The big news for this week! Negative Gearing potentially scrapped on existing dwellings.
In case you haven’t heard, Bill Shorten leader of the Australian Labor Party (the ALP) has announced a proposed reform to the negative gearing tax concession presently available in Australia.
Should the ALP win the next federal election and pass its proposed reform through Parliament, then from 1 July 2017 investors will only be allowed to negatively gear brand new properties. Also included in the reform package is a proposed reduction in the Capital Gains Tax discount from 50% to 25%, for property held for more than one year.
Now let me unfold the Negative Gearing changes for you, since they are the thing everyone is talking about.
Firstly, I’ll just clarify for anyone that’s not sure what negative gearing is.
Negative gearing allows the owner of an investment property to deduct certain ‘losses’ from the property against their assessable taxable income. In other words, if the rental income received is less than the ongoing costs to keep the property, then this ‘loss’ is discounted off the tax payer’s income figure, meaning they ultimately pay less tax.
As per the Albury and Wodonga Council websites, 26.4% of properties in Albury are owned by investors, and in Wodonga 24.1%. Although these present investors will be grandfathered under the proposed changes (meaning they will be entitled to continue to negatively gear their existing properties after July 2017), what does this mean for our region going forward?
The housing market is controlled by supply and demand. Traditionally, people want to live central, as that’s where all the hustle and bustle is. This desire to live centrally increases demand for those properties (therefore reducing the available supply), which increases their price as there is a limited amount of central properties.
The ALP are wanting to introduce the changes, one as a revenue raiser, and two as they believe it will cool a heated property market in the likes of Melbourne and Sydney. However, in Albury/Wodonga we are far from a heated market. As we are a regional hub we don’t see growth like the capital cities, for one main reason, there isn’t the massive demand to live here, and when there is we have the space to build out. This supply and demand is one of the reasons why we don’t see property prices in Albury Wodonga rise as much as our capital city neighbours.
The effects of these changes could see investors not buying established central properties, meaning they are pushing for new construction. But what happens when the price of new construction is pushed up from first home buyers who receive the incentive of a grant to build, and investors who are after the bonus tax deductions all bursting at the seams to get themselves a brand spanking new property and bidding against each other. If the demand for new houses grow and we see new house and land price increase to support this heightened demand, then it only makes sense that we see demand for established houses drop and established houses prices drop. This would also mean these new properties could be heading in to negative equity territory, meaning they are worth more brand new than once they are built, potentially meaning, after completion the house could be worth less than what they paid for it.
In Albury Wodonga I don’t believe investors are looking to buy here just for the tax deductions, mainly because our little regional area we call home doesn’t support the negative gearing framework, where the idea is the growth makes up for any shortfall in income. However at least half of the investors I see regularly, hold an investment property around here that is negatively geared. These aren’t wealthy CEO’s or business people I’m talking about, they are Mum and Dad investors trying to have a go. It would be a shame to see a knock like this make it one step harder for regional Australians to create a better life for themselves.
This has been tried before and failed when the Hawke Labor government of 1985 abolished negative gearing. By 1987, then treasurer Paul Keating, when reviewing this, suggested the 1985 abolition had caused investors to leave the market, causing more problems than it solved.