Another day, another Prime Minister. To a lot of voters, this PM turnstile seems to be an unwelcomed quirk of the Australian democratic system. For whatever reasons, many political commentators are now tipping an ALP win at the next federal election, which has caused me to check out the ALP’s policy on negative gearing and the capital gains tax (CGT) discount again.
This is what I can find on the ALP’s website:
Labor will limit negative gearing to new housing from a yet-to-be-determined date after the next election. All investments made before this date will not be affected by this change and will be fully grandfathered.
This will mean that taxpayers will continue to be able to deduct net rental losses against their wage income, providing the losses come from newly constructed housing.
From a yet-to-be-determined date after the next election losses from new investments in shares and existing properties can still be used to offset investment income tax liabilities. These losses can also continue to be carried forward to offset the final capital gain on the investment.
Capital gains tax
Labor will halve the capital gains discount for all assets purchased after a yet-to-be-determined date after the next election. This will reduce the capital gains tax discount for assets that are held longer than 12 months from the current 50 per cent to 25 per cent.
All investments made before this date will not be affected by this change and will be fully grandfathered.
This policy change will also not affect investments made by superannuation funds. The CGT discount will not change for small business assets. This will ensure that no small businesses are worse off under these changes.
Labor will consult with industry, relevant stakeholders and State governments on further design and implementation details ahead of the start date for both these proposals.
After reading these policies, I have been trying to guess how these policies may potentially affect the residential property market in Brisbane. I say ‘guess’ because I am not an economist and there is every chance that I could get it completely wrong (cue my disclaimer at the end of this article).
Be that as it may, nothing ventured, nothing gained, so I am going to call it. If my guess is right, I will of course remind everyone about this article until I turn blue. If not, I would appeal to you to destroy this article and never let it see the light of day again!
So here it is…
I think most people would agree that units and houses are two different markets in Brisbane. Anecdotally, there seems to be signs of life in the house market, albeit at a rather slow pace, while the unit market is stagnant or declining as it continues to absorb excess stock.
With this backdrop in mind, my thoughts on the impact of the ALP’s policy if the party comes into power are as follows:
- There could well be a temporary increase in demand for existing residential properties in Brisbane if the ALP comes into power as investors and would-be investors try and snap up these properties that may no longer allowed to be negatively geared once the Government of the day announces that it will introduce law to implement the policy. In fact, this may already be underway for those investors who are convinced that the ALP would win at the next election.
- The impact may be bigger on the unit market as there is a perception that older units generally have bigger floor areas and better ‘guts’ for potential future improvements, not to mention that they generally sit at a lower price point than houses. Perhaps, to a lesser extent, the house market may also benefit as block sizes have been progressively declining, especially in the inner-city suburbs.
- The temporary increase in demand may drive up residential property prices across the capital city, at least for a period as FOMO grips investors. There is a big ‘if’ in this scenario – the availability of credit and future interest rate movements may literally make or break this eventuality. The more the credit market is tightened, the less likely that property prices may rise in probability and extent.
- Beyond the grandfathering date when the policy comes into full force, on the back of the mini-investment boom, there may well be excess residential rental stock coming onto the market, which may hamper growth or even drag existing rental yields down. This would likely be more pronounced in the unit market as rental yields on higher density units have already been under considerable pressure over the past few years.
- As rental yields decrease, both existing and new properties may become more expensive to buy, which may reduce the volume of residential property transactions. However, as negative gearing is still allowed for new properties, the market may shift to these new properties at the expense of the existing ones. As a result, the price of existing properties may stagnate while new properties may fare a bit better.
- From then on, normal market forces would prevail. Provided that population and employment continue to grow and credit continues to be available and stays relatively cheap, any excess stock on the market would be absorbed and there would be a point when rental yields would rise again as more people compete for rental stock.
- The stagnating housing prices and higher rental yields may encourage first time home buyers to come back to the market once they perceive that the dust has settled and the financial gap between buying and rent has narrowed, which may in turn spark price growth again. However, as investors have to pay more CGT if they sell their properties under the ALP’s policy, less investors may opt to sell, which may limit available stock on the market and therefore create a steeper price rise in future price growth cycles.
- As long as the ALP’s policy persists, there may well be a permanent skew towards new stock by investors in the property market while new home buyers may flock to existing stock to minimise competition with investors who usually have deeper pockets.
As with any brute-force housing policy being introduced by the government (google ‘rent control’ and see how it has fundamentally affected various markets that adopted it), the ALP’s policy would likely give rise to a more acute short-term distortion in the housing market but the market forces of demand and supply would eventually take over to normalise prices and transaction volumes. The policy may also leave a permanent bias towards the type of assets it favours, ie, new residential properties, for as long as it remains in place.
Now burn after reading please.