Negative gearing, CGT changes would not destroy house prices

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The rate of house price growth would only slightly moderate if the Labor Party was to win the upcoming federal election and subsequently alter negative gearing and the capital gains tax (CGT) discount.  

According to modelling of the plans, which would see negative gearing restricted to new builds only from 1 July 2017 and reducing the CGT discount to 25%, by the McKell Institute, Labor’s changes would have only a minimal effect of prices.

In relation to negative gearing, the McKell modelling claims house prices across Australia’s capital cities would grow at a compound annual growth rate of 2.6% from 2017 -2026 if the Labor proposal was introduced.

If the current arrangements were retained, house prices would grow at a compound annual growth rate of 3.09% over the same period.

While those opposed to the changes have claimed Labor’s plans for negative gearing will devastate house prices, the McKell Institute claims the grandfathering of investors who have purchased property prior to 1 July 2016 will prevent any major collapse.

“The long term effect will be that this policy will moderate demand for existing homes and lift demand for new homes. The increased new supply will ensure rents remain stable,” the McKell Institute research said.  

“Grandfathering existing negatively geared homes will ensure the housing market remains stable during the transition phase.”

The McKell modelling assumes Labor’s negative gearing policy would increase housing supply by 10% per year.

The modelling predicts that Labor’s plans to cut the CGT discount in half would have a similar effect on house prices.

“The reduction in the CGT discount will result in higher tax liabilities on investor owned property which may result in a long term effect that marginally reduces demand for homes with higher expected capital gains (although homeowners are left unaffected),” the McKell Institute research said.  

“The result will be to moderate future house price growth. Grandfathering the discontinuation of the CGT discount will ensure a smooth transition without any sudden changes to prices. As such, we estimate a 0.5% reduction in housing price growth per year from the discontinuation of the CGT discount.”

While the modelling suggests house price growth will be slightly subdues if Labor was to implement its plan, the McKell institute believes the changes will be of a benefit to home buyers and investors.

“These findings demonstrate that the proposed changes will have a positive effect on housing affordability, while ensuring current investors in the housing market still see a long-term increase in the value of their existing investments in a de-risked and more stable investment environment.

“The results disprove certain suggestions that the proposed changes would have a dramatic impact on house prices when introduced in 2017 as proposed by the Federal Opposition.”
 

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