The Opposition wants to scale back the generous tax perks, saying it would make property more affordable for first-time buyers and boost the construction of new housing.
But the property industry is concerned the plan will instead detonate house prices, sparking a catastrophic flow-on effect for the nation’s economy.
“Even if you don’t own property, you will be hit hard if the property market is crashing and burning because the rest of the economy will go down with it,” Dominique Grubisa, founder of investment consultancy DG Institute, told news.com.au.
The loss of negative gearing — except for investors who buy newly built dwellings — will lead to plummeting house values and rising rents, Ms Grubisa believes.
The Reserve Bank of Australia (RBA) has expressed concern about the state of property prices across the country — a market that contributes significantly to the economy.
As a result, a growing number of economists expect the RBA to cut interest rates this year in a bid to soften the blow from falling values.
The majority of a group of economists assembled by The Conversation said they expected house prices to continue to fall in 2019, accompanied by a reduction in new housing investment.
University of New South Wales real estate research fellow Nigel Stapledon said the biggest drag on the economy would be the collapse in residential construction — and it would be made worse by the crackdown on negative gearing.
FEWER LANDLORDS IS BAD NEWS FOR ALL
Labor’s changes will result in a large-scale exit of landlords, which will hurt property prices, Ms Grubisa fears.
“Negative gearing means property investors can write off or deduct the losses for tax purposes, and it encourages people to buy properties and rent them out,” Ms Grubisa said.
“If people don’t get tax benefits from investing in property, they’ll look elsewhere. If it changes, I think people will sell up their properties, and new investors won’t be incentivised to come in.”
That lack of investor activity will put downward pressure on house prices, Ms Grubisa said, but the Australians who will be hit hardest in the long run are homeowners, not investors.
“There’s a day of reckoning coming. A lot of people, due to the falling property market plus the impacts of removing negative gearing, will experience negative equity. Their properties could be worth less than what they owe.”
RELATED: Coalition offers alternative to Labor negative gearing reforms in 2019 Federal Budget
When Labor first floated its intentions to reform negative gearing some three years ago, housing markets in Australia were booming. Things have changed dramatically, with steep price falls across the country — particularly in Sydney and Melbourne.
“The context of Labor’s policies, namely an ‘overheated’ housing market, no longer exists, bringing into question the need for reforms to curb investor activity,” Master Builders Australia boss Denita Wawn said.
“Master Builders calls on the ALP to rethink their policies in the light of this new research and a changed housing market.”
Late last year, Master Builders claimed Labor’s negative gearing policy would not increase the supply of new dwellings as promised, but rather supply would go backwards.
That’s despite negative gearing benefits still being available on new homes, which Labor said would spark a supply boom.
Economic modelling issued by Master Builders found there could be 42,000 fewer new homes built across the country. That slump would result in 32,000 job losses, it claimed.
Building activity is already stagnating.
Developers have been spooked by price drops over the past two years and are putting projects on hold, which will constrain supply for some time to come.
There have been “rapid declines in approvals and building starts” recently, Laurence Troy, from the City Futures Research Centre at the University of New South Wales, said.
“As we are now seeing, when the price a property can fetch drops, so too does the desire to build it,” Mr Troy wrote for The Conversation.
“It was rampant price growth that underpinned developers’ (activity) to add supply, not a desire to make housing more affordable.”
‘HIGHER RENTAL PRICES TO COME’
With fewer landlords renting out their homes and a crash in new dwelling supply, rental prices could rise — particularly in cities already experiencing a housing shortage.
When the Hawke government ditched negative gearing in the mid-1980s, rents rose sharply in Perth and also increased in Sydney.
They fell in Brisbane and Adelaide while remaining stable in Melbourne, although property economists later argued those cases were driven by other market forces.
Experts predict the rental market will face intense pressure when Labor cuts negative gearing benefits due to an exodus of landlords.
“It’s a matter of simple supply and demand,” Ms Grubisa said.
“Fewer investors means fewer rental properties, which means higher rents. Everybody loses in the long run.”
A report from property market analyst firm SQM Research warned renters in Brisbane could pay up to $5000 more a year due to negative gearing changes.
“There is likely to be upward pressure from 2021 due to the current slump in building approvals, which will be aggravated by the loss of negative gearing,” SQM analyst Louis Christopher said.
“The slump in approvals has now fallen below underlying demand requirements, which may create a shortage of dwellings from late 2020.”
SQM Research reports Perth rentals could jump 20 per cent, Melbourne and Adelaide 15 per cent, while Sydney, Canberra and Hobart may rise 10 per cent.
Although, the Grattan Institute looked at the current state of markets and said negative gearing changes meant rents “won’t change much”.
VIEWS ARE MIXED
Cameron Murray, lecturer in economics at The University of Queensland, argues most of the fears expressed about negative gearing changes are misplaced.
Opponents of the changes say they will hurt “mum and dad” landlords who rely on tax breaks to make their single investment property stack up, but Mr Murray said the professions most likely to use negative gearing were “surgeons and anaesthetists”.
And on the purported slump in building activity, Mark Steinert, the boss of Australia’s largest developer, Stockland, told the Australian Financial Review last September limiting negative gearing to new housing would “put a rocket” under the building industry.
RELATED: Changes will be made to the negative gearing and capital gains tax by January next year if Labor wins the May election
A poll by the Housing Industry Association found half of voters were confused about Labor’s planned changes to negative gearing and three-in-four want a review of the impacts before they are implemented.
Instead of ditching negative gearing, pundits believe whoever wins the next election should instead invest in building cheap, accessible, properly designed and well-located housing.
A major focus from government on the supply of affordable and social dwellings would support Australians struggling with housing costs and underpin the construction market, Mr Troy wrote.
“A properly designed, large-scale, not-for-profit program could mean investing in new housing becomes a positive for state and national balance sheets,” he said.
“In short, the evidence-based economic case for government investment in social and affordable housing is strong.
“Given the impending fallout of a property bust following the largest property boom in Australian history, now is the time to act and reshape the nation’s housing system for the long term.”