Labor’s housing policy could have a dramatic impact on housing prices, but that might help a “level playing field” between investors and first-time buyers, according to a leading property expert.
In a report on the Australian Labor Party’s proposed changes to negative gearing and the capital gains tax discount on Australia’s residential property market, property research firms RiskWise Property and Wargent Advisory analysed the effect the rollbacks could have on the residential property market, should the ALP be successful at the next federal election.
The property landscape has changed “very significantly” since the changes to negative gearing were first mooted, report co-author Peter Wargent said.
“When the ALP proposed these policies in 2016, the Sydney and Melbourne markets were red hot,” he told The New Daily.
“Now lending finances are soft, and getting softer by the month. If the polices were to be implemented now as proposed in 2016 that would be on top of an already soft environment.”
Tax reform should be “considered carefully” as some markets — in particular post-resource boom regional areas — are “already fragile”, Mr Wargent said.
Parts of the inner-city apartment market that are “very investor centric” could also be affected, he said.
In the Sydney unit market, the proposed reforms would be equivalent to a sudden 1.15 per cent increase in interest rates for investors, the report claims.
However, tax reform would have a positive effect on housing affordability by pushing down prices in the country’s most expensive cities, according to Mr Wargent.
“The modelling found prices would fall relatively quickly in Sydney and Melbourne, by around 9 per cent,” he said.
Changes to negative gearing would help “level the playing field” between investors and first-home buyers currently struggling to break into the housing market, he said.
“There’s an instant impact that would be positive for first-home buyers from an affordability perspective.”
The counterpoint: ‘Impact will be modest’
Acting shadow treasurer Andrew Leigh dismissed the report, citing modelling by Treasury, released earlier this year under Freedom of Information laws.
“We’ve had reports from Treasury which contradict this and say the impact will be modest,” he said.
In the leaked memo, Treasury officials found that the property price changes due to ALP’s proposed tax reforms were “likely to be small”.
“The ALP policies could introduce some downward pressure on property prices in the short term, particularly if the commencement of the policy coincides with a weaker housing market,” Treasury states.
“In the long term, increases in taxation on rental property could have a relatively modest downward impact on property prices.”
Labor would also implement a number of measures to increase housing affordability and supply, including restoring the National Housing Supply Council and investing in sustainable housing, Mr Leigh said.
Under the ALP’s policy, existing investment properties would not be affected, with new investments only eligible for negative gearing in new-build homes.
Additionally, foreign investors would only be approved for new-build homes, meaning that they would be contributing to the housing supply, Mr Leigh said.
“At auctions across Australia this Saturday investors will be beating out first-home buyers,” he said.
“There’s been a drop in the percentage of 25- to 34-year-old, first-home buyers, and home ownership is looking out of grasp for many people.”
Research by independent think tank the Grattan Institute shows that home ownership has fallen among every age group except over-65s since 1981.
The Grattan Institute also released a 2016 report titled Hot Property, which found that any effects on property prices from abolishing negative gearing and reducing the capital gains tax discount to 25 per cent would be “modest”, nudging house prices approximately 2 per cent lower.
“Would-be homeowners would win at the expense of investors,” Grattan Institute policy expert Brendan Coates said.
According to Mr Coates, the impact of the ALP’s proposed reforms would be “even smaller”, as existing investors would be unaffected under the proposal, and new investors would still be allowed to negatively gear new-build properties.
Crucially, tax reform would help prospective homeowners beat investors in the competition for affordable homes, Mr Coates said.
“Reforms to negative gearing would have a bigger impact on the market for cheaper homes,” he said.
“Increased investor demand for housing has likely been channelled into low-value homes that are lightly taxed under states’ progressive land taxes and tax-free thresholds. But these are precisely the homes, according to Corelogic data, which are holding up the best in the current market as owner-occupiers have instead been winning out at auctions over investors.”
Potential property price falls could be larger in ‘sub-markets’ that are currently dominated by investors “encouraged by tax breaks”, Mr Coates said.
“However, this would only occur in locations where every prospective purchaser was an investor, and the fall in prices did not attract any owner-occupiers,” he said.
“The actual impacts of the ALP’s proposed reforms would be less because they allow negative gearing for investors purchasing new properties, and grandfather existing investors.”