Impacts of Labor’s proposed negative gearing and CGT changes

Sydney and Melbourne’s house prices could slide by up to 9 per cent if  Labor gets into power and introduces its planned property tax changes.

At our annual Wealth Retreat Conference over the weekend one of our guest speakers Doron Peleg, CEO of RiskWise Property Research and a regular author here at Property Update discussed a report he co-authored with Pete Wargent assessing the impacts of the proposed reforms. negative gearing

The ALP has previously proposed to limit negative gearing to new rental dwellings and to halve the CGT tax discount from the current 50 per cent to 25 per cent.

When they initially announced these proposals, the stated intention was to level the playing field for first homebuyers competing with investors, improve housing affordability and strengthen the Commonwealth Budget position through limiting these subsidies.

Peleg said with the next federal election coming up in less than a year, government policies and their implications were being thoroughly assessed by policymakers, lenders, fund managers and property developers.

But things are different now

However, the landscape in the Australian property market has changed and this needs to be taken into consideration.

The authors of the report explain that from the second half of 2017, the risks associated with the residential property market increased significantly, and the proposed reforms need to be assessed thoroughly across all geographical areas to ensure they do not unduly impact the weaker and fragile housing markets.

Credit restrictions and tighter lending standards have had a direct impact on investors in the Australian housing market.

As a result, dwelling prices in Sydney and Melbourne showed a decelerating growth rate, followed by price reductions in Sydney and, to a lesser extent, Melbourne.

However, earlier this year the shadow treasurer Chris Bowen shrugged off suggestions the proposed tax amendments should now be scrapped because falling house prices are now making homes more affordable.
Bowen said that the negative gearing and CGT changes are about making long-term structural adjustments rather than addressing the short-term property cycle.

Property Landscape

However, the two-speed economy driven by the resources construction boom has reversed, and those once-prosperous economies are now lagging. 

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Peleg says that this necessitates thorough modelling and impact analysis of the proposed tax reform package according to Peleg.

One of the key findings of his analysis is that a blanket introduction of the reforms across the country would have unintended consequences, and some local government areas, especially those with weak or fragile property markets, would be adversely impacted more than others.

The report identifies the Top 10 Local Government areas that would be most impacted if the changes went ahead as currently proposed.

These include Darwin, Mackay, inner-city Perth and Townsville.

Property Landscape 2

Like a 1.5% interest rate rise.

According to the report another unintended consequence would occur in the Sydney unit market where the proposed changes would be the equivalent to a sudden1-1.5 % increase in interest rates.

Projected Price Reductions

Declining dwelling prices, or price deceleration in some regions, would lead to a reduction in dwelling commencements and deteriorating rental affordability in some locations.

The analysis also demonstrates that there would be some distortions in the investor market, with the creation of primary and secondary markets for investor stock if subsidies were limited to new housing prospectively, the thinner market on resale potentially increasing the risk of investing in new dwellings. Negative Gearing

Report co-author Pete Wargent explained to our attendees at Wealth Retreat that for years property commentators had been talking about a two-speed economy driven by the resources construction boom, but this dynamic had reversed, and those once prosperous areas were now struggling.

“The last thing they need is a further dampening of demand. An introduction of Labor’s proposed changes to negative gearing needs a more nuanced response with some mitigating processes and policies that could be implemented so there is no unintended consequences.”

Mr Peleg said the risks associated with the residential property market had increased significantly since the second half of 2017, and the proposed changes needed to be assessed thoroughly across all local government areas to ensure they did not unduly impact weaker housing markets. neg-gearing-hero2-Recovered1

“Credit restrictions have had a direct impact on investors in the Australian housing market. As a result, dwelling prices in Sydney and Melbourne showed a decelerating growth rate, followed by price reductions in Sydney and, to a lesser extent Melbourne” he said.

“In a relatively short period of time, the landscape for residential property in Australia has changed significantly and this necessitates thorough modelling and impact analysis of Labor’s proposed tax reform package.”

The bottom line:

The report was not meant as political commentary – just an independent assessment which explained that the proposed ALP tax reforms will achieve some of their stated objectives, including tackling the fiscal challenge and Budget repair, but not the others.

