Negative gearing changes won’t stimulate new housing demand – but new tax burden will hit investor demand for all residential property

 

The ALP’s proposed changes to taxation arrangements for investment property won’t stimulate investment in new housing as assumed and will lead to a fall in demand for all residential property types according to a survey of current and prospective property investors.

 The Property Council of Australia polled more than 1,000 people around Australia on the potential impact of the ALP’s policy to abolish negative gearing on future investments in established property as well as increase the capital gains tax on new and established property investments.The survey is the first of its kind to ask current and potential investors how the proposed policy changes would affect their future investment decisions.

 Property Council of Australia chief executive Ken Morrison said if implemented, the changes could have a significant impact on the property investment decisions made by Australians.

 “These findings directly challenge the ALP’s key assumption that its property tax package will stimulate new housing supply and construction,” Mr Morrison said.

“They show that investors will be less likely to invest in newly-constructed housing under the ALP’s tax changes, not more likely.

“This is a critical new insight, because if less new housing is being created for people to rent it can only mean higher rents in the medium term.

 “Housing construction is already falling and is a major source of jobs for Australians. The last thing we want to do is make this worse.

 “These findings highlight the dangers of making big policy changes at this uncertain time in the property cycle.

 “The ALP policy was first announced a few years ago when Australia’s residential property market was in a very different state.

“Since then, we’ve seen banks tighten up their lending, as well as changes to foreign investment rules, along with falls in residential property values in most markets,” Mr Morrison said. 

 “We are concerned that the proposed changes would drive away investors which will affect the supply of new and established property to the rental market which is essential for one-third of Australian households,” Mr Morrison said.

 Key findings

  • 33% of potential investors surveyed said they would probably or definitely buya newly-built investment property in the next five years under the existing tax arrangements. This number drops to 24% under proposed changes. 

  • Similarly, for current property investors intention to buy a newly-built property dropped from 34% under current arrangements to 27% under proposed changes. 

  • Around half (49%) of all those surveyed would be discouraged from investing in property if these proposed changes are made, while a further 42% would reconsider the type of property they would invest in. 

  • Current investors would be the most discouraged from investing in property under the proposed changes (58%) compared to potential investors (40%).

Support for investing in established property also showed a big decline under the ALP’s proposed changes: 

  • Among potential investors, intention to buy an established property fell from 42% under existing arrangements to 16% under proposed changes. 

  • Among current investors, intention to buy an established property was 39% under current arrangements and dropped to 21% under proposed changes.

  • Potential investors’ appetite for any property investment fell from 50% under existing arrangements to 20% under proposed changes. 

  • Intentions among current investors for any property investment fell from 47% under current arrangements to 25% under proposed changes, 

Almost three-quarters of current property investors surveyed have used or are currently using negative gearing: 

  • 79% of respondents from Queensland used negative gearing, followed by South Australia (77%), NSW (75%), Victoria (72%) and WA (59%). 

  • A slightly higher proportion of respondents from regional areas (77%) used negative gearing compared to metropolitan respondents (74%). 

Awareness of the ALP’s tax proposals was low among potential investors. While 60% of respondents had heard that the ALP was proposing changes to taxation arrangements for investment properties, only 19% of those surveyed had a good understanding of the proposed changes. Existing investors were best informed, with 27% saying they had a good understanding, compared to just 12% of prospective investors.

Knowledge of proposed changes to capital gains tax was very low, with 61% of respondents unaware that the rate would be increased from 50 to 75 per cent of the personal income tax rate for future investments in established or newly-built investment properties.

Current investors were also asked what would have been the impact on their most recent investment decision if the proposed changes had been in place:

  • 46% of respondents said they would have increased the rent charged to tenants for the property
  • 36% would have paid less for the property; and
  • 33% would have invested in shares or something else instead of property.
  • Only 27% said they would have invested in a new property instead of an established property.