By Allison Worrall
Would-be property investors are expected to rush to buy up real estate if Labor is elected at the federal election, in a bid to take advantage of grandfathered provisions in the proposed negative gearing reforms.
But this spike in investor activity would then subside, making way for a boost in sales to first-home buyers and owner-occupiers, economists say.
It comes as powerful property lobby groups and the Coalition step up their attacks on Labor’s controversial plan to end negative gearing for future investment properties, with the exception of newly built homes, and reduce the capital gains tax discount from 50 per cent to 25 per cent.
Critics have argued the changes would cause house prices to tumble, risking the nation’s prosperity, while also driving rents up.
In the wake of Labor’s landslide victory in the Victorian state election, which followed a string of polls showing federal Coalition trailing Labor, Wakelin Property Advisory director Jarrod McCabe said he had been contacted by a number of prospective investors spurred into action by the increased likelihood negative gearing reforms will become a reality.
“As the proposal includes a grandfathering provision, investors are thinking it would be wise to invest in property soon, to ensure they will continue to benefit from the rules as they stand,” Mr McCabe said.
A spike in investor buying could sharply increase in the period between a Labor win and the implementation date of their proposed changes, he said. “This extra demand from investors could dampen or even negate the current downward trend in prices for investor-focused property,” he noted.
If Labor were to win the next election, expected to be held in May, the proposed changes could be introduced as early as next July, however most political observers believe it would more likely come into effect in mid-2020.
Treasury advice released under freedom of information earlier this year stated the proposed negative gearing reforms would have a “modest” downward impact on property prices.
Economist Stephen Koukoulas predicted changing investor demand would create market volatility immediately before and after any changes were implemented.
“There will probably be some teething problems or jolts to the economy, which happens when big policies are announced,” Mr Koukoulas said. “That said, housing prices and housing demand [are] driven by a lot of different things and investor demand is just one of those.”
He noted that home ownership rates had been dropping for two decades, and argued an increase in first-home buyer activity or upgrader activity could support the housing market long-term.
But by making property investment less attractive, critics of Labor’s plan say it could cause rents to increase.
“If this was to result in less rental stock, that would have an impact on rents,” said Property Council chief executive Ken Morrison, who has called for more modelling on the potential economic risks of the opposition’s proposal.
Mr Morrison argued that even if house prices were to moderate further, the pool of people renting would continue to grow due to population growth. He added that housing remained financially out of reach for a significant cohort of society.
His claims were rejected by economist Richard Holden, who authored the 2015 report on negative gearing that Labor went on to adopt as its policy.
The changes were designed to “level the playing field” between investors and owner-occupiers, Mr Holden said, so the latter could leave the rental market to enter home ownership.
“So you’ve reduced demand in that rental market which puts downward pressure on rental prices,” he said.
Mr Holden lashed out at the “alarmist” criticism levelled against the reforms. “Let’s look at the folks who are making these wild and speculative claims, and it’s people like the Master Builders Association and the Property Council, who are not exactly impartial when it comes to this stuff.”
The Master Builders Association recently commissioned research that concluded restricting negative gearing to new housing would result in fewer new homes being built and fewer jobs in construction.
Shadow treasurer Chris Bowen criticised the modelling for failing to take into account Labor’s plan to grandfather existing negative gearing arrangements.
Mr Holden said the policy could actually boost housing supply and encourage new construction because it allows investors to negatively gear new homes.
What is negative gearing?
When the costs of owning a rental property exceed rental returns, investors can claim their losses as a tax deduction.
What is capital gains tax discount?
Capital gains tax is the tax paid on the profit made when an asset or investment is sold. Currently, if a property has been held for more than 12 months, investors can claim a 50 per cent discount on the capital gains tax.
How much does negative gearing and CGT cost?
The combined tax concessions will cost the budget $10 billion this year, according to the Labor Party. They claim their reforms will save the government $32 billion over 10 years.