The friendly tax exemption which still allows newly-built homes to be negatively geared may be a "trap" for inexperienced investors, a property expert has explained.
While negative gearing will be abolished from July next year for established properties bought after the 2026 Federal Budget, investors who purchase brand-new homes can still offset any net losses from their yearly taxable income.
This could inspire new investors to buy into sprawling apartment developments or house-and-land packages on the outskirts of major cities – but these types of properties historically "underperform" as investments.
READ MORE: Boost Juice founder lashes budget tax reform
EXCLUSIVE: Expat Annie decided to move back to the UK. She lasted just six months
Property investment guru and Your Empire chief executive Chris Gray said the federal government's new build exemption may "screw investors" who buy solely based on their freedom to apply negative gearing.
"These massive towers in Docklands in Melbourne or Zetland in Sydney, or the thousands and thousands of blocks of land where all the properties are the same, there is not necessarily lots of natural demand and typically they don't grow in value," Gray told Nine.com.au.
"It's basic economics. If something's in short supply and lots of people want it, the price goes up. Where you've got lots of supply, it won't."
First-time Australian investors who weren't lucky enough to buy before 7.30pm on budget night now have two choices: buy a newly-built home for the negative gearing benefit, or lose the tax break and buy an existing property.
Gray, who has 30 years of experience buying and selling property, said seasoned investors will know to give new builds a wide berth.
He would still choose the option of buying a second-hand home in a high demand area, despite the chance it won't be positively geared for at least a decade.
Some inexperienced buyers, however, could still be fooled by something called "manufactured capital growth".
And it could take years before the reality of their bad investment sinks in.
"Developers might sell 20 at a time and slowly release them. They sell the first lot at say $500,000 and the next one at $525,000 and then $550,000," Gray added.
"Everyone thinks that it's rising, but it's not.
"It's not until you get someone selling it to another person in maybe five years' time that you actually realise, potentially, the property hasn't grown in value at all."
The grandfathering policy, which allows the previous generation of landlords to enjoy negative gearing, will establish a wealth divide between older and younger investors.
Property experts previously criticised this decision as an "enormous injustice" to younger buyers who are still saving for a property.
The same younger investors will also be competing with foreign buyers in the new build market.
READ MORE: Melbourne woman Lorna's chronically-misdiagnosed illness now has a new name
The federal government extended its ban on foreign purchases of established homes until 2029 in this year's budget.
This could mean an influx of investors buying into this market artificially inflate prices, even pushing buyers into negative equity.
"If you get a whole bunch of people going out west to buy these house and land packages, it almost creates a false demand for it," he added.
"Where property was, say, a million dollars, now because you're getting the negative gearing, it might jump up to be a $1.025 million or $1.05 million.
"In the end, it's actually not a realistic benefit."
This advice is general and does not take into account your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances and seek advice from a broker or adviser before acting.
NEVER MISS A STORY: Get your breaking news and exclusive stories first by following us across all platforms.
