What happened in 1985-87 - by John McGrath
In short, Labor intends to abolish negative gearing on established investment properties purchased after January 1, 2020 and halve the capital gains tax discount for long term investors.
The likely impact will be a reduction in property values in some segments of the market – particularly apartments and sub-$1 million houses across Australia, as this is the typical stock of investors so these are the properties that will experience a loss in buyer demand.
However, the biggest impact will be felt by tenants! Fewer investors means a reduced supply of rental homes to serve our rising population. Simple supply and demand metrics mean rents will rise.
The property ecosystem is finely balanced with buyers, sellers, landlords and tenants all being impacted by legislative changes.
If we lost even 10% of the buyers who currently invest in residential property because a change in negative gearing locks them out of investment, it would be horrendous for every tenant in Australia.
A reduction in investment stock of that magnitude would put enormous pressure on current rents and materially impact the cost of living for more than 30% of Australians who live in rental accommodation.
Respected property market analytics company, SQM Research has done some modelling that reveals the likely impact on rents in every capital city should Labor's property tax changes go through.
Rental forecasts 2020-2022
- Sydney up 3% to 10%
- Melbourne up 9% to 15%
- Brisbane up 13% to 22%
- Perth up 12% to 20%
- Canberra up 4% to 10%
- Adelaide up 9% to 15%
- Hobart up 0% to 10%
- Darwin -1% to 4%
Source: SQM Research – figures based on implementation of Labor property tax policies & no cash rate change
As mentioned last week, we do have a precedent for how a repeal of negative gearing could affect the property market. Labor tried it once before in 1985. The policy remained in place for just 28 months from June 1985 to September 1987.
A recent report by SQM Research details what happened.
- Increasing rents above national CPI in five out of eight capital cities from June 1985 – September 1987
- Perth was the worst affected with rents rising 33.5%, well above CPI of 20.6%
- Rents also increased above CPI in Sydney 31.4%, Canberra 23.9%, Melbourne 22.9% and Hobart 22%
- Vacancy rates dipped in Sydney, Melbourne and Brisbane, which meant fewer rental properties were available for rent, heightening competition and pushing rents higher
- Brisbane's vacancy went from 3.7% in June 1985 to 2.2% in September 1987 and just 0.7% in March 1988
- Sydney's already tight vacancy rate of 1.1% in June 1985 fell further to 0.8% in March 1987. Melbourne's vacancy ranged from 1.9% to 2.4%, still well below a balanced market of 3%
- There was a sharp decline in new housing commencements from 39,348 new dwellings in the June quarter of 1985 to 30,067 in the September quarter of 1987
Of course, other market factors were at play during this 28-month period that contributed to the rise in rents, such as a shortage of rental stock in Sydney and a rise in average home loan interest rates from 11.5% in June 1985 to 15.5% in May 1986, followed by interest rate cuts from September 1987.
However, SQM concludes that these other market factors do not explain the immediate acceleration in rents after negative gearing was abolished.
This is one of those elections where the result is going to have a big impact on the property market either way.
We are already seeing an impact, with some long-term landlords choosing to sell now in anticipation of falling prices from next year if Labor wins. They want to lock in recent boom time capital gains and give themselves options for alternative future investments.
On the flipside, some people are aiming to buy investment properties ahead of the January 2020 deadline so they can retain the right to negatively gear and pay less capital gains tax when they sell.
It is really worth your time to properly consider the ramifications of Labor's proposed changes and how it could impact your current investment position and long-term plans for wealth creation.
Published: Tuesday, April 23, 2019