Negative gearing has been a hot button political issue for as long as most of us can remember. Ever since the days of Bob Hawke in the mid 1980s the issue of negative gearing has caused flare ups and heated debate about its impact on the economy and local property market. It’s typically viewed as a battle of classes – of investors versus first home-buyers. Both sides try and restructure this argument to suit their own purposes. Those in favour of negative gearing will argue that mum and dad investors will be badly hurt by any changes to the policy. Those advocating its removal say that it creates an unfair playing ground against those struggling to break into the housing market.
Now, with a Federal election looming in 2016, once again it’s become a burning issue. The Labor Party has promised to restrict negative gearing to new homes only and to reduce capital gains discounts. Negative gearing is like a potato dropped into a pot of boiling water. It’s always guaranteed to cause a stir and create much froth and steam. This time has been no different. Once again there’s been waves of fiery debate on the subject.
However the changes are not just coming from Labor. The Federal Government has also hinted at negative gearing changes, with Scott Morrison addressing the possibility of a cap on the amount that can be claimed from negative gearing.
However, it’s best to look at it impassively. How will the proposed changes actually affect the typical Australian investor?
Let’s start with those properties that are positively geared.
For something to be positively geared relies on a number of factors. The first is the tax benefit from depreciation on the building and fixtures and fittings, the other is to claim all expenses such as interest and property costs. If investors hold a large cash deposit this can make a property cash flow neutral or positive and mean that they don’t need to rely on the tax benefits
It will certainly propel investors towards new builds or buying off the plan, or else knocking down dwellings and rebuilding on the land instead of renovating. It may also push negatively geared investors into turning their properties into positive growth by raising rents.
So the policy could quite easily have the double effect of pushing up rental prices nationally and also pushing up strong growth in the construction industry as more investors turn to building new homes. Products such as DPN’s acclaimed CASA, which hit a sweet spot of building sophisticated new homes on a two-for-the-price-of-one deal would be even more attractive under the new changes.
Some changes of negative gearing policy toward new properties can create other aberrations that most people may not be able to predict.
I’d suggest that the most that the government can do is modify negative gearing to try and raise tax revenue or limit how much they pay out - to remove it would be political suicide and utterly disruptive.
It’s worth remembering that the NSW state government tried to raise revenue under Bob Carr by introducing a vendor duty (like stamp duty on buying, but paid on selling). It did the opposite. As a consequence less properties were sold or bought; the market began to freeze up because confidence was shaken and they collected even less in revenue. So some policies may seem to be good, but if you shake the market, you can have a higher percentage of nothing.
There are many unknowns at how the market would react. However if it is removed on older properties - it means that sellers of older properties will be disadvantaged in that only the owner-occupiers may buy the property or else highly cashed up investors. This also doesn’t address the fact that renters will be purchasers, because the issue of affordability could be simply an inability to be financially disciplined to save, not because you are competing with investors.
It’s quite likely that the proposed changes, if implemented, will see a winnowing of some investors. It will mean that investors selling their homes to avoid the changes won’t be selling to other investors, but to renters. Those with high incomes who are looking to use property to reduce their income tax may be affected.
As mentioned before, a modification is more than likely. This may or may not allow the government to collect more tax revenue or defer giving some tax benefits in the short term.
But it maybe wishful thinking that it will allow a dramatic number of renters the opportunity to get into the property market. This may not be simply addressed by handicapping investors in someway
It comes by empowering renters with ways to get in, perhaps borrowing against their super like Singapore for the deposit. Creative affordable housing solutions via planning instrument that create a certain level of affordable housing or discount that becomes a deposit within a development for higher density for the developer.
It’s also worth pointing out that the proposed changes will only affect properties purchased after July 2017 and not existing properties that are funded by negative gearing. So there’s nothing to stop investors buying solid investments right now if negative gearing is their preferred financial model.
In this case investors looking to buy new houses in areas with exciting and solid, projected growth will do well from the new changes. It’s worth remembering that successful investment is based on being able to be agile and quickly adapt to new changes. So even if alterations to negative gearing come into play after the next election, by either Liberal or Labor, the reality is that canny investors looking for long term solidly researched investments will always be able to find them.