There has been some fevered commentary of late regarding Labor's Housing Affordability package, and in particular proposed changes to negative gearing and the capital gains tax discount. It's fair to say not everyone agrees on the likely outcome of these measures. John Symonds, of Aussie Home Loans fame, is predicting a potential 10-20% drop in prices 'overnight' - others, such as Louis Christopher of SQM Research, have declared this as basically 'rubbish'. So what is the likely actual effect of these policies?
This debate reflects one of the wider problems involving property market analysis, and that is the tendency for 'analysts' to talk about the whole property market as if it is a single entity. This is clearly not the case. As it stands, the Australian property market includes millions of properties and hundreds of thousands of interactions between buyers and sellers every year. This makes it an infinitely complex organism, and the slightest changes in it will have unpredictable consequences.
What would the changes mean?
So with that in mind, I'm not going to make a prediction on the effect of Labor's proposed changes, because it would be nonsense if I did. Instead I'm going to break down the key facts surrounding the changes, and make some deductions on how these will affect different aspects of the market:
- Fact: CGT changes affect all investments, not just housing. Deduction: This makes all investment less attractive, not just housing. While it does make a noticeable difference on the kind of gain you'd make on a long-term property investment, I wouldn't expect it to deter investment in general. The biggest impact of this change is likely to be the rush it creates to invest before the proposed introduction date of 1st July 2017.
- Fact: Negative Gearing changes are designed to encourage investment in new housing. Deduction: This is the clear intent of the policy and all things being equal, should lead to an increase in prices for new property. You're already paying a premium for new property versus existing property, and these changes will likely increase that. Off-the-plan apartments, which are a large chunk of the new property market, are already heavily favoured by investors (or perhaps more accurately, not favoured by owner-occupiers), and this change is likely to skew them even more in that direction.
- Fact: Negative Gearing changes are designed to discourage investment in existing housing. Deduction: Established property types owned predominantly by investors will go down in value. While existing investors will not forfeit their ability to negatively gear, new investors will undoubtedly be discouraged from buying existing properties that can't be negatively geared. This is going to hit some property types much harder than others. In particular, I see some big problems for owners of near-new inner-city apartments. The inner city market is dominated by investors (Over 50% or more of all owners), and prices and yields are already being hit by a wave of new supply coming onto the market. Much of the attraction of these properties is the significant depreciation than can be claimed against income. If you discourage investors from buying these properties by removing negative gearing, then you are discouraging a big chunk of potential buyers in an already problematic market. This applies to a lesser degree to near-new houses in outer suburbs that are competing with a lot of new housing supply.
Higher-end properties which are producing low rental yields are also likely to become less attractive. The percentage of these properties owned by investors is generally lower though, so the effect on the market will be less pronounced.
So in summary, while it's hard to say what will occur across the whole market, Labor's proposed changes will certainly have an impact in specific markets. Indeed, they are designed to.
HOW DO I PROTECT MYSELF IN THE SHORT-TERM?
The best way to ensure you don't buy a property that will be hard-hit by any changes, is to buy a property that is a good investment regardless of what happens with negative gearing. So instead of buying an established property in an investor-heavy market that relies on negative gearing to stack up, look for properties with the following characteristics:
- In areas with owner-occupier ratios above at least 50%. These markets will be less impacted by any changes to investment rules (full-stop),
- Buy properties that will produce a neutral/positive rental return. Again, these will be less affected by negative gearing changes. There are plenty of such properties still available in Australia, and not just in regional areas or in student accommodation.
These a good rules for buying in any circumstances. It's critical to remember that the housing market is ultimately about housing people effectively, and the properties that are most attractive to genuine owner-occupiers and tenants will be the best investments. A high proportion of owner-occupiers and strong rental yields is a good sign the property you're buying is such a property.
The biggest unknown in the short-term is how the changes will affect confidence. This is one of the most important determinants of short-term price movements, and one of the reasons why the property market has such pronounced cycles. Over the long-term, however, these kinds of changes won't have a great impact; people will adapt to the new paradigm as they always do, and the market will steady. Property investment will still produce great returns for the smart investor, and that, not tax benefits, is the main reason why you should invest.