The Impact of Changing Negative Gearing
Property investors bring many benefits to the real estate market, which is a point that should be considered during the current debate about negative gearing, ahead of the Federal election in the coming months.
The policy is not simply a tax minimisation scheme for the wealthy, but also assists all households by providing a solid supply of affordable rental accommodation.
More than 2.5 million dwellings in Australia are leased and attract an average weekly rent of $450, according to latest figures. These are not all luxury palaces but ordinary homes.
There is a risk that the proposed changes to negative gearing will discourage long-term investment in residential property and reduce the number of rental options for those unable to afford to buy their own home.
A recent report from SQM Research found that, if the proposed changes to negative gearing are implemented, investors would demand higher rental yield; with rental prices potentially increasing by between 7 per cent to 12 per cent from 2020 to 2022, assuming there is an interest rate cut.
Retaining negative gearing for new properties has been designed to keep the construction sector active, but our view is that it could do the opposite. The proposed changes combined with recent increased financial regulation has generated some nervousness for those considering purchasing off-the-plan.
Investors will no longer be confident of a `quick exit’ because they will be limited to who will want to buy it. Another investor will not be able to enjoy the benefits of negative gearing, for the same property, so it eliminates the crucial secondary market.
The majority of these new developments rely heavily on investors - sometimes up to 60 per cent of sales - before they can even commence construction. When you hit one part of the supply chain, you really hit the whole supply chain.
It won’t encourage new stock because investors need to know there is potential for future capital gain, but at the moment they have no idea what their property will be worth on the other side of abolishing negative gearing.
If the market experiences a slow-down, on-top of what is currently being experienced, in new housing being created it would be another factor driving an increase in rental prices because there will be a limited number of properties available to rent.
Regional areas are also likely to be impacted if investors drop out of the market. There are many small and medium sized towns which attract little new construction but have a population that relies on rental accommodation.
Historically investors have made up around 30 percent of housing finance commitments and over recent years it has peaked at almost 55 percent in NSW. During this period, rents have remained relatively flat, in real terms.
So, we can see benefits that a strong supply and investors add to the property market. It not only allows ordinary Australians to invest in real estate, but more importantly provides stability and peace of mind for those who rely on such housing stock for everyday living.