Question Mark: Sydney simmers

Cashed up investors are beginning to trickle back into the Sydney residential property market, setting the scene for a new Australia-wide cycle from 2007, in which prices will grow at sustainable rates over the long term.

Although there is no firm evidence to support this observation (clearance rates continued to hover around the 50% mark during July) there are clear signs that confidence is returning to the Sydney market.

The number of properties going to auction is always a good indicator of market confidence. During July, this figure was 25% higher than in July 2005, an encouraging sign that the market will soon be on the move.

Traditionally, Sydney sets the trend for the wider Australian property market because it is the largest population centre, with the largest base of wealth in both the share and property markets.

The people who invest in the sharemarket are the same people who invest in property; it’s simply that they tend to gravitate to one asset class or the other at different points in time.

As the graph below shows, the Sydney market clearly overheated in 2002 and has been going through an adjustment phase ever since. This echoes the Sydney market during the late 1980s, when spiralling inflation and interest rates pushed the city’s already high prices far out of sync with those in the rest of the nation.

This really was the adjustment that had to happen, to put the Sydney residential market back on a footing with other capital cities and ensure its longer-term sustainability.

Now the Sydney market is finding its feet, just as the sharemarket is beginning to cool. Savvy investors are looking at the Sydney residential market, seeing how much it’s fallen in the past few years, recognising the opportunities to buy at the bottom of the market, and skimming sharemarket profits to buy back into residential property.

Once this trend takes a firm hold and investors begin transferring funds out of the sharemarket in large enough numbers, the Sydney residential market will move again.

I expect Melbourne and Brisbane will follow close behind, and that the smaller capitals are a few years away from a growth cycle just yet.

The exceptions are Perth and Darwin, whose resource boom-fuelled residential markets have seen unprecedented growth in the past two to three years.

As the graph shows, both cities are now so out of sync with the rest of the nation that they must either go through the short-term pain of an adjustment now, or suffer a much bigger drop in values later. I would not be putting any further money into the Perth or Darwin residential investment market at this stage.

When it comes to the Sydney, Melbourne and Brisbane markets, now’s the time to make your move to take advantage of good buying opportunities at the bottom of the market and reap the benefits of a full growth cycle.

Timing the sale

I think we have made a big mistake. We owned an investment property for 10 years before selling it earlier this year, and made a big capital gain.

We instructed the agent to make sure the property settled after June 30 because we didn’t want to pay CGT until next financial year. I have since been told that, for CGT purposes, the property is considered “sold” on the day of sale, not when it settles. Is this right and is there anything I can do to wiggle out of my position?

Unfortunately you’ve been correctly advised: for CGT purposes, the property is considered to be “sold” on the day the contract is signed and dated.

The only way you can remedy this situation is if both parties agree to void the contract and sign a new one. Ask your solicitor to approach the purchasers about the possibility of voiding the contract and signing a new contract after 30 June.

You should also run this past you accountant to ensure he’s satisfied that this suggestion when applied to your full situation will not fall foul of the tax office’s strict tax avoidance provisions.

I suggest that if your intention was to sell the property after June 30 and you made an honest mistake, you would have a good case to argue.

Divorce and CGT

I am going through a divorce. My husband and I own our own home outright, and have a $150,000 debt on an investment property we purchased 10 years ago.

I want to keep our home and give the investment property to my soon-to-be ex, but he keeps saying I will have to pay capital gains tax on the gain we’ve made on the investment property. We bought the property for $290,000 and it’s now worth close to $500,000 so that would be a substantial CGT bill!

The tax office has specific provisions regarding the transfer of property between spouses in the event of a marriage break-up.

You will be exempt from CGT if the “CGT event” (such as taking you off the title) happened because of:

• an order of a court or court order made by consent under the Family Law Act 1975; or
• a maintenance agreement approved by a court under section 87 of that Act.

If you and your husband enter into a private agreement or arrangement regarding the transfer of property, these conditions won’t be met and normal CGT provisions will apply (that is, you will be liable for CGT on any gains made between buying the investment property and taking your name off the title).

I suggest you speak with your solicitor for further advice before making any decisions.

Two main residences

My husband and I are in our late 50s. I am a writer and work most of the time in our home in the Blue Mountains. My husband works long hours in Sydney, lives in our city base during the week and comes up to be with me on weekends. Both properties are in joint names.

In five years we plan to sell up and move to New Zealand where our daughter and grandchild live. Can each of us claim one property as our respective main residence so we won’t have to pay any CGT when we sell the properties in five years’ time?

Answering tax questions is never straightforward and simple, and this one is no different. It can get a bit confusing and I suggest you go through this in more detail with your accountant.

Yes, you can claim the Blue Mountains house as your main residence while your husband claims the Sydney house as his main residence, for as long as your husband is splitting his time between the mountains and Sydney. However, this arrangement will not exempt you from CGT completely.

Any capital growth achieved by the Blue Mountains property while you’re living there will only be 50% exempt from CGT. Your half-share in the property will be fully exempt, but your husband’s share will be subject to CGT on 50% of the capital gain when you eventually sell.

The reverse will apply for the Sydney house. Your husband’s share will be CGT-exempt, while your share will be subject to CGT on 50% of the capital gain.

I suggest you consider claiming the main residence CGT exemption on just one property, the one that’s likely to achieve the greatest amount of capital growth over the next five years. This will minimise, though of course not eliminate, your tax bill.

Outside buying in

I’m an expat Aussie and I’ve been working in Qatar for almost a year. I’m keen to get into the investment property market back home before prices start moving up again.

I’m looking for a property around the $400,000 mark. I’m earning a pretty good income but I’ve only saved $30,000, which isn’t even 10%. Will this be a problem?

In the past, most lenders would only lend Australian expatriates up to 80% of the property’s value without stipulating that you take out mortgage insurance.

In recent years, however, many lenders '” and their mortgage insurance providers '” have relaxed their lending policies for expats. With 5% of Australians working overseas (often on substantial salaries) lenders are reluctant to miss out on a potentially lucrative slice of the home loan market.

I suggest you contact a number of different lenders to ask about their policies for expats and find one that will allow you to borrow more than 80% of the property’s value.

Mark Armstrong is Director of Property Planning Australia www.propertyplanning.com.au, an integrated property advisory and mortgage sourcing service. He also writes for Australian Property Investor magazine www.apimagazine.com.au.

You can email any questions regarding property to Mark Armstrong right here, by clicking questionmark@eurekareport.com.au