With elections around the corner, negative gearing has become a topic of debate, and the Labor Party has recently proposed to reform this common practice and investment strategy. The fundamental changes that the Labor Party include:
Limiting negative gearing to only new housing purchased from 1 July 2017 (purchases before this date will be ‘grandfathered’, and will be entitled to negative gearing). Individuals will no longer be allowed to claim negative gearing when purchasing on an existing property.
Reducing Capital Gains Tax from 50% to 25%, (Again this will be ‘grandfathered’ and only applicable to purchases made after 1 July 2017.
So, what will this mean for investors and how will it affect the property market?
With the media throwing multiple and conflicting accusations of what will happen, perhaps we can start by looking at the results of the removal of negative gearing in the mid 1980’s by the Hawke/Keating government. One view is this reform will increase rent, however historically, the similar reform in the 1980’s did not create a surge in rent.
If Labor is elected, we may find a rush in activity post-election, but pre 1 July 2017 as investors look to secure property investments prior to the changes. This could lead to a mini boom in the property market, as demand is increased in the short term.
Furthermore, continuing to have negative gearing on newly built dwellings is likely to promote more investment and demand into new housing, increasing prices of new property, and at the same time making it more difficult for first home buyers to purchase new property – which ironically, currently is the only type of property in which First Home Buyer benefits are available across Australia.
With the changes in place, there is likely to generally be less demand in the market place from investors. This may actually in the long run lead to less rental properties being available for the market. This affect can then lead to increased government cost to house those in need of rental accommodation – this increased cost would go against the entire purpose of removing negative gearing – which is to save taxation dollars and address the current budget deficit.
In our opinion, changes to the negative gearing policy, and the eventual affects on the price of property and the cost of rent, seem to be poorly thought out by the Labor Party.
The godfathering of existing investments gives a reason for current investors to hold their properties and may even increase rents. However, it is important to remember that across Australia approximately 70% of all property is owner occupied, or homes, to which this suggested change in policy will not impact. Investors make up a much smaller proportion of the property market – contrary to what the media will create a story around.
Regardless of who is elected, and the policy that is implemented, there will always lie opportunities to take advantage of in the Australian property market. Investors will need to be more savvy about where they buy (strong growth potential and rental yields will be a must), and what they buy (a new property, well priced, will be a smarter investment). This does not change anything for Meridian Australia, who is always, and has always been focusing on these factors.