The Albanese government is pushing ahead with its controversial tax law changes that promises to upend property markets across the nation. By limiting negative gearing only to newly built homes and replacing the flat 50% Capital Gains Tax (CGT) discount with a more complex indexation system, the legislation tabled in parliament last week has completely changed the rules for property investors.
Since the budget was handed down, investors have withdrawn from the market despite the negative gearing carve out of new homes. This is because investors expect house prices to fall because of the proposed changes and they’ll only buy in a rising market. Given the government’s plan does nothing to address the core issue of housing supply, it’s evident they’re hoping to force house prices down to address affordability by disincentivising investors. The problem with this strategy is it damages the economy. This is because equity in the family home provides the foundation from which small businesses can draw to get started or grow, it helps others into their own homes, it buys rental homes, it is the foundation of our nation’s prosperity. Reduced equity in the family home makes us considerably poorer.
Removing the current tax incentives away from established homes has scared off everyday investors who provide the bulk of Australia’s rental housing. Facing lower returns, grandfathering provisions and confusing new rules, many of these investors will simply hold what they have. Instead of sparking new construction, this drop in investor confidence together with higher interest rates has slowed down the entire market leading to fewer homes being built, not more.
Proof of this partly lies in auction clearance rate numbers across the country. Prior to budget night, auction clearance rates in Sydney, for example, were trending at around 70%. The weekend following the budget saw clearances drop to 49.2% – a six-year low. Brisbane’s clearances went from 60% to 35%. Perth’s auction market is small, so the figures are unreliable, but market activity has slowed here too despite lingering under-supply.
The real test for these changes will play out in Australia’s incredibly tight rental market. National rental vacancy rates are currently sitting at a critical low of 1.2% to 1.5% and are as low as 0.6% in some capital cities. If worried investors start selling off their portfolios, the rental pool will shrink even further, driving up weekly rents for struggling tenants. Housing advocates counter that when a renter buys a home, they leave the rental market anyway perhaps to a first home buyer meaning total housing demand stays balanced. Ultimately, the success of this budget depends on whether the incentives for new builds can create new housing fast enough to make up for investors no longer incentivised to buy in the established parts of our cities where tenants want to live, work and recreate.
Presented as the most significant federal budget for decades, Treasurer Jim Chalmers delivered a budget designed to combat alleged generational unfairness particularly around housing. The key changes have dominated media channels; removal of negative gearing for housing other than new home purchases, scrapping of the 50% capital gains tax discount and effectively removing benefits of … […]
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