- Based on current polling and the Wentworth by-election result, the Labor Party is on track to win Australia’s next federal election.
- It has proposed changes to negative gearing and capital gains tax on housing.
- Incorporating the proposed changes as well as other factors, RBC Capital Markets is forecasting that Australian home prices will fall 15% from peak to trough by the end of 2020.
If recent polling and the Wentworth by-election result are anything to go by, Australia could have a change in government at the next federal election.
Whether sooner than May next year or otherwise, the signs right now point to a Labor Party victory, and with it, the potential for widespread changes on the tax treatment of housing.
According to new analysis from RBC Capital Markets, Labor’s announced policies to limit negative gearing to new dwellings and halve the capital gains discount from 50% to 25% for any property held for a period of 12 months or longer carries the potential to exacerbate recent weakness in the housing market, even with the grandfathering of existing arrangements for homeowners.
“We expect the proposed changes to negative gearing and halving of the capital gains discount to add further downward pressure to house prices,” says Su-Lin Ong and Robert Thompson, senior members of RBC Capital Markets Australian team.
“At present, around 90% of investor finance commitments are for established rather than new dwellings, suggesting that there is room for a considerable shift in investor behaviour.”
Fitting with prior analysis from the Grattan Institute, RiskWise/Wargent Advisory and Australian Treasury that suggest these tax changes will lead to larger price falls than what would otherwise have been the case, RBC says these policies, at a time when lending standards have been tightened and foreign investment is weakening, will likely see national home prices fall significantly further in the years ahead.
“Our own base case forecast is for national house prices to experience falls of about 15% in peak to trough terms by the end of 2020,” Ong and Thompson say.
“This is likely to result in a protracted downturn, with annualised price declines running at about 6% to 7% before we see the cycle turning around the end of 2020.”
While the pair say this “paints a fairly grim picture for housing”, they says falls of such magnitude are not out of the question given median values surged 50% from late 2011.
“The previous two dips in 2008/9 and 2010/11 were shallower, with national prices falling around 5% in peak-trough terms, but both periods saw the RBA cutting rates,” they say, adding that on this occasion the risk is the RBA will be tightening policy settings, potentially by the end of 2019.
However, while such a scenario is unlikely to be welcomed by most homeowners, especially those who bought into the market at or near the prior cyclical peak last year, RBC says the removal or reduction of tax concessions towards housing may provide Labor with the fiscal firepower to help support other areas of the economy.
According to estimates from Australian Treasury, the proposed changes to negative gearing could save the federal budget $19.9 billion in the decade after being implemented.
On the halving of capital gains discounts, it also estimates that could boost revenues by $2 billion per year over the longer-term as properties purchased prior to the changes are sold to those under the new arrangements.
“We suspect that much of the savings from the negative gearing and capital gains tax changes will be recycled into other spending measures to counter any loss of electoral appeal on this front,” Ong and Thompson say.
“At present, Labor’s set of policies is projected to deliver around $30 billion over the next four years.
“We suspect, however, that there will be additional spending announcements and slippage ahead of the election.”
From a financial stability perspective, they say the proposed changes are not only likely to be welcomed by policymakers but could also see the RBA leave interest rates on hold for even longer than they currently expect, especially with household incomes likely to impacted by Labor’s proposal to limit excess franking credits on company dividends and rollback on future income tax cuts announced in this year’s federal budget.
“A weaker housing market and softer household income may well keep the RBA on hold for longer while we expect,” they say.
As for when the electorate will get to decide on who will govern, Ong and Thompson believe the current parliament will likely run its full course, suggesting that with state elections in Victoria and New South Wales on the way, it will probably occur in May.
According to the Labor Party website, the current tax arrangements on housing have “given investors an unfair advantage over first home buyers”, helping to “fuel an investor driven property boom, leaving more and more young people and first home buyers unable to purchase a home”.
It says the “interaction of negative gearing and the capital gains tax discount has also encouraged speculative behaviour exposing the economy to unnecessary levels of financial risk”.
“These changes will promote productive investment rather than debt-fuelled speculation in existing property,” it says. “Labor’s plan makes Australia’s tax system fairer.”
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