Will Labor’s negative gearing policy decrease property values & increase rent?
With an Australian federal election looming, it comes as no surprise to see an increase in commentary on the potential effects each political party’s policies could have on the economy.
A recent report by SQM Research suggests that the proposed rollback of tax concessions for property investors by Labor, will result in increased rents and a further decline in property prices.
The tax concessions in question involve reforming Negative Gearing & Capital Gains Tax.
If voted in at the next election, Labor intend on getting rid of Negative Gearing on existing / old houses and limiting the tax break to new housing only.
The proposed date for the change is yet to be determined but it is well worth noting that any purchases made prior to this date will not be affected by the change in tax concessions proposed by the Labor Party.
Capital Gains Tax
The proposed changes by Labor will see the Capital Gains Tax Discount, on assets which are held for more than 12 months, halved from the current 50% rate to 25%.
As with Negative Gearing, a proposed date to implement the change has not been determined as yet but any purchases made before this date will not be affected by the change.
SQM Research’s findings assume the implementation date of the tax reforms to be the 1st July 2020 and is based on 3 different scenarios.
1. Negative Gearing cut, Capital Gains increased and interest rates cut by 50 basis points late 2019 or early 2020
In this scenario, property prices are forecast to fall between 4 and 8 per cent, as rent increases anywhere from 7 to 12 per cent.
2. Negative Gearing cut, Capital Gains increased but no change in interest rates
This is the worst of the 3 scenarios as it assumes that the tax reforms will be implemented without any cut to the official interest rate. In this scenario, property prices are forecast to fall between 5 & 12 per cent and rent increasing 8 to 15 per cent.
3. No Negative Gearing change and 50 basis point rate cut
Here it is assumed that Labor’s tax reforms do not go ahead, the Liberal party wins the 2019 Federal Election and the official interest rate is cut. In this scenario, we see the better outcome for the market as property prices are expected to increase 8 to 14% while rents likely to rise anywhere 3 to 9 per cent.
Property prices for existing houses will fall because, without the tax breaks, these homes will become less desirable to the investor and demand will reduce. The report also suggests that there is a risk that investors who have purchased new properties will experience losses when reselling the homes as the ‘secondary buyer will demand some type of discount given that buyer would not be entitled to receive Negative Gearing tax concessions on the property. And subsequently, such a buyer may demand a discount to offset the lack of concession.’
Rents are likely to rise as investors look to increase their rental yields as compensation for removal of the tax concessions.
As some of the findings have been questioned, Treasury’s own advice to the government was that “the ALP policies could introduce some downward pressure on property prices in the short term”. However, Treasury also ‘warned that the proposed policy change could be particularly problematic if it coincides with weakness in the housing market.’
Whilst we do not necessarily endorse or agree with the report published by SQM Research, it is clear that the proposed tax reforms by Labor will have some negative impact on housing values. We just hope that whatever the outcome of the next Federal election is, the government is able to address housing affordability concerns and maintain a healthy property market at the same time.
Click here to download a copy of the SQM Research report in to Labor's Negative Gearing policy.
If you have any concerns or questions about Negative Gearing or Capital Gains Tax, have a chat with your accountant.