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Will Labor Cause a Housing Crash?

Date: 03/10/2018

Given that current polling points to a change of Federal government in 2019, it’s timely to consider Labor’s policies and how they may affect property investors.

To help separate partisan politics from financial fact, I was recently joined by Julian Cheng, Tax Director of Pitcher Partners (a national accounting firm) on an insightful webinar. Some of the topics discussed during that webinar form the basis for what’s written in this article, but note the interpretation and special commentary is mine, not Julian’s.

Liberal Party’s Smoke & Mirrors Tax Cuts 

Before we discuss Labor’s policies, I feel it important to first comment about the Liberal party’s next to useless (at least for buy and hold property investors) yet much-trumpeted company tax cuts.

Lowering the rate from 30% to 27.5% (and promising further reductions from there), the Liberal party is attempting to show it is pro-business. When you look at the detail though, it’s not what it first seems.

How so? Well, in order to qualify for the lower company tax rate, you have to be within certain turnover thresholds (not a problem for most private investors), and can only have a maximum of 80% so-called ‘base rate entity passive income’. Given rent and net capital gains are included as passive income unless there is other income that the company earns, the income will still ALL be taxed at 30%. Thanks for nothing!

For instance, let’s say BBB Pty Ltd owns commercial property worth $1om, and those are its only assets. Given all company income comes from rent, it will be taxed at 30%, not 27.5%.

In fact, you might actually end up paying more tax under the Liberal party’s sham company tax cuts because of the way dividends are franked! Julian provided the following example that explains how that might happen…

The first column is how things would be at a 30% tax rate. No problem. However, once at 27.5% tax in the example provided, the taxpayer will end up paying more income tax in his or her own hands, despite the company tax rate being lower. Doh!

Source: Julian Cheng, Pitcher Partners

The only way to sum this up is to call it out for what it is: a dud policy.

Despite many pleas and submissions, it seems this is what we are stuck with, and doubly so, as Labor has said they will keep the lower tax rates for companies in place now (although it will not reduce them further).

Labor Policy 1: Negative Gearing

Turning our attention now to Labor’s proposed policies (remember, they are not currently in Government), the standout policy would appear to be their desire to change the rules about negative gearing.

Negative gearing allows an individual taxpayer who owns a loss-making property to offset that loss against other taxable income (like salary and wage income), thereby lowering their taxable income, and hence their annual income tax payment. Presently, all properties – new and old – qualify to use negative gearing if the circumstances say so (i.e. property expenses are higher than property income).

Labor is proposing to only allow negative gearing on new properties. For pre-existing residential properties, any loss cannot be used to offset non-investment income but rather will be quarantined and carried forward to offset future investment gains, either when the property becomes profitable or when it is sold and there is a capital gain.

Personally, I think the intention here is quite good. As a principle, loss-making taxpayers who speculate on property should not have their activities underwritten or subsidised by taxpayers. Why should the government subsidise an investor’s second, third or fourth property when so many people can’t even own one? That said, I think the application of that policy is going to be problematic.

A good precedent that points to what will probably happen is to recall the events leading up to the introduction of the First Home Owners Grant (FHOG) in the year 2000. After announcing the policy several months before it was to begin, many buyers (who were to qualify for the FHOG) delayed their buying until after the FHOG began, thereby creating a ‘demand vacuum’ in the meantime. That caused prices to temporarily fall, before bouncing back quickly once the FHOG started, when there was a lot of demand and a comparative shortage of houses.

Applying such hindsight to what might happen with Labour’s negative gearing change, if the ‘beginning date’ is known ahead of time then it could pull forward a lot of demand as people buy up those properties that qualify for negative gearing while they still can. Then, once the new rules begin, there could be a substantial drop in values of second-hand dwellings targeted at investors (see below).

The safest thing Labor can do is to bring the change into effect on either the date they are elected (relying on the fact that everyone ought to know they were going to make the change) or else on budget night.

