Nothing has changed - you still need property to be rich

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If you’re planning to rush out and sell your investment property portfolio - and turn your back on the asset class - due to the changes in the recent Budget, then I’d like to suggest something.

Take a deep breath and relax. That’s right - as my spin instructor says - “in through the nose, out through the mouth.”

This Budget has in no way, shape or form wrecked the long-term thesis behind investment property ownership, and I vehemently disagree with Sebastian Ferrando that it has made the economics of the asset class “much much worse”.

If anything, I’m taking a contrarian view. I support abolishing negative gearing on existing homes - and think the replacement rules, particularly the quarantining mechanism, could make property investing, on balance, an even more attractive asset class.

But first, I’d like to respond to the points raised by Sebastian in his wire, particularly with respect to his three big reasons to not own property.

Many of my views on why property investing remains one of the most powerful ways to build wealth were laid out in a popular wire last year that sparked more than 100 comments. Here, I revisit those arguments through the lens of the Federal Budget changes.

Property

I’m sorry, but you need property to be rich

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Reason 1: High costs... that you get tax breaks from!

In his argument, Sebastian states: “The costs of buying, holding, maintaining and selling residential real estate have gone up.”

Of course they have - but so have rents to offset said costs (see below)! More fundamentally, so what if there are costs to owning a property?

Many of us happily spend vast sums on expensive university degrees or starting businesses with no guarantee of future success. Yet when it comes to property, where many costs are tax-deductible and the cash flow is immediate, suddenly every expense becomes unacceptable. I don’t get it?

Sebastian also makes an unusual argument here:

“How often have you heard an investor talk about real estate and tell you that they bought it for 2, sold it for 4, I doubled my money? Perfect example – that person has just ignored stamp duty, insurance, rates, repairs, maintenance, taxes, and real estate agent fees.”

There is no responsible property investor I know who has conveniently “ignored” these costs... but regardless, this argument overlooks one key nuance. You are typically *never* paying the full price for a property - you are only fronting up the deposit and letting the tenant pay back the bank.

Consider a typical Western Sydney townhouse bought for around $200,000 in the early 2010s and now worth close to $800,000. People look at that and say: “Nice, the property quadrupled.” But that misses the point. If the buyer only needed roughly $50,000 upfront including the deposit and costs, it wasn’t the property price that 4x’d - it was the investor’s original equity that exploded higher thanks to leverage.

Reason 2: Low liquidity... which protects you from yourself!

One of Warren Buffett’s most famous quotes applies just as much to property as it does to shares: “If you aren't thinking about owning a stock for 10 years, don't even think about owning it for 10 minutes."

Property can be a powerful anchor for wealth creation because it has the ability to compound steadily over time while allowing investors to harness prudent leverage.

But it also needs strong financial buffers around it; Buffett’s Berkshire Hathaway hoards enormous amounts of cash for rainy days and unexpected shocks. In the same vein, you need cash reserves for repairs, emergencies, vacancies and the moments when life inevitably happens.

If you’re forced to sell a property at the first sign of stress, outside of unfortunate circumstances like divorce or illness, then the issue usually isn’t the asset class itself. It’s the planning.

Reason 3: Low yields... that grow, grow, grow!

Cotality's data showed rents increased by 80% over the past 17 years on average across Australian capital cities. As strong as that data is, remember that they are only averages - areas such as Western Sydney have seen prices and rents more than quadruple over that same time thanks to rapid population growth.

Meanwhile, income stocks in Australia have been a mixed bag. Woolies, Telstra and the Big Four-ex CBA and Telstra actually pay lower dividends today than they did back in 2008!

Cash was considered trash for much of the 2010s, and alongside bonds, it has only regained its allure in recent years. But over the long term, returns from these assets have generally sat closer to 2–3% annually.

S&P 500 - an unwarranted obsession?

“Australian” and “property” - both words carry weight

There’s one more point I want to make before discussing the Budget, and I think it’s something people especially appreciate if they weren’t born in Australia - or if they’ve seen enough of the world to realise just how blessed the Lucky Country really is.

