What would be the impact of Labor’s proposed changes to negative gearing?

Real EstateNegative gearing could play a major role in the outcome of the upcoming Federal election, with contrasting views from Labor and Liberal governments over whether or not the tax provision should remain available to Australian property investors.

Prime Minister Malcolm Turnbull announced last week that the Liberal government has no plans to change negative gearing, insisting that any change would reduce home values and raise rents.

Labor disagrees, and is looking to pare back negative gearing to make it easier for young Australians to enter the property market. Their plan is to remove negative gearing for established properties purchased after July 1st 2017 and halve the capital gains tax discount to 25%.

While Labor believes their plan will put downward pressure on house prices and increase housing supply, with negative gearing still being available for new homes. Their plan will also help save $32 billion over the next decade.

While their plan has some merits, it is also likely to have some negative consequences, one of which would likely be a drop in the value of established properties… although not initially.

Could it create a short-term housing bubble?

If negative gearing won’t apply to established properties purchased after July 1st 2017, then you can bet that a lot of property investors will be rushing to buy an established home before the changes come into effect. Similar to changes in first homebuyer grants, this would create a short-term housing bubble, which would inflate prices temporary and result in price drop after the cut-off date.

New homes won’t hold their value for long

Labor’s plan would make new homes more popular amongst investors, however the problem with this is that if an investor decides they then want to sell their property, it will no longer be new so the property will have already lost half of its buying market. This would mean that a lot of investors are likely to see losses if they sell a new property in a short timeframe (which impacts the value of all homes in an area).

There will no doubt be a lot more issues to consider before the upcoming Federal election, but possible changes to negative gearing do provide some food for thought before heading to the polls.

What are your thoughts on the Labor’s proposal for negative gearing?