There is a lot of noise in the property sector at the moment – prices are down, financing hurdles are higher and tax policies impacting property could change.
Yet what remains the same is that people need housing and our growing population means this is a conversation that can’t be ignored.
Changes to negative gearing have been flagged if Labor wins the election in May with a grandfathering allowance for negative gearing on assets bought before 1 January 2020. After this date negative gearing will only be available for investment in new housing.
While investors in residential property are taking this proposed change very personally, it’s important to remember that investors in all assets that are negatively geared will also be impacted. So deductions from borrowings against commercial properties, shares and trust unit holdings would also be limited to the level of income received from that investment.
As the only asset class remaining to benefit from negative gearing, new residential properties should become more attractive to buyers after the change takes effect. Therefore, in theory this should present great opportunities for developers, particularly those that have been dealing with a slowdown in sales as a result of the property market softening in the last six to nine months, particularly in Sydney and Melbourne.
However, there is a lot to be said for the comfort investors take from purchasing established properties and when it comes to investments of that size, it is still an emotive decision. The perceived stress that can come with a new build or off the plan purchase, both of which don’t have the immediacy of the established buy, could tip the balance in the investment decision. To combat this we would need more developers speculating and carrying stock at the completed stage – which in the current financial environment is unlikely and uncommercial.
Despite the historically low interest rate era, the tighter lending conditions as a result of the Banking Royal Commission, are making it considerably more difficult to access the funding needed to meet the purchase prices developers are looking for. While banks are still offering deals on property lending, the hurdle rates on LVR’s and serviceability have been tweaked and are increasingly harder to meet.
Consequently, the proposed tax changes may not see the anticipated improvement in affordability or boost for new or first home buyers in the short term. If anything, they may find investors that have previously geared other asset classes are now turning their attention towards new housing to maintain the negative gearing benefits, driving prices up.
Labor has also proposed subsidies to boost the supply of affordable housing, which in turn intersects with the changes to negative gearing.
The proposed 15 year subsidies of $8,500 per year will be available to investors who build new houses or apartments, but are conditional on them being rented at 20% below market rent for the long term. In contrast, the Government had put forward their own longer term incentive for affordable housing, being an additional 10% CGT discount on eligible properties as part of the 2017/18 budget - but to date this hasn’t made it to law.
Encouraging investment in affordable product to increase supply has merit and it is imperative there are appropriate housing options on offer to meet the varying needs of the community. This has to remain on the agenda for whoever wins the election, but the key to these measures will be ensuring that investors in affordable housing options can still receive a reasonable return for outlaying their capital on this asset class. Otherwise there simply won’t be the take up and it will only be the tax exempted benevolent groups that will continue to invest in this area as part of their charitable objectives.
Ultimately, all of Australia’s major cities are expecting continued population growth. So, in the long run, any market anomalies resulting from proposed tax changes is expected to be absorbed through the continuing demand for new supply. However, minimising the impact of change at a time when the market is not at its strongest will require collaboration between all levels of government around planning and infrastructure and a sensible approach to decisions around the taxing and availability of land.