Impacts of Labor’s proposed negative gearing and CGT changes

With a federal election expected to be called within the next 12 months, and Labor proposing some controversial reforms to negative gearing and the capital gains tax discount, a new report has assessed the risks of taking a blanket approach to their implementation across Australia.

RiskWise Property Research and WargentAdvisory co-authored the Impact Analysis: Negative Gearing, CGT & Australia’s Residential Property Markets report assessing the impacts of the proposed reforms.

RiskWise CEO Doron Peleg said with the federal election looming, government policies and their implications were being thoroughly assessed by policymakers, lenders, fund managers and property developers.

The ALP has proposed reforms to negative gearing and the capital gains tax discount to level the playing field for first home buyers competing with investors, improve housing affordability and strengthen the Commonwealth Budget position through limiting these subsidies.

However, Mr Peleg said one of the most important aspects of the proposed changes was that their blanket introduction across the country would have unintended consequences, and some geographical areas (SA4s), especially those with weak or fragile property markets, would be adversely impacted more than others.

The report identifies the Top 10 SA4s that would be most impacted if the changes went ahead as currently proposed. These include Darwin, Mackay, inner-city Perth and Townsville.

“Another unintended consequence would occur in the Sydney unit market where the proposed changes would be the equivalent to a sudden 1.15% increase in interest rates.”

Report co-author and WargentAdvisory director Pete Wargent said for years property commentators had been talking about a two-speed economy driven by the resources construction boom, but this dynamic had reversed, and those once prosperous areas were now struggling.

“The last thing they need is a further dampening of demand. An introduction of Labor’s proposed changes to negative gearing needs a more nuanced response with some mitigating processes and policies that could be implemented so there are no unintended consequences.”

He identified other impacts of the proposed changes, including declining dwelling prices (or price deceleration in some regions), a reduction in dwelling commencements and deteriorating rental affordability in some locations.

“While there would be some positive initial impacts on housing affordability, these would only be sustained in the largest capital cities if appropriate policies encourage the supply of owner-occupier suitable housing in addition to investment units” he said:

“There will also be distortions in the investor market, with the creation of primary and secondary markets for investor stock if subsidies are limited to new housing prospectively.”

Mr Peleg said from the second half of 2017, the risks associated with the residential property market had increased significantly and the proposed changes needed to be assessed thoroughly across all SA4s to ensure they did not unduly impact weaker housing markets.

“Credit restrictions have had a direct impact on investors in the Australian housing market. As a result, dwelling prices in Sydney and Melbourne showed a decelerating growth rate, followed by price reductions in Sydney and, to a lesser extent, Melbourne,” he said.

“In a relatively short period of time, the landscape for residential property in Australia has changed significantly and this necessitates thorough modelling and impact analysis of Labor’s proposed tax reform package.

“The bottom line is that the proposed reforms will achieve some of the ALP’s stated objectives, including tackling the fiscal challenge and Budget repair, but not the others.

“The Impact Analysis: Negative Gearing, CGT & Australia’s Residential Property Markets report covers our key findings. These are the principles that need to be looked at before any changes are made along with the consequences, and recommendations, if they are applied across Australia.

“As an independent company we wanted to assess the objectives, impacts and key findings when the proposed reforms are not supported by any mitigating measures, and also to add additional information to enable policymakers to take steps to improve housing and rental affordability, which is high on the political agenda.”


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