I believe the biggest losers will be those who buy a new negatively geared property after the change comes in, as, while they will be able to claim the loss, they will probably take a hit to their resale value since whoever buys it from them later won’t be able to claim the loss (as the property will now be second-hand).

Consider Rebecca. She owns a flat which is built for student accommodation. She bought it as a negatively geared property in the hope it will appreciate in value so that the capital gain will exceed the sum of the annual income tax losses. This type of property will be less attractive after the rules change because the person buying it off Rebecca will not be able to offset the loss (from the property’s expenses being higher than its income), and so it will thus become less affordable (since the loss will need to be funded in pre-tax dollars). Instead, buyers of student accommodation will prefer new properties that do qualify to be negatively geared. The outcome must be an increase in the price of new properties (since the demand will be focussed there), and a decrease in price of second-hand properties (as sellers discount the selling price to provide the same after-tax outcome).

This is unlikely to cause a crash (see my concluding comments), but it will cause a redistribution of wealth and create winners and losers.

Note that Labor has said they will grandfather any existing properties, meaning that those who own an investment property before the rules change can still offset the loss against their other income. That might theoretically entice people to ‘hold on’ to negatively geared properties longer than they otherwise would, and cause a shortage of houses for sale (thereby putting upward pressure on rents and property prices). A possible fix for this is to give people a finite period to sell, say three years, before pre-existing properties lose their eligibility for negative gearing too.

Labor Policy 2: Halve the CGT Discount

Given Labor trumpets about allocating more money to welfare, education and health, in order to fund their projects, they’re going to either have to increase existing taxes, make up new taxes, and/or remove some of the existing perks. On the radar is the capital gains tax (CGT) exemption.

In case you don’t know, the CGT discount was the brainchild of Peter Costello to make the GST more palatable. He did away with indexation (i.e. adjusting capital gains for inflation) and replaced it with a blanket 50% capital gains tax (CGT) exemption for individuals, and a 33% CGT exemption for Super Funds (nothing for companies), who owned a property for at least a year. It’s worth remembering that the introduction of GST was supposed to coincide with the reduction and eventual dismantling of stamp duty – something that never happened. Grrrrrr!

In hindsight, this has proven to be poor policy, as it contributed to inflating asset values, including housing. Think about it… those who negatively gear can offset 100% of their losses, and only pay tax on 50% of their gains? What a great deal!

A point I keep making over and over again is this: a blanket 50% CGT exemption that you qualify for after 12 months skews investing to favour near-term projects.

Consider Investor A. He owns the property for 13 months during an upcycle, sells it, makes (say) $100,000, and gets $50,000 of that profit tax-free. Investor B buys a property on the cusp of a down market, owns it for 5 years while the market recovers, then sells it and makes $100,000 profit. She too gets $50,000 tax-free, but her profit is worth less in after-inflation terms because an amount of $50,000 in 5 years time buys less than $50,000 today.

The flawed principle is this: the longer you own a property, the more of the gain pertains to inflation which you will have to pay tax on.

Imagine Investor C. He buys a property, owns it for 5 years, then sells it for $50,000 more than he bought it for. After all in and out costs, he makes a $20,000 profit. Half of it, $10,000, is tax-free. The other half is taxed, however in after-inflation terms, he probably hasn’t made any money at all.

The conclusion: unless the property market keeps going up, and up, and up, many taxpayers will end up paying income tax on profits they didn’t really make!

And you guessed it… reducing the CGT exemption to 25% is going to make this situation even worse.

Then there is the dislocation that comes from companies not being eligible for the CGT discount at all, enticing people to use trusts. This is a problem because of Labor’s proposed changes as outlined below.

The simple fix, albeit politically unpalatable, is to just say we can’t afford the CGT discount any more (because we want to increase the unemployment allowance, fund hospitals, schools, the NDIS, etc. etc.), and just revert back to the old indexation rules (the latter always was a far more equitable system for all concerned).

Naturally, pensioners will be upset about their middle-class welfare being snatched away, but realistically, that’s how we will be able to afford to pay their pensions and hospital bills. It is unfair to burden younger taxpayers with that cost.  Don’t hold your breath though.

