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Industry weighs in on negative gearing proposals

23 February 2016 Reporter

Labor has announced a proposal to limit negative gearing to new houses from July 2017, with a mixed reaction from the real estate sector.

REINSW president John Cunningham said removing negative gearing from existing homes will not drive investment in new housing.

“Existing properties are where most tenants are living due to more affordable rent,” Mr Cunningham said.

“The vicious cycle continues and even today we are seeing the lowest ratio of negative gearing to income/expense variation in a decade where low interest rates and mid-range yields are seeing the negative gap diminish.”


Mr Cunningham cautioned that Labor’s policy would see investors move away from the housing market for more favourable opportunities, which would in turn place pressure on supply.

“Suggestions that landlords are going to absorb costs are mistaken. The loser in this misguided policy will be tenants paying higher rents,” he said.

Laing & Simmons managing director Leanne Pilkington said new supply has impacted the rental market, particularly in Sydney where rental growth for units has stalled and vacancy rates remain extremely low across the board.

“Greater stability in rents has been a welcome relief to tenants, for so long subjected to hike after hike, yet Labor’s policy could potentially reverse the situation and exacerbate renters’ pain all over again,” she said.

Ms Pilkington said Labor's proposed policy would make existing owners reluctant to sell, which would inflate prices and heighten demand.

“This could lead to a scenario where vacancy rates drop even further, on top of the most recent tightening trend, putting renewed pressure on rents and jeopardising the ability of tenants to accumulate a deposit for their first home,” she said.

“No major reform should be implemented without comprehensive and detailed modelling, and the various unknowns with this Labor policy seem to warrant further investigation.”

However, SQM Research managing director Louis Christopher said Labor's policy, if passed, would not result in a surge in rents.

Negative gearing was briefly scrapped in 1985 and reinstated in 1987, during which time rents rose but there was no spike in rental growth rates, he said.

“Post the period, rents did accelerate, however so [did] inflation as the economy entered into an overheated period post the stock market crash of 1987; rents and inflation have historically been closely correlated.”

“In this regard, we think the evidence of a spike in rents, directly attributed to the scrapping of negative gearing is scratchy at best. And worse, it is misleading.”

Mr Christopher said if negative gearing was scrapped for existing houses there would be an adjustment period of potentially reduced investment activity, but only until yields rose again.

“Potentially yields could rise to the point where existing residential properties are cash flow positive from day one, or at least, cash flow neutral,” he said.

“For those advocating for a return to better value on residential property, the reduction in negative gearing concession may well trigger this process.”

[Related: Scrapping negative gearing would ‘add to rental prices’]


Industry weighs in on negative gearing proposals
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