Debbie Shankar - 15 Apr, 2016

Negative Gearing Changes and Property Prices

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Many housing industry experts are suggesting that the proposed changes to negative gearing legislation will decrease home prices. There are also concerns that home affordability will be reduced as the cost of rental property is pushed-up.

The Political Area and Proposed Negative Gearing Policy

The opposition leader, Bill Shorten, is seeking to introduce a negative gearing policy that is restricted to new homes. Therefore, homes that are established will no longer be eligible for negative gearing from 2017. This, according to the Australian Prime Minister, Malcolm Turnbull, means that no investors will be present at home auctions as they will be building new homes instead. This, in turn, means that there will be more new developments, which will increase the number of new homes. However, when it comes time to sell these properties their capital value won’t be as high due to there being high numbers of property and no investors wanting to purchase the now established homes. Based on this analogy, it is estimated that demand for established property will fall by as much as 30%, which will reduce established home prices by as much as 6%.

Malcolm Turnbull says that the opposition leader’s policy is poorly thought-out and that it needs to be reviewed, otherwise it could be damaging. But, supporters of Bill Shorten suggest that the Prime Minister is preparing to launch a ‘massive scare campaign’ prior to the looming 2016 election.

How Negative Gearing will Decrease Property Value

Home prices are expected to fall if the proposed changes to negative gearing are introduced. The fall in property values will be due to investors seeking to sell, rather than hold investment property, and due to the lack of investor buying activity in the market. This, in turn, will see demand for property fall and the market could possibly be flooded with property for sale.

Of all Australian capital cities, Sydney is expected to be the hardest hit in terms of asset depreciation if the legislation comes into play. In a report recently published by BIS Shrapnel, it was noted that Sydney unit values, for example, could fall from say $873,000 at ‘full negative gearing’ to $820,000 at ‘limited negative gearing’.


Negative Gearing and Rental Cost Increases

It is estimated that changes to negative gearing may increase rents by as much as 10% over the next ten years. This means that a unit which is currently rented for $320 per week, will rise to $352 per week. This figure excludes any annual CPI increase.

According to data that was recently published on the economic impact of negative gearing, the hardest hit capital cities in terms of rental cost increases will be Melbourne and Adelaide. These capitals are expected to rise by 9.6 and 10% respectively.

Report Under Scrutiny

However, a number of politicians are questioning the accuracy of the BIS report, which has been compiled using modeling that was based on investor tax changes. There are also questions surrounding the commissioning of the report, and whether or not it is entirely independent and unbiased. But, regardless of any speculation over the reports motives, its release has added more fuel to an already burning negative gearing fire.

Plus, the report confirms what real estate bodies, such as the Real Estate Institute of Queensland (REIQ) have been saying. REIQ and other real estate groups are predicting that if the proposed changes to negative gearing policy are implemented, then investors will abandon property as an asset class. This will result in rental cost rises and will cripple housing affordability.

The result for families who are on the rental roundabout could be disastrous. This would be attributed to the fact that the supply of rental property would diminish across Australia and the demand for housing would push-up rental costs.

The debate over the impact of negative gearing legislation is dominating political discussion, and if any changes are made, then undoubtedly the government will want to tread carefully so as to not have a detrimental impact on the Australian economy.

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