There has been a lot of noise around Labor’s planned changes to negative gearing if the party is successful in the upcoming election. Labor proposes to reform the process with the intention of improving housing affordability. The Coalition intends to leave negative gearing as it is.
Negative gearing is a form of financial leverage that was introduced in Australia in the 1930s. An investor borrows to purchase a property where the rental from the property is less than the interest repayments and the cost of owning and managing it. Under Australian tax law, a portion of the loss can be offset against other income earned, such as salary, and therefore reduces taxable income and tax payable.
If elected, Labor says it will limit negative gearing to new housing only and the changes, to be introduced on 1 January 2020, won’t apply to existing investment properties. “If you already use negative gearing, nothing changes,” says shadow treasurer Chris Bowen. “It’s not retrospective. And you can still use it for new houses. Federal Labor's plan is good for the budget, good for housing construction jobs and fair for first home buyers.”
He said that the long start date would provide enough time for scrutiny of the legislation and more industry consultation.
Crucially, it’s a proposal that is likely to make off-the-plan apartments an appealing choice for investors.
Managing director of property research house SQM Research, Louis Christopher, says: “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 predicts that after the changes, rentals are likely to remain stable in the short-term, “But we will see upward pressure from 2021 because the current slump in buildings approvals will be aggravated by the loss of negative gearing”.
The company says that “The slump in approvals has now fallen below underlying demand requirements which may create a shortage of dwellings from late 2020”.
“It is predicted investors will demand higher rentals yields to compensate for their loss of tax concessions,” Mr Christopher says.
The Coalition has been damning of Labor’s proposal, claiming it puts at risk Australia’s economic strength and predicting sharp falls in property prices, saying: “This will punish not just the 1.3 million people with negatively geared properties, but everyone with equity in their home, as when they eventually sell their property they will do so in a market with fewer potential buyers. What is more, many of those accessing negative gearing are people that the public would not necessarily consider rich.”
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