July 2017 peakandMelbournepricesare
down10%fromtheNovember 2017 peak.
Manyeconomists,includingtheGrattan
Institute,andTreasurymodellingdisa-
greethatLabor’spolicywillcauseArma-
geddoninthepropertymarket,butany
changeintheruleswillhaveimplications
forinvestors.
There’sa possibilitythathouseprices
willrallyasinvestorsrushintothemarket
aheadoftheJanuary1 deadline,asall
negativegearingarrangementsinplace
onthatdatewillbepreserved.
Butthis alsodependsonbanksloosen-
ingtheirpursestrings,whichwerefirmly
tightenedinreactiontotheroyalcommis-
sionintofinancialservices,whichheard
evidenceofinappropriatemortgagelend-
ing.Newhomelendingvolumesdropped
by$11.9 billion(12%)inthequarterto
December2018,accordingtoAustralian
PrudentialRegulationAuthority(APRA).
Inthe 2018 calendaryear,newhomelend-
ingsettlementsfellby$25.1billion(6.5%),
drivenbya sharpdropinnewinvestment
lending,whichwasdown$17.7billion
(14%),from$126.9billionto$109.2
billionovertheyear.
Ty r on Hyde,a quantitysurveyorand
propertyinvestor,saysheunderstands
whymanyAustraliansareagainstthetax
deductionsavailabletonegativelygeared
propertyinvestors.It canleadtosomeone
owning 50 properties,claimingalltheloss-
esandreducingtheirtaxableincomedown
tozero andpayingnotax.
ButHyde,whois themanagingdirector
ofWashingtonBrown,arguesthatLabor’s
solution to curb these excesses is not the
correct one and he warns it will itself
spark new problems that investors
should be aware of.T
heclockis tickingforwannabe
negativelygearedpropertyinves-
torsandthosewantingtoaddto
their tax-advantagedrealestateportfolio.
ThefederalLaboroppositionhasnominat-
edJanuary1, 2020asthestartdatefor
itscontroversialplantoscrapnegative
gearingonexistingproperties,limiting
it tonewpropertiesonly,andhalving
capitalgainstax(CGT)relieffrom
50%ofthegainto25%.
Ofcourse,it firsthastowingovernment
at theelection,butif theopinionpolls(and
bookies)areright,it’sa distinctpossibility.
Andthenit willalsoneedtonegotiateits
changesthroughtheupperhouse.
Labor’snegativegearingpolicywillpre-
ventinvestorsfromwritingoffthelosses
fromtheirpropertyinvestmentsagainst
thetaxtheypayontheirwages.Thelatest
taxofficefiguresshowthat1.3million
investorsmadea combinedlossof
$12billionontheirrentalhomesand
unitsinthe2016-17financialyear.
FirstannouncedinFebruary2016,the
Laborpolicy’saimis tohelpmakehousing
moreaffordable,generateconstruction
industryjobsandraise$32billionovera
decade.“Laborwantstocreatethecondi-
tionsthatpromotehomeownership,nota
systemwhichpromotesa nationofproper-
tyoligarchsandrenters,”saidtheshadow
treasurerChrisBowen.
Thepowerfulrealestatelobbyandthe
federalCoalitiongovernmenthaveboth
warnedthattheplanwillcauseresidential
propertypricestofallandrentstorise.
Andsinceearly 2016 residentialproperty
prices, which had been booming, have
declined. The biggest cities with the
highest prices have been hardest hit: Syd-
ney house prices are down 13% from theirPamWalkley,foundingeditorofMoneyand
former property editor with The Australian
Financial Review, has hands-on experience
of buying, building, renovating, subdividing
and selling property.He foresees the rise of spruikers pushing
overpriced off-the-plan property under a
tax regime that favours new over old. “Next
thing you know investors will be flying off
to the Gold Coast and shown the red car-
pet!” he says.
Another big concern for investors is the
creation of a two-tiered market. “In a market
where you allow far greater deductions on
brand new property compared to a similar
second-hand property, it will be very hard
to sell almost new property,” says Hyde.
“Why would an investor buy a property
that is, say, one year old when he or she can
buy the one that is brand new next door
and get significantly better tax benefits?”
There is already a significant benefit in
buying new, thanks to the changes in depre-
ciation implemented in May 2017 (you can
only claim depreciation on plant and equip-
ment in brand new buildings) and Labor’s
policy will just increase this bias against
second-hand properties, claims Hyde.
But, of course, first home buyers will not
discriminate between new and old because
they get no tax breaks from either.
And he also believes, as many in the
property industry argue, that the timing
is wrong. “Labor’s policy on negative gear-
ing was launched at a time when property
in Sydney and Melbourne were, quite
simply, inflated. As we all know, things
have changed.”
Hyde says he’s OK with the proposed
changes to CGT as it will affect all asset
classes equally. He is working on a solution
to enable Labor to keep its election promise
in a way that will not disrupt the property
market and will still increase the govern-
ment’s revenue. Stay tuned!Negative
implications
Investors need to be aware of
possible disruptions from Labor’s gearing proposal
REALR ESTATE Pam Walkley