Labor Policy 3: Trusts

Labor is proposing that unless you qualify for an exclusion (farms, charities, etc.) then those who receive a trust distribution will be subject to a minimum income tax of 30%.

Yikes!

Think about all those structures that utilise trusts as an income splitting mechanism to legally (I repeat legally) minimise tax. And not just investment trusts, but medical practices and many, many small, medium and large family businesses.

If this one goes ahead there will be a ‘financial earthquake’, and accountants are going to become very, very busy rejigging family and/or business and investment empires.

Labor Policy 4: Imputation

Finally, Labor is planning to tinker with how people claim franking credits.

Briefly, imputation stops shareholders being taxed twice on company profits, by giving them a credit for the tax paid by the company. Without a franking credit a company would pay tax, and then shareholders would pay tax a second time on dividends they received from after-tax company profits.

Prior to reforms instigated by Howard and Costello, if the company paid more tax on your share of their profits than you would have had if you earned the money in your own right, then you simply ‘lost’ the difference. Today though, you get a refund.

What is happening is that taxpayers who have a marginal tax rate less than the company tax rate receive a ‘refund’ of the overpayment of tax that the company essentially paid on their behalf. Forget about lowering the tax rate… many shareholders pay little or no tax on their dividends at all!

Once again, in hindsight, this was poor policy. It has only served to inflate the prices of companies paying comparatively high dividends, and effectively allow (some) shareholders to pay little or no tax on their share of company profits.

Returning imputation back to the way it was is a good and fair reform. The present situation is a largesse we can’t afford, although it will be difficult to pry this middle-class welfare entitlement out of the hands of those who have become reliant upon it.

So, Will Labor Cause A Property Crash?

Circling back to the question at hand, will these new Labor policies cause a property crash? No, I don’t think they will. A situation where you have a large number of forced sellers due to the unaffordability of their mortgages (because interest rates increase, or they can’t refinance as they expected, or because they lose their jobs, etc.) is much more likely to cause a house price correction (or crash).

What Labor’s policies will do though is to trigger a redistribution of wealth, and in doing so, there will be many winners and losers. I’ll be keeping a close eye on final policies and, once known, I’ll write more about it to try to help you understand and navigate your way through the changes.

What Do You Think?

Well, that’s my say. What do you think? Or if you have any questions, post them below, and I’ll do my best to reply.

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Profile photo of Steve McKnight

By Steve McKnight

Steve McKnight, the founder of PropertyInvesting.com, is a respected property investing authority as well as Australia's #1 best-selling business author.

Comments

  1. Hamish

    Dear Steve

    Imputation credits are a prepayment of personal tax. Only two other countries have such a system: NZ and Malta.

    It would be simpler, better and dare I say fairer if dividends and capital gains were taxed separately to income? For example the USA (which also allows couples to income split by filing jointly) taxes dividends and capital gains at a flat rate.

    Part of my thinking here is that a capital gain accrues over time, but is crystallised at a point in time. All the gain is then taxed as income in that year. The 50% discount (as you note, implemented in lieu of indexation) provides a degree of smoothing the gain over multiple tax years.

    And any depreciation claimed along the way reduces the cost base and is therefore clawed back on sale (noting the tax rate is lower as the 50% discount applies) .
    regards
    Hamish

    • Profile photo of Steve McKnight

      Hi Hamish,

      Thanks for your comment. I’m not sure about ‘fairer’ so much as ‘different’.

      I think the concept of imputation (as introduced) was brilliant: tax is paid once by the company / individual as an entity, with the minimum tax paid on dividends paid from company profits being the company tax rate, and if the taxpayer’s marginal tax rate is higher, they have to pay extra tax on the difference.

      I think the changes made by Howard and Costello, namely that the minimum tax paid on dividends paid from company profits being the lower of the company or individuals income tax rate, was a form of middle class welfare we can no longer afford.