In my mind if property values drop significantly in some locations as suggested, and I have no doubt they will there would be a significant economic flow on effect due to falling consumer confidence as they see property values plummeting. Economic growth

Another issue is that investors will be driven to buy new properties, both apartments (which will generally be in the CBD and houses (which are likely to be in the outer suburbs.)

Both these types of property make poor investments because of their locations and will make even worse investments as, once purchased, will be established properties.

Now we know around 50% of investors sell up in the first 5 years, so if these investor plan to sell their properties, the value will fall significantly, as their properties won’t attract the tax benefits of a new property any more.

So these poor investors who chase tax benefits will lose out in 2 ways – poorly located properties and ones that won’t appreciate in value.

WHAT CAN YOU DO TO STAY AHEAD?

As signs point to softer growth conditions for Australian property over the coming months, independent professional advice and careful consideration will be as important as ever in navigating Australia’s varied market conditions. 

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If you’re looking for independent advice, no one can help you quite like the independent property investment strategists at Metropole.

Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.

Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.

Please click here to organise a time for a chat. Or call us on 1300 20 30 30.

When you attend our offices in Melbourne, Sydney or Brisbane you will receive a free copy of my latest 2 x DVD program Building Wealth through Property Investment in the new Economy valued at $49.



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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


'Impacts of Labor’s proposed negative gearing and CGT changes' have 10 comments

  1. Avatar for Property Update

    July 1, 2018 @ 11:37 pm Alex

    Removal of negative gearing on established properties will turn investments in new properties from bad to worse because of poor resale results and the negative capital growth. Add to it lending tightening, out of cycle interest rates raises and crackdown on foreign investors and we’ll end up in a perfect storm being sharp decline in new residential construction. RE prices will fall but not for long before the lack of dwelling supply and continuous demand will restore the balance albeit at the new rental yield ratio. Eventually the “new tax” will find its way down the food chain.

    Reply

    • Avatar for Property Update

      July 2, 2018 @ 12:10 pm Michael Yardney

      Well said Alex – maybe you should become a consultant to the opposition :-)

      Reply

      • Avatar for Property Update

        July 3, 2018 @ 8:41 pm Alex

        Thanks Michael, Last month I was invited to appear in public hearings for inquiry into determining rates and Land Tax methodology in the ACT Legislative Assembly. Hope my answers to Honorable Members made a positive difference not just in regards to the amount of Land Tax but to Social Justice and Fairness. Without your books, blogs and videos my submission would have been impossible.

        Reply

  2. Avatar for Property Update

    June 26, 2018 @ 9:21 am Luke

    Nothing more than shallow populist politics. If labor, the greens or any other political party were actually serious about property prices they would reduce current immigration levels (therefore reducing demand in Sydney and Melbs), and invest in high speed rail to help decentralise the population from Sydney and Melbourne. In the Sydney context, if high speed rail allowed you to get into the CBD in an 1 hour or less from places like Newcastle, Wollongong, Goulburn, and the Blue Mountains, you would see thousands flocking out of Sydney to live in these satellite cities with much more affordable housing options (therefore reducing demand).

    Reply

  3. Avatar for Property Update

    June 16, 2018 @ 7:00 am Dean

    Making other people less well off has never helped anybody become more well off.

    Reply

    • Avatar for Property Update

      June 16, 2018 @ 1:20 pm Michael Yardney

      Dean – Are you suggesting people who are well off don’t help those less fortunate?
      If that is the case then you are very mistaken, but I know that’s the way many “poor” people think.
      I’ve just come back from 5 days with a group of wealthy people at Wealth Retreat – it would clearly surprise you how high contribution was on their list

      Reply

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        June 18, 2018 @ 5:42 am Dean

        No that’s the exact opposite of what I’m saying. I’m saying that in this country there are so many supposed ‘poor’ people who are constantly trying to tear down the supposed ‘rich’ people… (who are really just people who are working hard and saving and investing)
        Their hope is that by making hard working people who live within their means less well off the people who are currently ‘poor’ will become more well off. As I’m sure you’d agree it simply doesn’t work like that. No one will become richer by dragging down others who are well off. Rather they will simply decrease the overall wealth of the nation with this policy which is good for absolutely nobody.

        Reply

  4. Avatar for Property Update

    June 15, 2018 @ 9:29 pm Johnathan

    Thanks for this Michael – quite enlightening.
    Another stupid plan put together by politicians who don’t understand how the real world works

    Reply


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