Federal Labor's proposed changes to taxation arrangements for investment properties will prove cataclysmic for Australia’s $7 trillion real estate market and the broader Australian economy.
So, what is the ALP proposing?
The ALP wants to reduce the capital gains tax (CGT) concessions on the sale of investment properties and limit negative gearing to people who invest in new rental properties. The proposed new rules won’t apply to investors who own existing rentals – however as I’ll explain, existing property investors and owner-occupiers for that matter, will be affected if the ALP gets its way.
Sadly, this isn’t the first time the ALP has tried to end the benefits of negative gearing, which helps many hundreds of thousands of mum and dad investors build some wealth for retirement.
Busting the political property myths
There are several myths about negative gearing and the removal of this critical tax break that working Australians are using to prepare themselves for a financially secure retirement.
- Existing investor interests are protected – although their negative gearing arrangement will remain, property values across Australia are likely to fall. There will be fewer buyers when the time comes to sell, and fewer buyers mean lower prices. This dire situation will affect owner-occupiers too, whether they are upgrading or downsizing.
- There will be more construction – although the proposal is intended to direct investor interest towards new properties and hence result in more residential development, investors will realise that when the time comes to sell the property, it will not attract the same benefit of negative gearing for subsequent purchasers. Without the possibility of good capital gain on a property (and the prospect of higher capital gains tax), savvy investors will be forced kicking and screaming towards shares and other volatile asset classes – and not new residential real estate.
- Affordability for first home buyers will improve – the biggest hurdles for first-time buyers are upfront costs such as stamp duty, a 20% deposit or lender’s mortgage insurance – so removing tax benefits for investors won’t fix these challenges. Moreover, we’ve already had a market correction since the ALP announced these changes four years ago and first home buyers have returned accordingly.
- Tenants won’t be affected – Past experience shows that rents rose sharply in 1985 after the unfortunate yet short-lived demise of negative gearing. Moreover, winding-up negative gearing and the CGT changes will mean fewer investors entering the market and potentially a higher number of investors exiting the market. Fewer investors will mean fewer rental properties and higher rents.
- The economic impact of removing benefits for investors will be minimal. Property is currently Australia’s largest industry and if it suffers, so will every Australian. However, it doesn’t end here. With eminent Westpac economist, Bill Evan’s predicting two interest rate cuts in August and November 2019, the Australian economy is in a fragile state. So, with 25% of Australians drawing their livelihoods from the property industry including builders, plumbers, draftspeople, architects, mortgage brokers, bankers, and even property journalists, it would be a very dangerous political move to tamper with Australia’s favourite asset class and biggest employer.
Consider the implications of a change of government
The forces of supply and demand determine the cost of housing, and sadly, so do the questionable planning red tape imposed on property developers by state governments and local councils. It is not our taxation system that is at fault.