      Regards,

      – Steve

      • Kevin Frey

        I don’t think of imputation refunds as being middle class welfare. I think half the problem is that governments get too caught up in playing with numbers rather than taking a step back and considering what is FAIR.

        The argument is very simple, Steve:

        If I put $100K into a bank account and get $5000 interest, and I am NOT WORKING, I will pay no tax. Correct?

        If I invest $100K into shares and get a $3,500 fully-franked dividend, then $1,500 has gone to the tax office essentially on my behalf.

        Why am I NOT entitled to get this $1,500 back if I’m not working. How is it “middle class welfare” when I can get the entirety of my earnings back from a bank account but not from shares? And they can both be considered passive income even.

        Please tell me how you reconcile that as fair? That is what Labor wants to do, and it sucks.

        (By the way, I am not near retirement age nor am I affected by the decision, other than I strongly believe in a sense of fairness).

        Cheers

        Kevin

        • Profile photo of Steve McKnight

          What you are suggesting is that the company and the owners are really ‘one entity’. This is just not how hundreds of years of company law has been interpreted.

          At law, a company is a separate legal entity. There is a ‘wall’ (or more accurately a veil) that distinguishes the company as an operation, to those who own it and run it.

          As such, the company pays tax (at the company rate) on company activities, and the shareholders pay tax (on their marginal tax rate) on their investing activities. The two parties are different, as are their activities.

          In Australia, the tax rate on company profits is a flat 30% or 27.5% (at the moment). The tax rate for individuals varies depending on how much you earn, from 0% to 45% (plus medicare).

          Your retirement is entirely different to the company’s activities. The company should pay tax on its profits in its own right. Your situation as an investor is not relevant, except in your decision in how best to invest.

          In any event, we can happily agree to disagree. :-)

          Regards,

          – Steve

          • Dmitry

            Hi Steve,
            I disagree with your logic. The situation from investor’s point of view is a choice of providing company with a loan and not paying tax on it or providing company with an equity and being penalised. All what this policy is going to do is to cause people to change the way they invest. Instead of investing in companies that pay fully franked dividends people would invest in companies that either don’t pay any dividends or pay unfranked dividends. It will cause some initial losses to the people who get caught but eventually, government won’t receive any extra revenue as a result of this change. Instead, government should simply start levying taxes on retirees that would be a much fairer approach, they have kind of started doing it but on amounts over 1.8m in super.

            Cheers

  2. Timothy Lord

    I cant help but wonder if the change to trusts will possibly cripple some accountants income and work.

    Everyone who uses it to income split will no say: “why bother?” And choose to Cancel/close their trust and then all the accountants will not recieve their income from annual audits, statements, etc etc.

  3. Sam

    Very well put article, insightful and educational, seems labour just want to even things out or make it more of an even playing field for all. The capital gains discount being reduced seems like a major factor, let’s see how business decide to handle the 80% passive income rule should it come into law and what clever ways they can formulate to work around or re-structure their business model/systems to abide by the rule and keep passive income below the threshold.

    I agree with you Steve in the regard that it won’t cause a property crash, this is after all Australia and it’s home to some beautiful cities with plenty of projects, infrastructure and population growth on the horizon, would take a lot more than a few policy changes to cause a complete crash for mine, even though some forecasted appear to be major, especially when considering what some other major cities around the would are “valued at” I would still prefer Liberals in charge I feel, let’s see what happens in future, thanks for the article.

    • Profile photo of Steve McKnight

      “…let’s see how business decide to handle the 80% passive income rule should it come into law and what clever ways they can formulate to work around or re-structure their business model/systems to abide by the rule and keep passive income below the threshold.”

      This is law now Sam. Accountants are advising government and the ATO that their system is stuffed, but they’re not listening as the political fall out from lowering the tax rate for all is too great.

      Regards,

      – Steve

  4. Essie

    Steve, you seem to think that higher taxes are the answers to all the country’s financial woes, which is an easy point of view to have when you own 100’s of properties already. We need greater efficiencies in the public service & reducing government wastefulness to reduce expenditure rather than looking to increase taxes.

