Melbourne and Sydney property values could plummet if Labor introduces its proposed changes to negative gearing according to a report by RiskWise.
With a federal election expected to be called within the next 12 months, and Labor proposing some controversial reforms to negative gearing and the capital gains tax discount, this report has assessed the risks of implementing these changes uniformly around Australia.
The report suggests that some segments of our property market could be detrimentally impacted with prices falling over 10%.
To get a better understanding of what’s happening watch this Sky News interview where I explain what’s going on.
Some of the points we discussed:
What do we know about Labor’s proposed reforms if they are elected into government next year?
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- limit negative gearing to new rental dwellings (those who currently own properties won’t be affected just new purchases
- Halve the Capital Gains Tax discount from the current 50% to 25% when investors sell their property.
What was Labor’s reasons behind proposing these reforms?
- the stated intention was to level the playing field for first homebuyers competing with ugly greedy property investors (my words),
- improve housing affordability and
- strengthen the Commonwealth Budget position through limiting these subsidies.
Just so we’re all on the same page, please explain exactly what negative gearing is and why a property investor would consider it
How many property investors use negative gearing
- ATO statistics suggest there are just over 2 million property investors
- 28 million (just over 60%) are negatively geared
So, if Labor did come in to government next year and did introduce their proposed measures, what impact would they have on our property markets?
- Would have unintended consequences
- Proposed changes would be the equivalent to a sudden 1-1.5 % increase in interest rates and dampen segments of the property market especially those driven by investors
- Property values could drop significantly in some locations
- I f 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
What does this mean for property investors
- Some will rush in and buy before the next election
- 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 lose out in 2 ways – poorly located properties that won’t appreciate in value