Labor’s changes to negative gearing: the unavoidable repercussions for the Australian property investors
Feb 08, 2018
Over recent months, Labor’s commitment to limit negative gearing to new dwellings if reinstated into power, has sparked plenty of speculation. While some experts have predicted values will improve, the controversial move has put a black cloud over the future of Australia’s property market.
However, a new data-modelling tool created by RiskWise Property Research is able to help predict investor trends based on market conditions.
RiskWise’s Surplus/Shortfall Ratio (SSR) finds the ratio between gross rental return and mortgage repayments based on 80% LVR and the RBA’s discounted variable rate.
According to RiskWise CEO Doron Peleg, as the ratio between surplus and shortfall increases, so does the volume of active investors, and vice versa. This is demonstrated in RiskWise’s SSR vs Investor Ratio graph, which is based on a decade of historical data:
“Identifying the correlation between the SSR, which is an investors’ serviceability measure, to their level of activity in the property market, and the impact on dwelling process, helps us to predict our future in a world where negative gearing for existing properties is no longer available,” Mr Peleg said.
“Removing or limiting negative gearing and its tax benefits to new dwellings will only increase investor shortfall and, as we can see from past trends, reduce their activity in the market.”
The model has proven its value already, having predicted in July 2017 that the low SSR meant the property market in Sydney was at its peak – which proved true, as investors struggled to cover their out of pocket expenses on their properties, and the market stalled.
“This model has shown us that the volume of investor activity has a very strong correlation with strong price growth,” Mr Peleg said.
The resulting equation is clear but concerning: removing negative gearing for existing dwellings will create a gun-shy investor environment which will dampen demand and increase owner-occupied purchases, which will adversely impact the strength of housing values.
However, Mr Peleg said if Labor won the next Federal election any changes to negative gearing would be affected by a number of variables.
“While it’s highly likely that housing prices will be negatively affected, the exact strength of impact will vary across states, suburbs and property types.”
In September 2017, Riskwise Property Research published an article which stated that Labor winning the election and limiting negative gearing for new properties would “have repercussions on property values and how investors research the property value estimate of new and existing properties”.
There are other reliable sources that corroborate these forecasts. A preliminary paper being developed by the Reserve Bank of Australia titled Negative Gearing and Welfare: A Quantitative Study for the Australian Housing Market states “the presence of negative gearing has a major impact on households’ decision to become landlords”, as well as confirming that costs for investors would increase, “depressing the aggregate demand for housing stocks and therefore lower housing prices”.
While the RBA’s report assesses the entire elimination of negative gearing and not only limitations of negative gearing to new properties, RiskWise’s data-based forecast has been supported by the findings of the paper.