    • Profile photo of Steve McKnight

      “We need greater efficiencies in the public service & reducing government wastefulness to reduce expenditure rather than looking to increase taxes.”

      Where am I saying that Essie? No where because I agree with you!

      What I disagree with were the (in hindsight) overly generous policies the Liberal party of the day put in which we can no longer afford IF we want to continue with our current standard of living.

      I don’t see the (courageous) changes as raising taxes, so much as resetting the mechanism back to the way it was supposed to work.

      Bye,

      – Steve

  5. collins

    STEVE < KEATING–labour introduced imputation tax credits—VERY JUST–the govt has taxed the profits once—what justification DO YOU have to state UNJUST— PLEASE LETS HAVE YOUR REPLY—-thankyou

    • Profile photo of Steve McKnight

      I’ve probably had one too many hot chocolates today @collins, but I’m struggling to find where I said the imputation system (as introduced by Keating) was unjust.

      Without a franking credit a company would pay tax, and then shareholders would pay tax a second time on dividends they received from after-tax company profits.

      Quite the opposite. I said that without imputation dividends would be double-taxed, and that IS unjust.

      And please, no more shouting.

      Bye,

      – Steve

  6. Roger Friend

    Why can’t individual shareholders (Aus TFN Holders) automatically receive un-franked dividends? Would there then be any no need for an Imputation policy at all. Or would this cause major shifts in the percentage of profits companies pay as dividends?

    • Profile photo of Steve McKnight

      That’s not the way the franking system works Roger.

      Without imputation (i.e. franking) credits the company would pay tax on profits in the first instance, and then the shareholder would pay tax on dividends it receives. That is, the same profit would be taxed twice.

      That does not seem fair.

      Regards,

      – Steve

    • Profile photo of RogerF

      Thanks Steve,
      Could un-franked dividends be treated as a tax deductible expense by the company to avoid double taxation?
      However it appears that what you are arguing for is to stop some taxpayers getting a tax refund on tax that someone else paid (i.e. the company they are shareholders in). Although this may seem a little unfair for someone to pay tax when their total income would not normally require them to pay as much, it is after all simple enough to change an investment strategy to one where this does not happen.

      • Profile photo of Steve McKnight

        Interestingly, dividends paid by a US REIT (to investors) are a tax deduction, with the receipt fully taxed in the hands of the recipient.

        That is an alternate approach you are suggesting Roger which might be simpler and fairer.

        – Steve

  7. John Baragwanath

    Hi Steve I guess one of the other worries on many home owner’s minds is will their family housing prices go down? This is especially important if a person is close to retirement and planning to sell the family home (probably fairly large if they have had a family) and downsize to something smaller – perhaps in a less costly area – eg, sell in Bayside & buy in Phillip Island – no need to have a house handy to commute from and living by the water could be quite therapeutic. The spare funds realised could then be used to partially fund their retirement.
    However if the larger family home drops seriously in price – all plans go askew! It may even mean that retirees decide to stay in the workforce for longer thereby taking jobs from younger people wanting them.
    It is time of uncertainty with many people – even the diehard Liberals – not trusting either parties!

    • Kevin Frey

      You will be no different to the thousands of retirees that hope the stock market is “in good shape” when they retire, so they can walk away with the most superannuation possible. In your case some of your superannuation is in your house instead of shares. You are both subject to “market conditions” in the end.

      A consolation is that if the market drops collectively, the house you want to buy in Phillip Island will also be cheaper to acquire. It won’t necessarily make up for the price drop of what you’re selling, but it will perhaps take the sting out a bit.

      Cheers

      Kevin

  8. Kevin Frey

    Hi Steve,

    I don’t consider myself pro-Liberal or pro-Labor, and your viewpoint on the Lib’s tax policy is interesting, in the context of you calling it a dud.

