The freeze on negative gearing: Will a Labor win push investors to re-think property value estimates beyond tax concessions?

The freeze on negative gearing: Will a Labor win push investors to re-think property value estimates beyond tax concessions?
Property Value Estimate

Winter is coming – housing affordability, wage growth, underemployment and the potential end of negative gearing.

It is often difficult to focus on the number one risk to property investors – the potential end of negative gearing and the key measures that provide a good barometer indicating its likelihood.
The recent focus of the media has been on the oversupply of units in our major capital cities, Australian household debt, and unsustainable property prices that may fall.
However, the very possible scenario that Labor will win the election and execute their plans to restrict negative gearing to new dwellings and halve capital gains tax concessions, is often overlooked when projections are made regarding the Australian housing market.
The key questions are:
1) What are the best key indicators that will help us assess the likelihood that the Labor will win the elections; and
2) How can investors mitigate the risk of the potential changes to negative gearing.
Basically, the top indicators to assess the changes that Labor will win the elections are:
The key indicators that Labor will use

1) Housing affordability: Call to level out the property value estimate to make accessible to younger generations

Housing affordability is high on the agenda of the federal government and is a major concern for the Australian people and one of the key parameters to assess the performance of the Federal Government. In the 2017–18 Budget, the Government proposes a number of measures to address this issue.
The perception of housing affordability report 2017 by CoreLogic shows that “the degrees to which the great Australian dream of home ownership is becoming an insurmountable challenge. It reveals that a growing proportion of younger generations, while overwhelmingly maintaining a sustained appetite to live the dream, are staying home with parents – increasingly into their 30s – to save for deposits.
The survey identifies how buying a home is becoming the privilege of high income earners who are being expected to assign ever increasing proportions of income towards servicing a mortgage. And it reveals how older Australians are deeply fearful of the costs of moving or downgrading, which in turn is affecting supply and contributing to rising housing costs even further especially in inner cities”.
National Price to Income Ratio
Property Value Estimate

2) Underemployment

Underemployment is when people work a lower number of hours than the hours they want to work. The ABS categorizes people as underemployed if they belong to either of the following two groups:
§ People employed part time who wanted to work more hours and were available to start work with more hours, either in the reference week or in the four weeks subsequent to the survey; or
§ People who are usually employed full time but who worked part time hours in the reference week for economic reasons.
At an individual and household level, it represents lost opportunities for people to engage more fully in work and derive their desired financial and personal benefits.
The current level of underemployment of 9.3% is the highest recorded since 1978.
Property Value Estimate


3) Wage growth

Wage growth is another key indicator that is a major concern for the Australian workers.
As per the ABS, wage growth was 0.5% in June quarter 2017 and 1.9 per cent over the year, according to figures released today by the Australian Bureau of Statistics (ABS).
One of the key reasons for poor wage growth is a high level of underemployment. Put simply, the supply of working hours is significantly higher than employers demand. Therefore, employees are not in a position to negotiate higher wages.
Property Value Estimate
According to the RBA, the economy is picking up, and wages are about to climb. However, consumer sentiment is weak and is expected to remain so, unless there are actual improvements to wage growth and underemployment.
In this scenario of significant economic improvement, it is possible that the Coalition will win the election, and there will be no changes to negative gearing.

4) Polls regarding the next elections

Based on recent poll by Newspoll from 4 September 2017, there is a 2.5% swing towards Labor. Therefore, at this point of time it is very possible that Labor will win the election.
In conclusion, it seems that each of these four key indicators suggest that it is likely that Labor will win the elections and execute their bold plans to limit negative gearing to new houses and halve capital gains tax concessions. Moreover, this will have repercussions on property values and how investors research the property value estimate of new and existing properties.
In a follow-up article we will address the question how can investors mitigate the risk of the potential changes to negative gearing.
To organise an interview with Doron Peleg please contact:

Orly Peleg
RiskWise Property Research