Market impacts of negative gearing

Market impacts of negative gearing

29 February 2016 by Grant Harrod 1 comments

As a company with a clear interest in property, it will surprise no one that LJ Hooker has concerns that negative gearing has become an election platform.

But it’s more telling to hear from those who will be affected on the ground as to the real ramifications of the proposals.

A poll of 1,700 investors with properties managed by LJ Hooker showed 37 per cent of investors earned a combined household income of less than $100,000, while 67 per cent had a household income of $150,000 or less. The perception that investors are well-to-do is overblown, especially in the major business hubs of Sydney and Melbourne.

The poll also found 31 per cent of investors would sell some or all their portfolio if negative gearing was abolished or restricted. This tells us that property investment is central to an individual’s, couple’s or family’s wealth accumulation, helping to fund major milestones in life. As we’ve seen recently, property is a solid investment option.

The residential real estate market – including construction, sales and rentals and related services – is one of the Australian economy’s largest sectors both in value and employment. Changing negative gearing legislation will lead to a structural change of the real estate market.

The proposed legislative changes suggest existing properties bought before 1 July 2017 would be grandfathered. This would likely create panic purchasing with a rush of investors buying up existing properties in the six months before implementation. It would create a build-up of demand followed by a drop-off in sales and, as we know, a sudden spike is never good for markets. Such activity hurts everyone from investors to first home buyers and even retirees planning to sell to fund what should be the best years of life.

In addition, we would also expect to see both an initial and long-term increase in rents as investors look to cover their costs or sell off property, reducing the available pool of rental properties. The suggestion this would be offset by a focus on new constructions that overlooks the substantial time lag in approvals, funding and the delivery of new developments. Plus, these new developments are more likely to be high-density apartment living, suggesting families who would previously have rented a free standing home with a backyard would now no longer be able to do so.

From an employment perspective, abolishing negative gearing for established properties could reduce employment in a number of sectors. The real estate sector would require fewer strata and property managers, and as rental properties require regular maintenance and renovations to meet regulations, a fall in demand would impact trades people, handymen and other service providers.

It is important to remember investors play an important role in the evolution and shaping of the Australian property market; they boost stock and provide much-needed rental accommodation, with a reasonable portion of stock addressing social housing needs. Therefore, changes to negative gearing arrangements could see a significant demand on both state and federal governments to fund increased public housing requirements.

Negative gearing, asset depreciation, repairs and maintenance have long been allowable tax deductions and a key feature of the Australia taxation system, to support investments and maintenance of assets across all industry sectors. To specifically target housing as an asset class no longer entitled to these deductions makes no sense; especially to justify this on the basis it is singularly contributing to ‘affordability’ issues in the housing market. It is a successive lack of vision and government policy around regionalised employment opportunities, poor infrastructure and development planning delays that has led to this concentration of demand in a small number markets that has led to increases in house prices and questions around affordability.

Grant Harrod has been chief executive of LJ Hooker since 2014. From 2009 to 2013, Grant was chief executive of Salmat. Before joining Salmat, he spent 13 years with Corporate Express Australia, where he served as chief executive for six-and-a-half years.

Grant has an MBA from Macquarie University’s graduate school of management and is a fellow of the Australian Institute of Company Directors.

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