    I would look at things another way — if the point of giving a company a tax cut is to help that company grow jobs, and invest in itself, then clearly that is _not_ done by paying out all of its profit to a shareholder as a dividend.

    So in that sense, I think it is kind of good that the arrangement doesn’t promote personal wealth gains versus doing what it is arguably supposed to be doing – which is helping companies invest in themselves and employ more staff.

    (But from thereon it becomes an entirely different conversation because I don’t generally trust that corporate tax cuts will produce the benefits being touted).

    Cheers

    Kevin

    • Profile photo of Steve McKnight

      That is certainly the logic behind why they did it Kevin, and all would be fine except they bang on about broad based company tax cuts which is simply fantasy.

      Also, splitting taxation based on activities within a class of entity isn’t particularly efficient as it just adds complexity.

      Finally, those who have a half decent accountant will find ways of getting just enough non-passive income into their structure, so I suspect the rules will be there for the rorting.

      Regards,

      – Steve

  9. Mick

    Great article Steve! Of course we cannot know what will happen until an election takes palce and a winner decided, but then again, minority governments can’t always get what they want either.
    The way things were prior to the Howard/Costello changes to taxes of course were what they were then, but go back a little further and families were able to claim the interest paid on their PPOR as a deduction also. Oh for the good old days!
    Things don’t stay the same forever and I suppose the lesson for all is don’t be so inflexible in what we do as the most definite thing that is guaranteed is that change can come at anytime.

  10. Profile photo of Steve McKnight

    Here is something fun… marginal tax rates in 1983-84:

    Taxable income; Tax on this income;
    $1 – $4,594; Nil
    $4,595 – $19,499; 30%
    $19,500 – $35,787; 46%
    $35,788+; 60%

    Top marginal rate was 60%!!!!

    – Steve

    • And the corporate tax rate was in the high 40’s too. So dividends were taxed once at the corporate level @ say 46%, and the 54% available to distribute to shareholders was taxed at 60% if on the top marginal rate.

      So 46% + (54% x 60%) = 78% of company profits could hypothetically have gone to the government.

      What did Kerry Packer have to say about governments?

    • Kevin Frey

      Aw, come on Steve, don’t give _half_ a story :-) Let’s make it really fun.

      Let’s look at the weekly earnings for 1983 from our friends at the ABS, all freely available data.

      Average male weekly earnings = $362 (Sep Quarter), or $18,824 per annum.

      AND… The 90th percentile of earnings per week for a male is $524 per week, or $27,248 per annum.

      What does the second statistic mean? Only 10% of workers earned above $524 per week.

      I have only provided male figures because they are higher and therefore a better indication of “worst case” taxation — female wages were lower (just like now).

      The ABS stats show the 70th percentile weekly income at $389 per week, or $20,228 per annum. So the number of people in the 46% marginal rate or higher was a shade above 30%, but based on the 90th percentile figures, there is still a _long_ way from that 90th percentile value to the threshold of $35,788 where the 60% rate kicks in.

      Seems like things haven’t improved that much in 35 years for the average punter.

  11. Kerry King

    Terrific article Steve. Even the comments added a heap of value on the subject. Immediately shared it on my Facebook page.

  12. Profile photo of Steve McKnight

    I disagree with your logic. The situation from investor’s point of view is a choice of providing company with a loan and not paying tax on it or providing company with an equity and being penalised. All what this policy is going to do is to cause people to change the way they invest. Instead of investing in companies that pay fully franked dividends people would invest in companies that either don’t pay any dividends or pay unfranked dividends. It will cause some initial losses to the people who get caught but eventually, government won’t receive any extra revenue as a result of this change. Instead, government should simply start levying taxes on retirees that would be a much fairer approach, they have kind of started doing it but on amounts over 1.8m in super.

    @Dmitry

    Thanks for joining the conversation.

    Imputation is a complicated matter, and I think you may have confused yourself a bit.

    Lending money to the company would be an asset. Interest earned on that loan would be taxable in the hands of the lender, and deductible in the hands of the payer. A dividend stems from an investment made in the company by an investor (also an asset). The dividend is the return.

