Proposed changes to negative gearing would create two markets: RiskWise CEO

The Labor Party’s proposed changes to negative gearing would create a two-tier property market that would hurt existing investors, and prices, when it came time to sell, consultancy Riskwise says.

While Labor’s plans to “grandfather” the tax incentive would allow investors to continue to deduct net rental losses against their income for newly constructed housing, investors who own or buy new property to negatively gear would lose out when they went to sell their second-hand properties, which would no longer qualify for the same tax benefits, RiskWise chief executive Doron Peleg said.

An badysis by RiskWise found an investor in the present market with a median income would benefit from about $60,000 in negative gearing and capital gains tax incentives, compared with just $10,000 for an investor under the proposed rules.

“Assume the proposed changes take place, which means you can still enjoy the benefits of negative gearing as you are the primary investor, however, if you want to sell to another investor, that investor will need to badess how much he or she is willing to pay given they will not be able to claim negative gearing against their wages and only receive 25 per cent capital gains tax discount,” Mr Peleg said.

“The secondary investor will have significantly lower financial benefits and therefore he will want to pay much less for the property.”

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Fears ‘unwarranted’

To address housing affordability while encouraging supply, Labor plans to limit negative gearing to new housing and to reduce the discount on capital gains tax from 50 per cent to 25 per cent. Critics say the policies will cause investors to retreat, and that will put further pressure on a housing market already under stress.

The tightening of credit has taken its toll on investment lending after a crackdown by APRA and the banks as a result of the Hayne royal commission. National house prices dropped 3.5 per cent during the year, led by Sydney with price falls of 7.4 per cent.

Economist Stephen Koukoulas, however, said fears about changes to negative gearing were unwarranted because lower prices would open the doors to first home buyers.

“Yes that source of demand that has fuelled house prices will no longer be there, but there will be pent-up demand from people who have been ‘frozen out’ of the market for the past 10 years, who will take advantage of the fact they can turn up to an auction without having to compete with an investor who doesn’t care about the price of the property,” said Mr Koukoulas, a one-time adviser to former Labor prime minister Julia Gillard.

Losing the grease

The proposed changes would not curb supply because negative gearing would remain a tax-effective measure for some investors. 

“Most decent financial planners would suggest holding on to a property for 10 or more years, so sure, when it comes time to sell your property that you’ve been negatively gearing through that decade, it’s unlikely an investor will be stepping in to buy it, but it doesn’t mean someone else won’t be there – it could be a new immigrant or a young person tapping into the market,” he said.

Tyrone Hodge, JLL’s head of valuations and advisory in NSW, said changes to negative gearing would have an impact on housing supply and would cause the market to “lose the grease on the wheel”.

“At the moment our system relies on a certain level of investors to create supply, so if you reduce supply you’re actually going to put pressure on rents, you’re going to put pressure on prices, and you’re going to create more affordability issues,” Mr Hodge said.

“Our view is that by 2020 most markets will be short of supply because we’re not getting any commencements, so to have incentives disappear in a market that’s already under stress is not a good outcome for anybody.”

Late last year the Reserve Bank published a report that found abolishing negative gearing would result in lower house prices, higher rents and higher home ownership rates. The badysis found 76 per cent of households would be better off, with renters and owner-occupiers the real winners, at the expense of “young and rich” landlords.