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RESIDENTIAL PROPERTY

Negative gearing changes will impact market for three years

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LABOR’S proposed negative gearing changes would impact the market for three years and trigger a rise in dwelling rents if introduced, according to SQM Research, and should be phased in gradually to soften a further fall in prices and weakening of the construction sector.

In its updated report examining the effects of federal Labor winning the upcoming election and repealing negative gearing and capital gains tax concessions from July, the research firm suggested price growth in each capital city would suffer from the 2020 to 2022 period when compared to a scenario with a stable economy and no repeal. Both scenarios assume a cash rate cut of 50 basis points over late 2019 and early 2020.

In the case of Labor winning government and rental yields rising between 60 and 95 basis points, Melbourne dwelling prices would fall by between 8% and 13% over the three-year period, and in Sydney from 7% to 12%, with capital cities falling on average 4% to 8%.

Canberra prices would be hardest hit outside of the major markets with a fall across 2020-2022 of between 1% to 7%. Darwin could land 5% either side of stable, while Hobart could fall by 5% with a ceiling of 3% growth. Brisbane would come in between -3% and 2%; Adelaide -2% and 2%; and Perth would see growth from 3% to 10%.

The ceiling of the alternative scenario could see capital city average growth of 8% to 14%, with nearly 10% to the mid-teens across all individual capitals, except for Darwin at stable to 9%. Prices could potentially rise by up to 19% in Hobart and 17% in Perth, followed by 14% in each of Melbourne, Sydney and Canberra, and then Brisbane with as much as 13%.

“If Labor’s negative gearing policy is legislated in its current form, we expect a rise in rental yields which will occur through a combination of additional falling dwelling prices and, eventually, a rise in rents,” SQM Research managing director, Louis Christopher said.

Rental growth in Brisbane would range from 12% to as high as 19%, followed by Perth (11% to 17%), Adelaide (9% to 14%) and Melbourne (7% to 13%). Hobart and Canberra could both expect growth of between 3% and 9%, and Sydney from 3% to 8%, while Darwin would fall between -7% and 3% movement.

The capital city average would be 7% to 12%, which would come down to between 3% and 9% in the alternative scenario. Brisbane and Perth would both have a growth ceiling of 13%, Melbourne 10%, Adelaide 9%, Hobart 7%, Canberra 6%, Sydney 5% and Darwin 2%.

“[We] strongly encourage Labor to consider some of the investor issues, particularly surrounding the distortion their policy may create on pricing of off-the-plan developments and the likely losses investors in those properties would face come resale time to those who won’t have the tax concession.”

Goldman Sachs expects the negative gearing and capital gains tax changes to have a muted effect on investors and the residential market, saying that the changes make property investing less attractive from a cash flow perspective, “but negatively geared rental properties are already an unattractive asset from a cash flow perspective”.

Christopher said housing construction would fall further due to the lack of investor demand and set up a shortage of housing come later 2020, based on current strong population growth rates.

Some industry groups have suggested supply of new housing would be reduced and decimate the property market should the changes be introduced, while a report from the McKell Institute suggests negative gearing reform is needed more urgently now than when the last federal election was held in 2016.

According to Australian Industry Group/Housing Industry Association Australian Performance of Construction Index, building took its steepest monthly fall since 2012 in February, and apartment building continued to weaken as residential new orders dropped to their lowest levels in nearly six years.

“Such a tax change during a housing downturn is in our opinion a risky move for the economy and so we encourage discussion of perhaps a phase in period for such legislation that would reduce the economic shock that this tax change could create,” Christopher said.

“While we take the view that negative gearing reform is a good thing over the long-term, such reform should be executed as part of a wider property tax reform that should be phased in over time.”

Christopher said a basis cut of 50 basis points to the official interest rates would provide some cushion to the effects of negative gearing repeal, although the market would still record dwelling price falls.

Another scenario posited by SQM Research shows a path of no cash rate change, a rise in rental yields between 85 to 120 bps, negative gearing repealed and capital gains taxes increased leading to weaker conditions than either of the alternatives. Capital city falls would come in between 5% and 12%, with Melbourne down from 8% to 16% and Sydney by 9% to 14%.

House prices fell by 2.4% across the country in the December quarter, according to this week’s official data, making for an annual drop of 5.1% that signalled the fastest fall in prices since the global financial crisis.

Prices in Sydney were now 7.8% below where they were in December 2017, while Melbourne prices were down 6.4% down year-on-year.

“While property prices are falling in most capital cities, a tightening in credit supply and reduced demand from investors and owner occupiers have had a more pronounced effect on the larger property markets of Sydney and Melbourne,” chief economist for the Australian Bureau of Statistics, Bruce Hockman said.

Last week’s ABS data showed home lending slumped to its biggest fall in more than a decade in January. Investor lending 28.6% over the year to January, while lending to owner occupiers was down 17.1%.

Australian Property Journal