It’s almost election time again and that means only one thing ‒ the same tired proposals by politicians who have no intention of seeing them through. (How many times have we heard about a high-speed rail network? Tackling child poverty? Crackdown on welfare recipients?)
One of the most common pledges that could have an impact on the real estate industry concerns negative gearing and the Labor Party’s plans for reform.
Bill Shorten has announced that he wants to change the current negative gearing policy so that it no longer applies to existing properties. Labor’s plan is for negative gearing to continue only for investors who buy new builds. For current investors who make use of negative gearing, there will be no change on the properties they own, unless they sell them on.
Labor’s goal is to encourage growth in the building sector, which they believe will increase the supply and lower the overall price of housing and rent in Australia.
Labor’s goal is to encourage growth in the building sector
Housing affordability is a major issue in Australia, with many first-time buyers unlikely to be able to afford property in the biggest cities. This is something Labor is hoping to tackle, and something it hopes will win them votes.
Labor also wants to halve capital gains tax discount to 25%. Currently, investors who own a property for more than 12 months are entitled to a 50% discount on the capital gains they would otherwise have to pay. As with their intended changes to negative gearing, this will only come into play for purchases made after the new laws are introduced ‒ on 1 January 2020.
As always in politics, there's a disagreement about whether this plan would actually work. The coalition government disagrees with Labor's strategy and has pointed out several potential issues. Scott Morrison and his allies have committed to leaving negative gearing as it is, should they be re-elected.
The first issue that they have with Labor's plan is that even if housing prices come down in capital cities, the change in costs probably won't be enough to encourage first-time buyers to enter the market.
For prices to drop enough in cities like Melbourne and Sydney to encourage first-time buyers onto the market, that could have a hugely negative effect on the economy. Because for so many Australians, property is their biggest asset, a drop in value across the country could wreak havoc. Even for those who don't own property themselves, they're likely to have an investment in the market through their super.
An independent view
If you want to know if Labor's plan is a good idea or not, it's best to find independent advice. SQM Research, a company that specialises in analysing residential property, has mixed reports on the initiative.
Based on Labor’s pre-election promises, SQM thinks Labor's plans would reduce property prices by 5 to 12 per cent over the next three years. This is dependent on other factors; SQM says that if the Reserve Bank were to cut interest rates it could reduce the drop in property prices to 4 to 8 per cent.
Conversely, with the Liberals in charge again and a similar rate cut, we could see house prices rise by 8 to 14 per cent. This would be a better result for investors, but not for first-time home buyers.
Another possible effect of the potential changes to negative gearing could be higher rents, as people look for other ways to make their investments lucrative.
What changes will we see?
While house prices are likely to drop, it's still to be seen if that will increase the demand for property.
In most cases, the decrease in price won't be enough to allow many new buyers into the market and, with the lack of negative gearing potential on existing properties, it's no longer as appealing for investors. Should they buy a property in an investment area, it's likely that their rent would have to be higher than nearby homes or units to make up the difference, which makes it harder to find tenants.
SQM expects that the drop in houses prices would be evident for up to three years, when things will begin to level out.
However, demand for new properties is set to soar as investors look to make the most of the negative gearing focus in this area. Developers might look to buy up properties at a reduced rate to build new homes or units that will be of interest to investors, so the property market will continue to tick over in most areas.
And remember that for any number of reasons, people need to sell their home ‒ to move interstate for work, because they’ve outgrown their current property, because they’re downsizing, because they want to move to a better school catchment area.