For many immigrants, buying property in Australia is not some speculative gimmick or lifestyle trophy. It’s not about ticking off a dream of living in the Northern Beaches.

It often represents the culmination of generations of sacrifice - families who endured instability, corruption, economic hardship or even war to reach Australia, or send their children here, in pursuit of a safer and more prosperous life.

For many newcomers, owning property in Australia - investment or otherwise - is the first true foundation of emotional and financial security their family has ever experienced.

That’s why when I talk about “Australian property”, I’m not talking about just any asset class. I’m talking about a very special, tangible asset that embodies political stability, strong institutions, legal protections, population growth, and one of the most desirable lifestyles in the world.

Perhaps that’s part of the reason Australian property has proven so resilient across downturns, as the the data from Cotality shows below.

Impact of the Federal Budget

Now let’s talk about the Budget - there are two main factors to unpack here.

1) Axing negative gearing on existing homes

The Budget proposes that negative gearing is effectively phased out from 1 July 2027 for investors who bought an existing property from May 12 onwards.

Thank goodness! Vamoose! Au revoir! Good riddance!

I cannot stress enough how happy I am to see negative gearing go. When I first started investing in property, I watched people boast about massive portfolios built almost entirely on engineered tax losses.

They leveraged themselves to the hilt, convinced endless capital growth would save them, only for the whole house of cards to wobble once higher interest rates, vacancies or major repairs arrived and their modest incomes could no longer absorb the pressure. Those people will be gone from the market and I won't miss them.

As such, here are three ways I think removing negative gearing could actually improve the property market.

First, it should increase the proportion of financially prudent investors in the sector - particularly those on higher incomes, those with larger cash buffers, or those willing to contribute deposits well above 20%. This means landlords will have longer holding periods, which has implications for housing supply.

Second, it will force landlords who lose access to negative gearing to reprice risk through rents. A high-income investor with a $10,000 property loss currently saves roughly $4,700 in tax through negative gearing alone. If that tax shield disappears, what do you think many landlords will do? I’ll leave it to you to guess (hint: tenants won't like it).

Third, the changes alter the timing of profitability, not necessarily the attractiveness of the investment itself. In many cases, they simply shift where the money is made - away from front-loaded tax losses and towards stronger profitability in the middle and later years of ownership.

For example, imagine an investor records $10,000 in losses annually over the first five years. Under the quarantining rules, those losses don’t disappear. 

The investor builds up $50,000 of carried-forward losses that can later be used to offset taxable income once the property becomes positively geared, or potentially reduce capital gains tax upon sale.

My best thesis is that investors will look to accumulate quarantined losses while they’re in the 32% or 39% tax brackets, and then utilise those losses later when they move into the 47% bracket. I struggle to see how that makes the economics materially worse for disciplined long-term investors - let alone “much much worse.”

2) Scrapping the 50% CGT discount

This part is far less clear-cut because the outcome depends on a huge range of variables: inflation, the growth rate of the property itself, buying and selling costs added to the cost base, and the amount of quarantined losses accumulated over the holding period. 

Forecasting the exact impact is extremely difficult, although The Guardian has created a useful calculator for investors wanting to test different scenarios. And don't forget, the government also threw in the 30% CGT floor into the mix, which complicates calculations.

For now, it appears that if your real returns sit around 2–3%, you may actually pay less tax under the new system. But if your real returns are materially higher - whether from property or shares - then you’ll likely end up paying more.

Final words

We’ve covered plenty of ground today, and I’d like to finish by pointing readers to the excellent article my colleague Keith Ford recently wrote. Regardless of what changes governments make to tax settings, investment decisions should never begin with tax.

The essence of Keith’s piece was simple: what ultimately drives wealth creation is the quality of the portfolio itself.

Of course, everything I’ve written here is still just an opinion. But if there’s one thing I’ve learned from years of covering markets and investing, it’s that the best long-term outcomes usually come from sensible diversification, patience, and owning quality assets for a very long time.

Education

Why your investment decisions shouldn’t start with tax

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