Implications of policy changes to Negative Gearing/ Capital Gains Tax.

externalFirst and foremost, investors must understand that negative gearing as a wealth strategy is just one of many options available to property investors and by no means the only viable option. For a large % of investors, any changes to policy relating to negative gearing will have little to no impact as they focus on a cash flow positive strategy.

Ever since I first invested in property, back in 1996, negative gearing has always been seen as a political hot potato and depending on how the community is feeling, will depend on how far the government of the day will push the agenda for reform. In 20 years it has never had so much bad publicity as it does today, and why, simply because negative gearing is being marketed as evil and the cause of all of Australia’s housing problems.

Whilst policy changes targeting investors is well meaning, they are dangerous policies and provide high level of risks not just for mum and dad investors, but the community as a whole. The negative sentiment towards investors in unfounded. Most investors are ordinary mum and dad investors building wealth through property to fund their retirements, as such, not be a burden on the government or tax payers in their retirement years. It is these mum and dad investors who are taking the risks, not the government, not the tenants and not the non investors.

Without mum and dad investors, there simply would not be enough rental property in the market to cater for demand, as such, rents would sky rocket and tenants would find it even more difficult to secure a home.

So what is driving up prices?

Simple – supply and demand. Wherever there is little supply and high demand, prices will increase.

This occurs in every market, not just housing. When a Qantas aircraft is close to capacity, seat ticket prices increase. Whenever a hotel is almost full booked, room prices increases. Basic supply and demand.

What we also need to realise is most of the pricing issues is occurring in 2 markets only, Sydney and Melbourne. Australia has hundreds of different property markets, but its only 2 that seem to be causing the hysteria.

Potential Policy Change.

The Labor party has announced they will restrict negative gearing concession to newly constructed home from July 1, 2017 and reduce the Capital Gains Discount to 25%.

Investors who buy newly constructed property after July 1, 2017 will still be able to deduct net rental losses against their income.

Investor with existing properties purchased before this date will not be affected.

The Labor Party believe these changes to negative gearing will generate billions of dollars of extra revenue, increase the supply of new housing, improve affordability for low to middle income earners and increase jobs in the construction industry.

What they fail to address is:

Prior to the implementation of this policy, investors will rush to purchase property to take advantage of existing concessions. This will no doubt drive up prices and reduce affordability, which is the complete opposite to the new policies objectives.

If concessions are reduced and the investor’s costs increase, they will pass this onto the tenant in higher rents. As there will be less and less investors in the market, thus meaning less rental properties available, demand will out strip supply and rents will rise again. (Back to the old supply v demand scenario).

Since established property is not included in the new policy, those areas (within 20kms of any city) which has a high proportion of established property could see their values decrease, not only does this affect the investor but also owner occupiers. Mean while, rents will sky rocket in these established areas which ironically, is where most tenants want to reside.

Calculator leaned on a little house with red roofOwner occupiers and investors would be impacted by potential decrease in their established property, and being their single biggest asset, this could have far wider impact on the economy.

Consumer confidence would decline.

If taxes are higher, rents are higher and home values lower, the whole economy suffers. Consumers will have less disposable income to spend, they will be less inclined to take “risks” and invest and generally will feel poorer, thus creating a wait and see approach.

The government would also be impacted, with higher CGT rates on properties sold; investors are likely to hold onto their investment forever, and thus ensuring the government earns NO capital gains tax.

This is not what the country needs right now.

With our transitioning economy, increasing unemployment and general concern for the future, our country and economy needs progressive thinking, positive investment and policies that would benefit everyone.

Not a carpet bomb approach attacking the very essence of what is keeping this countries economy alive, property.

Changing policy to restrict negative gearing to newly constructed property in the outer suburbs will not create a construction boom, or create ten of thousands of jobs or make property more affordable. It will simply drive up rents in areas that have a high proportion of established housing and potentially decrease the value of these properties affecting more then just the investor, but also the owner occupier.

Whilst I can accept that some reform will eventually occur, maybe not in the next term of government but someway down the track, this reform must be considered by working with key stake holders and building a positive plan that benefits everybody. Too much policy is created on the run due to media hysteria.

 

 

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