Prices to Fall with Negative Gearing Gone

With a federal election due next year, swinging voters with investment properties will more easily be able to decide which party to back.

Labor’s plan to limit negative gearing provisions to new dwellings only is premised on the idea that such a move will encourage new construction, improve supply, improve affordability and raise $500 odd million over the forward estimates. These “positive” outcomes can be countered by rising construction cost, supply of rental housing will plummet, a lack of skilled workers, property values will fall, affordability wouldn’t change much and $500 million is chump change given our current deficit.

Any plan to mess with the current negative gearing provisions is fraught because it is so deeply entrenched (it’s been part of our tax system for more than 100 years) and therefore interlinked with our vast and complex tax system. Tinkering with one part of it inevitably impacts on others. What about losses incurred across other asset classes such as businesses or shares? Excluding them will simply mean investors will re-direct funds to those assets that are unaffected by the rule change.

Existing investor-grade housing stock will be ignored as an investment option rendering them unsaleable whilst putting pressure on the supply of rental properties. I predict that owners of two bedroom flats built in the 1970’s will lose 20-30% of their value immediately and it will take more than a decade for prices to recover.

Rents would inevitably rise too. Labor’s plan grandfathers the rules so investors holding existing stock will simply not sell putting pressure on supply in established areas forcing tenants to outlying areas away from the developed parts of our cities. In short, the plan discourages investment.

The States have much to lose too as it will be them and their tax payers that will need to come to the aid of those no longer able to afford the rent and provide them housing in a system already short on supply and resources.

About 80 percent of investment properties are owned by mum and dad types who only have one investment property. Labor’s proposal is hardly a tax on the wealthy and it ignores the fact that not all investors choose to buy property to avoid tax otherwise payable through negative gearing. A loss is a loss and pressure on families to meet their daily expenses means investors are often attracted to property investments that either break even or are positively geared in order to maintain cash flow.

The last time a government tried to abolish negative gearing it was back in several months later as the voter backlash from soaring rents and plunging property values frightened them into a retreat. With prices tumbling in NSW and Victoria, history may well be repeated.