SQM Research updated its initial paper released last June 2016.
Taxpayers will continue to be able to deduct net rental losses against their wage income, providing the losses come from newly constructed housing. 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.
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.
In short, if Labor’s Negative Gearing policy is legislated in its current form, we expect a rise in rental yields which will occur through a combination of additional falling dwelling prices and, eventually, a rise in rents.
Our analysis suggests the market impact would last by around three years. There is, right now increased consensus that the RBA may have to cut rates this year. If we were to see a cut of say 50 basis points, this would provide some cushion to the effects of Negative gearing changes. Even so, the market would still record dwelling price falls. Housing construction; already in a slump, would likely fall further due to the lack of investor demand. This would set up a shortage of housing come later 2020, based on current strong population growth rates.
Such a tax change during a housing downturn is in our opinion a risky move for the economy and so we encourage discussion of perhaps a phase in period for such legislation that would reduce the economic shock that this tax change could create.
Once again, strongly encourage Labor to consider some of the investor issues, particularly surrounding the distortion their policy may create on pricing of off-the-plan developments and the likely losses investors in those properties would face come resale time to those who won’t have the tax concession.
While we take the view that negative gearing reform is a good thing over the long term, such reform should be executed as part of a wider property tax reform that should be phased in over Time.
Louis Christopher
References:
- SQM Research was judged by The Australian Financial Review to be the most accurate Australian residential property market forecaster of 2015, 2016 and 2017.
http://www.afr.com/real-estate/2015-house-price-forecasts-the-good-the-bad-and-the-hopeless-20151230-glx5ih - SQM Research correctly predicted the Sydney property boom 2013, 2014 and 2015
http://www.moneymanagement.com.au/news/financial-planning/sqm-optimistic-about-housing-market - SQM Research correctly predicted the housing market downturn of later 2010/2011
http://www.smh.com.au/business/property/clearance-rates-under-60-point-to-correction-to-come-20100628-zcx2.html - A full list of media stretching back to 2002 can be found on www.sqmresearch.com.au/media.php
