The new depreciation measures announced in this years’ budget will reduce the ability of property investors to make deductions and to ability to negatively gear.

The Treasurer Scott Morrison stated:

“And from 1 July 2017, the Government will improve the integrity of negative gearing by disallowing deductions for travel expenses and, for properties bought after today, the Government will also limit plant and equipment depreciation deductions to only those expenses directly incurred by investors. 

These new changes only apply to residential property, commercial depreciation is still fully deductible.

The result of these changes is that thousands of properties that were cash flow positive, will no longer be cash flow positive after these changes.

If these changes are passed by the Senate, there will be a retrospective impact back to May 9 2017.

As a result of these changes, property investors may now hold onto their existing properties so that they can keep claiming depreciation because if they sell their property, they won’t be able to get as many deductions on their next one.

Also, developers rely on high depreciation figures in the early years to show investors how affordable investment properties can be. If depreciation allowances are taken away, they will struggle to get presales, which banks require to fund the deal.

It can also be argued that secondary buyers will demand discounts on a resale to account for the lack of deductable depreciation.

Off the plan investors regularly experience declines in new property prices, when selling in the first few years and these measures may aggravate this reality, which could negatively impact housing supply in the long term.

Developers will be looking to first home buyers to take up the slack that investors leave behind.

Hopefully, this will happen with the new measures announced, such as additional superannuation contribution scheme, the additional CGT discount on “affordable” properties and so on.