The potential effects of Labor’s negative gearing policies

According to new findings from SQM Research there will be a range of implications, from an increase in yields to falling prices, rising rents and increased risks for developers.

Louis Christopher, managing director, says the analysis suggests the market impact will last approximately 3 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.”

Louis Christopher also says that Labor should consider some of the issues facing investors.

"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.”

Key findings:

1. Yields will rise Rental yields are likely to rise between 85 and 120 basis points over a 2-3 year period. Average acquisition yields may rise from 4.0% to 5.2% as a result. Rise in rental yields will be smaller if interest rates are cut by 50 basis points.

2. Rental changes are likely to remain stable at 1% to +1%

There will likely be upward pressure from 2021, due to the current slump in building approvals that will be aggravated by the loss of negative gearing. The slump in approvals has fallen below underlying demand requirements which will create a shortage of dwellings from late 2020. Market rents should accelerate by between 7 per cent and 12 per cent over the period 2020 to 2022, if there is an interest rate cut. Brisbane and Perth will likely record the largest rises in rents.

3. Dwelling prices will fall

Due to the forecast of minimal initial rental growth and negligible rises in gross rental yields, further price falls are anticipated from 2020 to 2022.

4. Sales turnover and stamp duty revenue will fall

Property sales turnover is predicted to fall to 15% ( 8% fall) from 2019 levels. This would result in falls in aggregate stamp duty revenue (2.3 billion dollars).

5. Build- to- rent schemes will become more common

Higher gross rental yields will see an increase in interest from financial institutions, particularly industry super funds, who will invest in these sorts of schemes.

 6. More risk for Off- the-plan investors

Investors are exposed to substantial risks of their properties being valued below the purchase price, especially if they want to sell their investment within the first 3 years.

Jason Gwerder
Thursday, 28 March 2019

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