What might Labor’s negative gearing and tax reform mean for Melbourne real estate?

17 Apr 2019

Labor’s proposed changes to negative gearing and capital gains tax concessions may result in considerable disruption to property investment as we know it today.

With Labor reportedly leading opinion polls by way of two-party-preferred vote, many may be wondering what exactly the proposed changes are and what effects they might have on the real estate market, both here in Melbourne and across Australia.

What is negative gearing?

Negative gearing is a financial strategy to describe when money is borrowed to invest in an asset (usually property) and the income made from the asset (eg. rental return) is less than the expenses of holding that asset, resulting in a loss. Under current laws, Australians can claim tax concessions if their property is negatively geared.

What are Labor’s proposed changes to negative gearing and capital gains tax?

If elected, Labor proposes to limit negative gearing to existing investments and going forward, to newly built properties only. This means investors buying property would be unable to deduct net rental losses from their taxable income if the property is not a new build. Capital losses would still be deductible against other investment capital profit and may be carried forward to offset capital gains.

Labor also proposes to reduce the quarantining of capital gains tax (CGT) discount on all asset classes, from property to shares. Currently, when investors hold an asset for at least 12 months before selling, they can decrease the taxable value of capital gains on that sale by 50 per cent. Labor proposes to lower the discount to 25 per cent.

It’s important to note the proposed changes would all be fully grandfathered. This means any property bought before the commencement date of the reforms would be unaffected until sold again.

What impact might Labor’s proposed changes have?

The effects these changes may have on the real estate market is subject to ongoing debate. We sat down with Brad Teal himself to discuss the possible implications of Labor’s proposed reforms.

House prices

“I don’t think there’s any doubt that the changes will adversely impact property prices,” says Brad. “Competition from prospective investors will be limited, because they’ll have lost one of their biggest incentives to invest.”

Expectations on the extent of this downward pressure varies from analyst to analyst.

Modeling from SQM Research suggests prices could drop between 4 and 8 per cent, provided the cash rate is cut, or 8 to 12 per cent otherwise. Similarly, analysts from RiskWise Property Research and Wargent Advisory estimate a 9 per cent decline in Victoria.

Other predictions are not so extreme, with Treasury stating the following in a fact-checking email revealed in a 2019 Freedom of Information request:

“We did not say that the proposed policies “will” reduce house prices. We said that they “could” put downward pressure on house prices in the short-term depending on what else was going on in the market at the time, but in the long-term they were unlikely to have much impact.”

Brad adds, “The current drop in pricing has likely already factored in Labor’s proposed reforms as investors are noticeably fewer in the market place. This comes as a surprise as there’s a real opportunity to get in and buy now, because no government is likely to bring negative gearing back in again.”

Rental prices and yield

Perhaps the most contentious point of discussion is whether or not the proposed changes will impact rental prices.

Whilst SQM Research has forecast that rents may rise as much as 12 per cent on average over the period to 2022, Brad believes significant increases are unlikely.  “As property values fall, if rents stay the same then that’s automatically an increase to rental yield. And tenants just won’t keep paying more and more – there’s not the available liquidity in the economy for people to continue paying increasing rents.”

While supply of rental properties may fall as investors temporarily opt out of the market, Labor’s policy position is intended to make property more accessible to first home buyers.  If the policy has the desired effect, renters will look to buy as properties become more accessible, lowering demand for rentals in turn.

What do these implications mean for you?

There are a number of potential impacts this might have on investors, buyers and sellers in the market.

The risks

  • Property investment may become less attractive. Current investors will be able to take advantage of grandfathering, however after the reforms, new investors will find property less attractive as they won’t be able to enjoy the same tax benefits on existing builds.
  • Equity will be challenged in the short term. As prices soften, investors and home owners alike may lose equity in their homes.  This is more of a risk for those looking to turnover their property in a short time frame, as prices always recover over the property cycle.
  • Off-the-plan purchases are likely to become riskier. Though already risky, the fall of housing prices is likely to create greater risk around existing and future off-the-plan purchases as square-metre price calculations may differ more drastically from real market value.

 The upside

  • Owner-occupiers will find property more affordable.  As the market softens and investors back away, there may be more room for home buyers to purchase property at affordable prices.
  • Now is a good time to invest.  Anyone looking to build a property investment portfolio should consider making the most of grandfathering negative gearing by purchasing before the reforms can come into effect. The window is now!
  • What goes down must come up!  The housing market operates in cycles.  Without doubt, Labor’s proposed changes will result in a short term market adjustment.  But property has historically proven to be a resilient asset class and those with medium to long term outlooks will find opportunity in the current market that will realise strong investment returns.

With a vibrant network of offices throughout Melbourne’s north west, Brad Teal are your local experts on everything happening in the market. Keep an eye on our media room for further market updates as they happen.

 

The information contained in this article is intended solely to provide general guidance on proposed reforms as we understand them.

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