Has the veil finally been lifted on Labor's proposed tax changes?
I was invited to Canberra this month (February) to join a round table discussion with the PM, Treasurer and Assistant Treasurer, and other property heavyweights including Yellow Brick Road, hedge fund VGI Partners Global Investments, REIA, the Master Builders Association, the Urban Development Institute of Australia, the Real Estate Institute of Australia, Property Investment Professionals of Australia and the Property Council.
The topic being the nation’s housing policy.
Attending this meeting to share our research regarding the property market with such high-level decision-makers really brought home the impact Labor’s proposed taxation changes has already had and will continue to have both on the broader economy and, in particular, GDP growth.
I attended the round table discussion to talk about our research and insight but also to listen to the concerns of the others and join in a dialogue with them.
The attendees expressed their concerns regarding the impact of the proposed taxation changes on housing prices, dwelling commencements and GDP growth.
In particular, it was very interesting to hear the concerns that were raised by the development lobby groups.
Their interest is clear - to increase new development and this does actually align with Labor’s stated objectives which is to shift investor demand to new dwellings and, therefore, to increase new dwelling supply from developers.
But when these developers, who are having difficulties meeting pre-sales and sales targets, have clear evidence that dwelling commencements have fallen due to poor investor sentiment and will further fall under Labor’s proposed taxation changes, it follows that they are opposed to these reforms.
In fact, new independent economic modelling commissioned by Master Builders Australia shows will not increase the supply of new housing or create new jobs in the building industry.
So their concerns come from a very simple place - they are very confident that they are at risk.
The ALP has proposed limiting negative gearing to new housing and reducing the discount on capital gains tax from the current 50 per cent to 25 per cent to increase housing affordability, however, this solution will only be temporary.
Frankly, it’s time for Labor to have an open discussion on the consequences of these proposed reforms and what they think they will really mean to the property market in this country.
We are calling for Labor to perform a review of the current environment and what they expect to see down the track.
This is particularly important now, as the market is very weak and dwelling approvals are reducing sharply with GDP growth projections also being downgraded by the RBA.
Another issue that needs to be addressed is that existing investors will be affected by the changes, because the reforms will create a primary and secondary market, meaning they will lose money.
This is because the buyers won’t want to pay as much knowing they won’t reap the same tax benefits as secondary purchasers.
The property market has already been hit hard, mainly driven by lending restrictions, with an impact on confidence and lower demand for credit across the country.
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The steepest reductions in prices since 1980 have been seen in Sydney and Melbourne, however, weaker markets like Perth and Darwin have also been significantly impacted.
And let’s be clear, there are more reductions on the way if Labor come to power.
Dwelling commencements have also reduced by -2.2%, mainly for units.
And there’s more of this expected too due to a 22.5% drop in dwelling approvals with key risk indicators showing stronger falls in dwelling commencements.
Many developers are unable to meet presales and sales targets placed on them by the lenders, and this trend will continue if Labor’s proposed taxation changes take place.
The impact on both the broader economy and, particularly, GDP growth, is already significant with the RBA downgrading the GDP growth projections and a 50 per cent chance of an interest rate cut.
For most investors it is the first time they are dipping their toe in the water and it’s a big decision to buy an investment property and be separated from half a million dollars by, for example, refinancing their own house.
It’s something that they will only undertake if they are confident to do so and these proposed changes do not provide the appropriate environment for that confidence to shine.
And if this is the case, it means we will see a smaller number of presales and sales of off-the-plan properties, stronger reduction in dwelling commencements and a large number of people in the construction industry and those businesses associated with it who might lose their jobs.
The issue with housing affordability is that if demand is high, it is unsustainable, and Labor’s proposal will add additional pressure, not take it away.
With a very large number of newly created jobs in Sydney and Melbourne, it is unsurprising that the population growth in these cities is very high.
While there is definitely a strong downturn in the property market, this is only a temporary situation and the undersupply of family suitable properties will have an impact on price growth in the medium and long term.
The most effective way to combat rises in house prices is to focus on infrastructure and supply.
This means continuing to increase infrastructure investment that will effectively enable a larger number of people to commute to employment hubs.
This can be done via a co-ordinated approach between federal, state and local government on land supply and rezoning in the middle and outer rings where there are already good transport networks.
Even more important is to commit to major infrastructure projects, education and health in areas outside of Sydney and Melbourne as well as make major investments in innovation funds and offer tax incentives to technology companies to attract high-growth companies to the other states.
Without investment and the creation of other industries eg IT, the majority of jobs will remain in NSW & Victoria, therefore increasing demand and decreasing affordability.