- The Australian Labor Party’s (ALP) plans to limit negative gearing and halve the capital gains discount from 50% to 25% could result in a series of “unintended consequences” in Australia’s housing market, according to a new report.
- The report suggests it could lead to a reduction in new dwelling supply, potentially exacerbating affordability constraints for both potential buyers and renters.
- It makes a series of alternate recommendations on how to improve affordability in the period ahead.
A detailed housing market policy analysis has found recent declines in Australian property prices create a new set of risks for Labor’s proposed changes to negative gearing and capital gains tax, warning of “unintended consequences” if it was to be introduced at this point in the cycle.
The report, co-authored by RiskWise and WargentAdvisory, suggests the ALP’s plan to limit negative gearing to new rental dwellings and halve the capital gains discount 50% to 25% would have a “material” downward impact on prices in some parts of the market, especially if there are no measures to deal with the supply shortage that has kept house prices at elevated levels.
“The ALP has proposed reforms to negative gearing and the capital gains tax discount to level the playing field for first home buyers competing with investors, improve housing affordability and strengthen the Commonwealth Budget position through limiting these subsidies,” said Doron Peleg, CEO at RiskWise.
“One of the most important aspects of the proposed changes was that their blanket introduction across the country would have unintended consequences, and some geographical areas, especially those with weak or fragile property markets, would be adversely impacted more than others,” said Peleg, a former Westpac executive.
Right now, with prices going backwards, that list includes Sydney and Melbourne, home to 40% of Australia’s housing stock and 60% of Australia’s total housing wealth.
Following in-depth investigation, modelling and data analysis, the report found that the proposed changes would likely lead to broad-based falls in property prices, led by those markets where investor activity and apartment supply is higher than the national average.
“In the short term, dwelling prices will decline, or price growth will decelerate, and significantly so in some cities and regions,” the report said.
“Our modelling considered all of Australia’s states, territories and Statistical Areas by dwelling type. [Regions] with a high proportion of investors and units will be among the most significantly impacted, although in some cases house prices will experience even more material declines.”
The expected decline in median property prices are shown in the chart below.
The report says that despite indicating broad-based declines, results for houses and units in specific regions varied greatly across the country.
It also found that despite looking to encourage new supply by limiting negative gearing to new dwelling supply, that would likely be offset by price weakness discouraging investors from adding to rental supply.
“The proposed policies will result in a reduction in dwelling commencements as prices decline unless measures are taken to encourage new supply, particularly in Sydney and Melbourne where the demand for rental housing is presently strongest,” the report found.
The supply problem
“Although middle-ring capital city suburb development has increased in recent years, including for high-rise apartments, the supply of family appropriate, medium-density housing supply must be increased.
“This imbalance in dwelling construction has been a contributory factor to housing affordability challenges in the two most populous capital cities.”
In an appearance on ABC’s Q&A last night, Labor leader Bill Shorten stood by the proposed changes to negative gearing and capital gains tax. Polls consistently show Labor is on track to win the next federal election.
The RiskWise report highlighted how the proposed changes would result in a bifurcation in the property investment market between new and established homes.
“There will be a primary market comprising new properties that qualify for negative gearing tax concessions and a secondary market, comprising second-hand dwellings that do not,” it said.
“The different status of these properties will have a significant impact on both buying and selling decisions by property investors with a flow-on effect to dwelling prices.
“There would be some distortions in the investor market, with the creation of primary and secondary markets for investor stock if subsidies were limited to new housing prospectively, the thinner market on resale potentially increasing the risk of investing in new dwellings.”
In essence, any benefit from investing in a new property could well be mitigated when it comes time to sell given the same tax treatment will not be applied.
Without addressing new supply additions, the report found that any improvement in housing affordability in Australia’s most expensive housing markets will likely be short-lived.
“While there will be some moderate improvement in housing affordability in the most expensive housing markets in the short term, over the medium term the impacts of the proposed policies on housing affordability will be limited once a new equilibrium has been reached,” the report said.
“In more affordable housing markets where [investor] demand is already weaker, the policies will dampen demand further, so mitigating policies may be required in some regions.”
Should new housing supply start to fall, it found that it could place upward pressure on rents and prices, especially in those cities with fast growing populations.
“In some locations there may be instances of rising rents in the short term where imbalances and shortages of rental properties arise, and dwelling commencements experience a slowdown, although these imbalances may take 12 to 24 months to become evident,” it said.
“As there is a continuing undersupply of residential properties, particularly those suitable for families in the Sydney and Melbourne markets, without a strategic and comprehensive solution to this issue it is likely that the current supply and demand patterns and issues will once again lead to escalating dwelling prices.”
Managing the change
Given the concerns about what the potential policy changes could bring, the report recommends that a coordinated strategy needs to be put in place to encourage the construction of owner-occupier appropriate dwellings in the middle-ring suburbs, including local government area (LGA) targets benchmarked against projected demand.
“Plans should be implemented to increase housing density around key public transport corridors and train lines… [that provide] accessibility to key employment markets,” it said.
It also recommended that stamp duty exemptions for first home buyers and down-sizers in some regions should be considered, as well as incentives for institutional investors to develop affordable rental housing.
Given a recent decline in foreign investor approvals, the report also recommends surcharges should be removed for non-resident buyers.
“Non-resident investors have played a significant role in stimulating new dwelling supply through this cycle,” it said
“Recently implemented surcharges and duties for non-resident buyers have slowed transactions significantly and, in the prevailing environment, will have the unintended consequence of a slowdown in dwelling commencements.”