Despite the economy doing quite well (record jobs growth, and now 26 years without a recession), support for the Coalition has fallen to the lowest level in a decade (see here), so the prospects for Labor winning the next election are very real.
A federal election is expected next year, and Labor is still proposing reforms which could have a big impact on homebuyers and property investors.
The proposals are as follows:
- That negative gearing will only be allowed for ‘new’ (rather than established) properties; and
- That the 50% Capital Gains Tax discount will be halved
The impact of the proposed reforms are not just isolated to property investors. Anyone buying property over the next 12-18 months should be informed.
- Is it better to ‘get in’ now, before the potential changes are implemented?
- Should you change your buying strategy?
At the risk of delivering a political message (not my intention), my view is that the proposals are short-sighted, and would have unintended/negative consequences. I also believe that if you have a safe and sensible investment strategy, then the proposed changes need not deter you from taking action.
Let me explain…
Labor’s plan is premised on improving the budget, creating a fairer tax system, and creating jobs. (see here)
Their position is that the current tax system favours the rich, and that by pushing people towards ‘new’ (rather than ‘established’) housing, it will stimulate the economy, by encouraging the construction of new dwellings.
There are a few problems here…
- Investors don’t want ‘new’ – 92% of property investors buy ‘established’ (see here)
- Homebuyers prefer being closer to major capital cities, not further away – the proposed changes promote investment/development in more remote locations, further away from desirable amenities, employment hubs, etc.
- The rental market could be weak – it makes sense to rent if it’s too expensive to buy where you want to live, or what you want to live in, however fewer people will rent where it’s just as cheap/easy to buy. Vacancies can prove terribly stressful for investors.
- The secondary market could be weak – what if you have to sell (and keep in mind 50% of investors sell within 5 years)… your buyer pool may be limited, because not only are you in a less desirable area, there are no longer gearing benefits available to the second purchaser of your property (it is no longer ‘new’)
Moreover, the underlying premise of Labor’s policy may be flawed in that negative gearing is really used by everyday Australians (not just the rich). ATO data released in April suggests nearly two-thirds of all investors who negatively geared property were on taxable incomes of less than $80,000 p.a.
So by confining negative gearing to ‘new’ (and not necessarily ‘desirable’) properties, there would likely be a lot of innocent/deserving investors – many just trying to build wealth to help self fund their retirement – who would be removed from the market.
With less investor activity, it wouldn’t be a surprise if the proposed changes caused various property markets across Australia to fall… and considering the extent of personal wealth tied up in property (not to mention the state government revenues generated from the collection of stamp duty), this would be a disastrous outcome for the economy.
“This is dangerous policy … not driven by economics” the now Prime Minister Scott Morrison said in April.
My sense is that Labor’s policy may now also be outdated, as the demand-side issues it addresses have already been impacted (and largely addressed) by APRA’s intervention into the banking sector, as well as via the royal commission, and also now with rising interest rates.
According to CoreLogic figures for August, property prices in Sydney fell at their fastest annual pace in more than nine years (5.4%), and auction clearance rates are now hovering below 60%.
RBA figures last week showed annual housing credit growth slowed in July 2018 to 5.5%, its slowest pace since December 2013 (see here).
To address the issue of housing affordability, the focus in my mind should be on the supply-side measures. Initiatives around land-use and planning reforms should be supported. Funding should also go towards the development of housing-related infrastructure around the key public transport corridors into our capital cities.
Granted these initiatives don’t sound as good, nor would they win as many votes, but they address the affordability issue, and they would probably be less destructive to the wealth of our nation.
Lastly, it’s worth mentioning that under Labor’s proposal anyone who buys an investment property prior to the changes being introduced will still be awarded the full negative gearing and CGT benefits. This in itself could have a substantial impact, as a lot of investors may rush to get into the market, so they don’t miss out.
Regardless of whether you’re a homebuyer or property investor, and irrespective of how Labor campaigns for the next election, there’s still no harm in following the tried and tested formula of buying high quality assets most likely to appreciate in value, and then of course financing them sensibly. I have chapters dedicated to both topics in my book ‘Long Property’.
I’m concerned that Labor’s proposal is dangerous for the property market… hopefully it is avoided.
