Negative Gearing changes - Friend or Foe?

June 28, 2016
Richard Ferguson

A change of Government could see negative gearing limited to investors who purchase newly-constructed homes as of July 2017. Existing investors would be exempt. The current discount on capital gains tax would also be reduced from 50% to 25% for new investors.

Labor estimates that the policy changes could save around $32 billion over 10 years and improve housing affordability, ultimately levelling the playing field for first homebuyers.

While there's no denying the potential savings for the Government, the jury is out on whether the changes will have the desired effect on the Australian property market.

i believe that Labor's policy is "not well thought out" because it wouldn't benefit first homebuyers and has the potential to place extra burden on the Government in the long run.

The majority of first homebuyers could service a loan, they just don't have the money for a deposit, even if the negative gearing policy did happen to bring house prices down, and I'm not sure that it would, this wouldn't help first home buyers because it wouldn't help them save for a deposit.

The changes would also lead to more Australians relying more heavily on the Government in retirement. Today's mum and dad investors depend on negative gearing to help them invest in property and ultimately benefit from capital gains to fund their retirement.

In addition, while money's so cheap, that's the biggest thing driving the investment market is low rates not negative gearing.

We could see a 2 speed marketplace where established properties will drop in value, and valuations on new properties will be lower because new property will eventually become established property. This will create a lot of negativity and eventually could lead to a downturn in the construction industry.

Damian Percy, General Manager, of Adelaide Bank accepts that there are a range of reasonable and alternative arguments around the changes, he says that his view sways in a "relatively unfashionable" direction to other people involved in the property sector.

"My long-held view is that it is a bad thing for house prices to increase faster than wages," he said. "House price inflation should not be cheered on any more than we should high five each other because the price of electricity, public transport, water, health care, or education is accelerating faster than our incomes.

"Now, there are a number of factors that drive up the price of housing in Australia, restrictions on supply being the most obvious, but I think there is little doubt that the combination of an extremely generous capital gains treatment and the ability to offset losses against PAYG income encourages excessive speculation in house prices and is, on balance and in its current form, bad policy.

"My only question to those for whom any change to current arrangements is an anathema is, 'If there was a change to policy - tax or otherwise - that would guarantee flat houses prices for the next 5 years, would you be supportive?' If your answer is anything other than a quick and unequivocal, 'Absolutely', then it might be worth considering if your concerns around changes to tax policy are not so much that they won't reduce pressure on house prices, but that they might."

Posted in: Home loans

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