
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.
“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 were 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 if house prices fell, given the federal government’s plan to build more homes and a possible cut to immigration.
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.”