Will the ALP’s negative gearing policy help or hurt the property market?
Will the ALP’s negative gearing policy help or hurt the property market?
By Veronica Morgan
It doesn’t matter who I speak to, everybody seems to think we’ll have a Labor prime minister come May. If that happens, they’ve made no bones about bringing in changes to negative gearing and capital gains tax. In fact, they’ve already released the effective date: January 1, 2020.
The pitch to the electorate is that first home buyers can’t afford to get onto the property ladder because of fat cat investors. The solution: axe negative gearing on all but new property. My issue with this policy is that there seems to have been no attempt to fully consider the complexity of the property market, nor the unintended consequences. Stick with me here, I’ll run through the biggest issues and then explain how the timing affects property investors.
You won’t get any argument from me about the impact investors have had on housing affordability in Sydney and Melbourne. It had to be curtailed – not just for the sake of first home buyers, but for all property owners. Stability is desirable for the property market as a whole. Neither will I argue in favour of buying property just so you can get a tax deduction. That’s misguided in the extreme.
I will, however, argue with a number of claims and assumptions made by those who support the ALP’s policy. I think the policy is poorly crafted and the political spin is misleading. In the short term it will create a two tiered market, funneling investors into buying new property, which is proven to have a high chance of underperforming. In the long term it will cause a shortage of rental properties and lead to increasing rents.
Smart investors won’t buy brand new property.
Labor will allow negative gearing for newly built property but not for established dwellings. They claim this will encourage supply of new apartments and houses. The problem is that any investor who can do basic maths will not tow the party line.
You know what makes a really bad investment? Buying brand new, claiming negative gearing and then finding out the property is worth less than what you paid for it. Quality established property makes a good investment because it’s more likely to go up in value than a brand new property. There is a load of evidence that shows the high probability of value loss with off-the-plan and brand new property. Which means that smart investors won’t take advantage of Labor’s offer to negatively gear a brand new investment property.
Anybody who does buy a brand new property may find themselves caught out because there will be no secondary market when it comes time to sell. This will put a severe dent in their capital growth prospects and if there is no growth, there is no point making a loss just to get some tax back.
This policy will hurt more of Labor’s core constituents than it will high income earners.
Labor keep ignoring the fact that 66.6% of taxpayers who take advantage of negative gearing have a taxable income under $80K. Even if their incomes have been reduced by, say, $20K courtesy of the deductions, that means ⅔ of those using negative gearing earn under $100K. Hardly fat cat territory. These people NEED negative gearing in order to be able to invest. To shunt them into buying brand new is irresponsible.
Here’s the thing, it’s written in the policy that losses from newly acquired established property (i.e., not brand new) will still be able to be written off against the income from other investments.
So the high income earners and people with multiple property portfolios spoken about so scathingly by Bill Shorten in his politicking will still be able to negatively gear. Why? Because they are more likely to have other investments that provide them with an income. It’s just those battlers earning under $80K who want to buy their first investment. They won’t be able to afford to buy a lower risk, established, quality investment property. Or worse, they will be forced to buy brand new and in the future face the very real possibility that their investment will fail to deliver any returns.
They’ve also ignored a trend for many first home buyers to rentvest and use negative gearing in order to get onto the property ladder.
Spruikers will have a field day with unsophisticated investors.
I can hear the sales pitches now: “roll up, roll up, buy your negative gearing approved investment property here.” How convenient, a ready made customer base, hand delivered by the Labor Party.
When developers build for investors, rather than for owner occupiers, they don’t build the housing we actually need. We get a proliferation of one and two bedroom apartments and this creates oversupply, such as we’ve seen in Brisbane, Melbourne and now also in Sydney.
Rents will go up.
Economic theory relied upon in some of the pro-policy arguments has it that every investor will sell to a first home buyer and therefore rents won’t rise. This is flawed. How many first home buyers live at home with their parents? How many house share?
ABS data shows that upwards of 30% of all first home buyers are living with their parents, not renting. Every property taken off the rental market by one of these buyers will reduce the stock available for tenants who can’t afford to become a first home buyer.
In regional areas, where there is little need for new construction, a reduction in property investment will certainly put pressure on rents over the medium to long term.
Supporters of the policy also put forward the argument that increasing new development will ensure supply of rental property. They cite ABS data that 90% of funds lent to property investors goes towards buying established property instead of new. This number refers to the total amount borrowed, not the proportion of new versus established properties that were purchased. It’s a fact that there is always more established property (roughly 98% of stock) than brand new, so it’s bordering on ridiculous to even bring it up.
As it is, my research suggests that around ⅓ of investors currently buy new rather than established. Modelling by the Parliamentary Budget Office predicts that investment in new properties will double following implementation of this policy. So there will be a shortfall. Simply speaking, out of 100 investors buying a property today, 33 of them buy a brand new. So, after these changes, 66 will buy brand new. What about the remaining 34 investors? Will they decide property is not their bag? What will that do to the supply of rental properties?
Why isn’t anybody calling it the Capital Gains Tax Policy?
The policy also reduces the capital gains tax (CGT) concession from 50% to 25%. This means that if an investor buys a property after January 1 2020, when they sell that property, they’ll have to pay an additional 50% tax. This is barely discussed, yet it is the part of the policy which will have the biggest impact on future property investors.
To be frank, the change to the CGT concession is the one part of the policy I believe has some merit. In the 10 years following the introduction of the 50% CGT concession, the use of negative gearing doubled. When it comes to the impact of investors on housing affordability, this could be the main culprit, coupled with ease of getting finance, which has been addressed. APRA and The Royal Commission into Banking have had a significant impact on investor borrowing. Prices in the cities where unaffordability has been a problem – Sydney and Melbourne – have certainly corrected.
When should investors strike?
OK, so Labor may not get in, they may win without a majority, they may not get this through the Senate, they may have a change of heart after being elected (don’t hold your breath for this one). It will be grandfathered, which means if you have been planning on buying an investment property, you really want to be doing it sooner rather than later in order to avoid the last minute run.
The big question most people will be asking is: will prices fall dramatically and if so, why buy before a crash?
The answer lies in how long you want to hold the asset. If it’s a short term play, you wouldn’t do it. However, if it’s part of your long term plan, time is your friend because you’ll be paying 50% less CGT when you sell.
Let’s look at an example of an investor who buys a property and holds it for the long term – say 15 years, and then sells for $2m.
Even if you save 10% on the purchase price, as this example shows, you’ll be up for more tax if you wait.
In summary, my prime concern with this policy is that it’s been crafted by those with a bias against high income earners. This bias has blinded the architects to the risks the policy poses to the most financially vulnerable property investors and tenants. It will hurt the people who need it most and won’t make Sydney and Melbourne more affordable. Savvy investors won’t flock to new stock because it’s a loss maker. Spruikers will have a field day with unsophisticated investors and developers won’t build the stock we need.
Veronica Morgan is co-host of Foxtel’s Location Location Location Australia & Relocation Relocation Australia, principal of Good Deeds Property Buyers, co-founder of Home Buyer Academy with Meighan Hetherington and co-host of The Elephant in the Room property podcast. She is a Licensed Real Estate Agent, Buyers Agent and Qualified Investment Property Advisor.