    That is, neither a loan nor an investment yields any tax, but rather tax is payable on profit.

    With that in mind, I don’t understand your statement above.

    Regards,

    – Steve

  13. Luke Cartwright

    Whose the proposed changes going to be fairer for? Definitely not the people who have worked hard to get in the position of investing. If properties do go lower in price it will only help foreign investors further. I dont like either party but these proposed changes all seem to target people having a crack at wealth creation. I wish they would stop moving the goal posts.

    • Profile photo of Steve McKnight

      Fairer Luke? One person’s fair is another person’s unfair.

      Do we want more wealth in less hands, or less wealth in more hands?

      You can’t have expensive property and housing affordability?

      I’m with you though that those who take risks should enjoy the rewards and not have them taxed out of existence. But when the incentives are overly generous, should they not be reconsidered if we want to lock in a minimum standard of living for those less fortunate?

      Regards,

      – Steve

  14. concerndcitizen

    I think if negative gearing goes, CGT will have to go as well – maybe not immediately but it will eventually. Further, if CGT discount stays and NG goes, there will be loss of income by state/territory govts as a result of reduced rates and stamp duty (precipitated by fall in property prices). There are no guarantees then that govts won’t push to tax profits from owner occupier sales which is currently tax exempt as they try to fill the shortfall. This is just one possible and I can think of two or three other unintended consequences but I’d leave that for another time.

    • Profile photo of Steve McKnight

      Thanks for the comment. I’m not sure I follow why the CGT discount has to go too.

      Less tax incentives = more tax income = more money for the States (via GST allocation).

      That said, I would prefer the CGT discount to be removed all together and indexing coming back, to halving it from 50% to 25%. Just my 2 cents though…

      Regards,

      – Steve

  15. Keith Lai

    Certainly a lot to digest. Notwithstanding that I haven’t read all of the comments, I had a thought on the removal of the negative gearing policy. If the policy were to have the effect of pulling demand forward and putting upward pressure on prices. Then after the introduction of the policy buyers would retract from the market causing a drop in prices. I think that the drop in prices of high-end properties would overshoot on the down swing (as you’ve previously mentioned). But then as prices stabilised the prices of these high-end properties would recover. Potentially netting a healthy capital appreciation.

    The two main assumptions with this are that: 1) demand would pick up for these properties and return them to pre-negative gearing abolition prices (unlikely if the target market are investors but possible if the property is desirable for homeowners); and 2) one could hold out on the negative cashflow nature of these properties until the prices recovered.

    Regardless of one’s politically affiliation it’s a potential situation that a prepared investor could take advantage of. Would love to get your input on this train of thought.

    • Profile photo of Steve McKnight

      Again, time will tell Keith.

      Structurally though, making owning (negatively geared) investment property permanently less affordable should translate in to a permanent adjustment to prices to the extent that current laws inflate prices.

      Consider the view when you climb a step ladder. The view is not as good when the step ladder is removed.

      The risk is the ‘perfect storm’: rising interest rates, less loan liquidity, removing tax breaks… in isolation they probably are not more than a bit of wind and rain. All at once though, and the storm becomes a tempest that requires house with a sturdy roof, walls and foundation to find respite in.

      Bye,

      – Steve

  16. Karen

    Thanks for sharing this article. A question about negative gearing- if I’ve signed a contract to purchase an apartment off the plan but it settles after the (hypothetical) new negative gearing changes are introduced, does it still qualify for negative gearing? From my read of the article it seems like the answer is “yes” but would like to be certain. Cheers Karen

    • Profile photo of Steve McKnight

      Hi Karen,

      Sorry, we will have to wait for the details to know for sure. At a guess, I would say assuming there was a sudden announcement with little to no advance warning, then provided you entered in to a contract before it was made you ought to be okay.

      If there is an announcement and longer lead time, then it may be a requirement to have settled the sale.

      As I said though, only time will tell.

      Regards,

      – Steve

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