The Labor Party’s proposed changes to the nation’s “negative gearing” policy are scheduled to go into effect in June 2017, and those changes could have important implications for values in the Australian property market. Under the proposed changes, only new properties can be negatively geared. That’s a sharp departure from the current policy, in which all properties can be negatively geared.
Under the current negative gearing policy, investors are able to reduce the amount they pay in taxes if they incur losses with investment properties. In short, if rental income doesn’t keep pace with mortgage payments due on the property then investors can use this loss to reduce their amount of taxable income. If an investor makes $90,000 a year, for example, and suffers a loss of $10,000 on the investment property, he or she would only need to report $80,000 in income.
In short, negative gearing reduces the tax burden on the investor and acts as an indirect subsidy for the purchase of investment properties. The problem, however, is that nobody can decide whether that’s good or bad for homeowners. According to ABC Network, for example, there’s a growing debate within the Australian government about what these changes to negative gearing policy would mean for property values.
Proponents of negative gearing say the current policy is important to maintain values in the Australian property market. People will continue to invest in housing, and that will stabilize prices, as long as they know that they are being subsidized for any losses as a result of negative gearing.
Opponents of negative gearing in the Labor camp, however, fear that prices have been driven up to an unsustainable level, putting many houses out of reach of first-time homebuyers. The idea is that getting rid of negative gearing for older housing will stop wealthy speculators and deep-pocketed older retirees from scooping up properties and artificially inflating the value of the nation’s housing stock.
So the Labor proposal is to leave negative gearing in place only for newly built properties. That would seemingly encourage investors to put their money into new housing, which would be good for first-time homebuyers. For older properties, the negative gearing tax policy would be phased out. That could dampen any demand for these older properties: why invest in them if there’s no tax advantage to doing so?
That’s what has the Turnbull government so concerned – they think property prices will go into freefall as soon as the changes to negative gearing policy are introduced. People will stop investing in real estate if they are not compensated for their losses, and that will depress demand. PM Malcolm Turnbull called the new policy a “wrecking ball” that would “smash” the value of housing.
To answer the question of whether or not the changes to negative gearing will really “smash” housing prices, it’s important to determine who’s responsible for rising home prices – wealthy investors or actual homebuyers?
For now, the data is mixed on providing an answer to that question. There is some evidence that wealthy investors are more likely than actual homebuyers to take advantage of negative gearing. A person earning $180,000 a year is three times as likely as someone making $80,000 a year to take advantage of negative gearing. But, on the other hand, the government says that two-thirds of people who use negative gearing have taxable income of $80,000 or less.
What could happen, some say, is that there will be a rush to take advantage of negative gearing between now and June 2017, leading to a mad frenzy for investment properties, pushing up prices even more – but to an unsustainable level. After the changes kick in, prices could collapse. So what will happen? Stay tuned – we could be in for a bumpy ride between now and 2017, with the Labor and Liberal Parties (and even people within those parties) trading barbs about what exactly is going to happen to property values in Australia.
For more on how changes to the negative gearing policy could impact your tax situation in 2017, you can find us online at: http://www.diligentgroup.com.au