Modelling by the Property Investment Professionals of Australia (PIPA) has found that limiting negative gearing to brand new investment properties as well as reducing the capital gains tax discount will drive investors out of the market in droves and leave a gaping hole in government coffers.
PIPA chairman Peter Koulizos said the research showed that Labor’s assertion that their policy would save $32 billion over a decade was a flight of fancy when it was actually set to lose that amount because of drastically fewer investors in the market.
The PIPA modelling found that an investor who bought a $675,000 property today would receive about $23,583 in negative gearing benefits over a decade, but they would pay $104,703 in capital gains tax if they sold the asset – leaving the Federal Government with a $81,118 net gain.
The modelling found that a Labor Government could lose between $10 billion and $32 billion over 10 years, plus fewer investment properties would drive rents higher and further hinder first home buyers from entering the market.
The modelling found:
- If investment activity reduced by 15 per cent there would be 390,000 fewer properties available for rent with the total loss of capital gains tax revenue to government being $31.6 billion over 10 years.
- If investment activity reduced by 10 per cent there would be 260,000 fewer properties available for rent with the total loss of capital gains tax revenue to government being $21 billion over 10 years.
- If investment activity reduced by five per cent there would be 130,000 fewer properties available for rent with the total loss of capital gains tax revenue to government being $10.5 billion over 10 years.
Mr Koulizos said the modelling was not even worst-case scenario, given 45 per cent of investors indicated in the 2018 PIPA Investor Sentiment Survey that they would put their future investment plans on hold if Labor brought in the proposed changes.
“Labor says they want to incentivize investors to buy new property, but our research shows that 93 per cent of investors buy established property as this has greater capital growth potential than new property.
“Under the proposed changes, investors will pay more capital gains tax, but since they have probably bought a new property that will mean lower capital growth and therefore reduced tax payable to the government.”
Mr Koulizos said Labor’s assumption that fewer investors would mean more first home buyers was incorrect with the ability to save a deposit being the main issue for first-timers.
“Saving a deposit for your first property has always been difficult and has been made even more so over recent years with the First Home Owners Grant restricted to new dwellings when more than 80 per cent first-timers buy an existing property,” he said.
Mr Koulizos said the reduction in revenue is likely to be even greater after the 10- year period as there would be fewer investors paying tax on their positively geared properties as well as paying capital gains tax on the strong equity growth that usually occurs after holding an established property for 10 to 20 years.
- According to ABS, national median price of residential dwellings is $675,000.
- According to CoreLogic, national median rent is $430 per week.
- According to the ABS, there are approximately 2,600,000 rental properties in Australia.
- Established house values increase at 7% per annum.
- Rent increases at 4% per annum.
- Cash expenses directly related the property increase at the rate of inflation (2%).
- Initially borrowed $500,000.
- Interest calculated at an average of 5% for the 10-year period.Interest only loan.
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