Negative gearing changes, the unforeseen consequences

Proposed changes to negatives gearing and capital gains tax have polarised economists into firm positions, one in favour and one against and both support their respective opinions with credible research and analysis.

What is not in dispute is that the property market is the biggest and most important market in the country. It’s health and activity is vital to all levels of government due to the large sums of revenue raised through stamp duty, land tax, council rates, GST and developer contributions. A thriving construction industry, which is the result of a strong property market, is essential to the economy and job creation and most importantly property is at the heart of the basic human need for shelter.

Currently it is delivering, if we impose a significant change it may improve things, but it may also have a catastrophic affect. 

The deeper you dig the more you see the proposed changes by Labor to negative gearing and capital gains tax show a lack of understanding of how investors behave and how critical sentiment and confidence are to investment decisions appears to have been completely ignored in this policy, which would come into effect on 1 July 2017.

First homebuyers who most commonly purchase established homes rather than new homes have been forgotten.

We face a disastrous cocktail of higher rents for tenants living in established home areas in urban locations due as a result of future supply issues and on the flip side the prospect of poorly developed urban ghettos in the growth areas which will destabilise the property market.

The simple facts are that there are two types of property investors who make up the between 25 to 30 per cent of the rental property owners in Australia and we need both for a balanced market. 

First, and in the majority with up to 80 per cent of the market are mum and dad investors who buy local in low risk established property in locations they trust. Secondly is the investor looking for higher returns and higher tax depreciation but with higher risk who buy new property in developing locations throughout Australia. For both groups the consequences are of great concern with every new property turning into a second hand property as soon as occupied thereby limiting the market appeal of what were once new properties along with the sale of every existing property.

Many of the first group will look for alternative investment strategies outside property that still offer low risk if negative gearing is taken away. Hence we would see the subsequent tightening of supply in established locations. The second group will be enticed into potentially price attractive property developments that look good on paper with rent guarantees thrown in but in time will have the potential to become urban ghettos that quickly lose their shine.

Do we want to see even greater divided cities where people are being herded around like cattle into locations where there is greater supply because the alternative preferred locations are so tight on supply that rents and prices are out of control? That is what can happen when you take an issue like housing affordability and see the simple solution being changes to capital gains tax and limiting negative gearing to only new property.

The best urban locations offer a vibrant mix of ages and socio-economic levels and have a good mix of owners and tenants. Changing that dynamic results in large scale socio-economic issues that simply have not even been considered as a consequence.

The majority of first homebuyers and renters will again be the losers in this equation as the push to increase supply for the wrong reasons will change the dynamic of the property market and kill off confidence which is critical to holding it all together.

The real issue with housing affordability stems from supply and not just supply for investors but appropriate supply for dynamic market movement in all sectors from first homebuyers to retirees. It is movement both from established homes and from new homes that increases activity and unclogs the supply chains, this is where the energy needs to be focused and this is the way to stabilise prices and give first homebuyers a chance.

The property market needs investors to supply stock and that stock is just not new property as the greater majority of investors own established homes. To toy with that balance is just playing with fire.

Do we really want to mess with something that's working and is so important to all of us?  That's a gamble we don't want to take, the NSW government thought the vendor duty was a good idea, the property market froze and we all suffered including government with a $1 billion dollar loss in revenue. And as the old saying goes, ‘don't mess with something that is working’.

John Cunningham is President of the Real Estate Institute of New South Wales. John commenced his career in real estate in 1977 with a very simple philosophy—to establish business relationships built on trust. He opened Cunninghams Property in 1991 with his wife, Ann, in Sydney.