03 Apr Be careful what you wish for with negative gearing – Louis Christopher
Many commentators have indicated some very bleak outlooks if negative gearing and capital gains tax concessions are repealed next year. We talk to the author of a detailed report on the likely outcomes and you might be surprised because Louis Christopher says we still need to be careful not to throw the baby out with the bathwater.
Kevin: Well, there certainly is a lot of talk about what might happen with negative gearing. There have been many, many reports out on the likely impact of Labour winning the next federal government, then fulfilling their promises to look at making some changes to negative gearing and capital gains tax. There’s a very interesting report that I want to talk to you about now that was released by SQM Research. I have the author of that, and the head of SQM Research Louis Christopher on the line.
Kevin: Louis thanks very much for your time.
Louis: Good day, Kevin. Good to be here.
Kevin: Yeah. Louis there’s a lot of detail in this, and the thing that surprised me a little bit was … Well, surprise probably isn’t the word. But, I was delighted to see that you’ve taken a very positive outlook to this and not necessarily just gone with one side that says, “Well, this is going to be negative.” Let’s have a look at what the likely impact is. Surprisingly you’ve indicated that we’re probably going to see a somewhat rosey outlook initially. But will that last? Can you walk us through your results.
Louis: Yeah. That’s right. So, look, we’ve done a forecast on each capital city regarding the projection for rent and the projection for dwelling prices. Overall our view is what’s likely to happen first once we see this policy passed by parliament, and let’s assume in its present form, is that we’ll see some further price falls. Those price falls will be fairly significant in Sydney and Melbourne in our opinion. For other cities the price falls will be more muted in our view.
Louis: The reason why we think Sydney and Melbourne will be more significant is because those two markets, even while we’ve had a correction they’re still over-valued. So, we think having less investors in the market, which is one of the views in this report, as a result of this change in taxation, property taxation policy. We’ll see less demand for real estate in the market.
Louis: So, prices will fall and in a way that’s what Labour wants to achieve out of this negative gearing policy. They’ve been on record saying they want to improve affordability. Well, how do you do that? By falling prices of course. So, that will happen.
Louis: Now, when it comes to rent our view is that we’re not expecting to see an immediate rental surge like what we had back in the 1980s. It will depend on each capital city. Looking at Sydney and Melbourne, once again, our view is that rents aren’t likely to rise immediately but they may well at a later point. We’re thinking perhaps years two and three into this policy change we’ll start to see a pick up in rents.
Louis: Now, the reason why … Sorry, I’ll-
Kevin: You’re all right. Keep going. Yep.
Louis: The reason why is because with the central view that we’ll see less investors in the market, that’s going to have a negative impact upon housing commencements and the housing completions. There’ll be less new stock in the market. Given our very strong population growth rates, it means existing stock we see now, our surplus in some cities will be quickly absorbed and that’s when we’ll start to see some upward pressure on rent.
Kevin: Some would argue, though Louis, that the measures that have already been taken have dampened the investor market already.
Kevin: Are we sufficiently down the journey that we wouldn’t need to make these changes that Labour are foreshadowing? Or do you think that, that’s a positive?
Louis: I think overall we’re in favour of property taxation reform, including negative gearing reform. We also would like to see a reduction in stamp duty taxes as well. And potentially consider a low broad based land tax in replace, we’ll say, the stamp duty. So overall we’re in favour of property taxation reform. But how it is done, how it is executed, and when are critical. We all know property is a very large component of our national economy. If you were to hit the market during a downturn, particularly for Sydney and Melbourne, that could create a second leg and have negative ramifications for the economy. We believe potentially it could create an economic shock. Right now, given how the economy’s a bit patchy right now, we’ve got to be careful how we actually do this.
Kevin: Do you see build-to-rent schemes? In other words, you know, bigger institutions coming in and maybe filling a bit of a gap that’s being created by mum and dad type investors leaving the market?
Louis: Yes I do. So, long-term our view is that changing negative gearing will likely see a rise in rental yields. We think that, that will occur over the long-term. So we’ve done some research and international comparisons and it’s pretty clear to us that rental yields are higher on countries where there’s no negative gearing.
Louis: So, if the market does trade on a high rental yield it will encourage many … In our view, many superannuation funds, particularly industry super funds, to invest in residential property. Provided that is regulated potentially we could see an offset down the track where that investment increases the supply of affordable rental accommodation.
Kevin: What about off the plan investors? I would think that they’re probably at risk here.
Louis: Well, so this is the thing. Labour has in their policy that they’re going to keep negative gearing on new property. Now, Kevin, both you and I know that off the plan development investing can be risky at the best of times. One of the reasons being is these properties generally come on at a premium to the rest of the market and then all the fixtures and fittings get depreciated and it can be a bit of an issue. A little bit like a new car rolling off the showroom floor.
Louis: Creating more of a gap where, okay, your first buyer has a benefit, but your second buyer doesn’t have the benefit. Means that, that second buyer’s going to demand a discount. That means that the probabilities of that first buyer losing money when they sell is higher in this instance.
Kevin: There’s, obviously, going to be … The impact on this will be sales turnover will fall, stamp duty obviously revenue, therefore will fall as well. This could create somewhat of a hole for taxation collection generally across the nation.
Louis: Yes. Our forecast is that total sales turnover would fall in the first couple of years. Our estimate is about another 12% from the 2019 levels. That would have a negative impact upon stamp duty receipts. We estimate that stamp duty revenues nationwide would fall by some $2.3 billion. It’s a fair amount. You know, Labour needs to consider that when they’re doing their estimate savings that they think they’ll get out of negative gearing reform.
Louis: So, yeah, that’s a negative ramification. Look, it also goes to show, though, that look I’d like to see where we are less reliant on stamp duty for revenues. I don’t think it’s a great thing for government, state government. It creates a bit of a boon bust in their budgets.
Kevin: Yeah. But getting rid of it’s going to be a tough one. Although this-
Louis: I agree.
Louis: No, I totally agree. Once upon a time we got rid of wholesale sales, stamp duty and tax duty and replaced it with the GST which took cooperation with all the various states.
Louis: I agree, it’s unlikely, Kevin. But it’s possible one day.
Kevin: Good on you. Hey, Louis, it’s a fantastic report. Thank you for doing this. I guess we just got to brace ourselves for the fact that it looks like it might work in the short-term but in the long-term we have to brace ourselves a little bit. Yeah, good report, Louis. Thanks very much for your time.
Louis: No, thank you.