Negative gearing change could see 15% price fall

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Labor’s negative gearing plans would likely have a relatively quick impact on house prices while the rental market would see a period of stability before change occurs according to research released today.

SQM Research today became the latest prominent voice to enter the ongoing negative gearing campaign with the release of its new report - Labor's Negative Gearing Policy - A Market Viewpoint.

In the report, SQM predicts house prices in Australia could be up to 15% lower four years after a Labor victory, with potential price falls of 3% in the 2018 financial year, up to 8% in the 2019 financial year and up to 4% in the 2020 financial year.

SQM said those predictions are a worst case scenario and that further lowering of the cash rate could mitigate any possible price falls to around 4%.

“Our analysis suggests the market impact would last by around three years with sales falling significantly in year one and a correction to take affect with dwelling prices falling the most in the second year,” head of SQM Research, Louis Christopher said.

“We think there would be a possible response to this event with the RBA cutting rates, thereby mitigating some of the potential price falls. We don’t think the market will crash per say, but it will be felt by the economy. We then expect the market to return to equilibrium from year three,” Christopher said.

Using historical sales figures from Brisbane, the only market that has comprehensive records from the when negative gearing was removed in the 1980s; the SQM report predicts that sales would fall by between 12% and 21% in the first full year of the new system before stabilising in a similar manner to prices.

For the rental market, SQM predicts the current construction boom will keep downward pressure on rents immediately after the changes, though following years would likely see upward pressure in rents.

Rental increases of up to 2% are predicted in the 2017 and 2018 financial years, before a possible increase of 3% in the 2019 financial year.

The 2020 financial year would likely be the year rents increase the most, with a possible increase of 6% predicted.

Christopher also warned that further market distortion could be caused by Labor’s plans to allow new properties to be negatively geared.

“In short, there will be a market impact if Labor’s Negative Gearing Policy is legislated,” he said/

“We strongly encourage Labor to consider some of the investor issues, particularly surrounding the distortion their policy may create on pricing of off-the-plan developments and the likely losses investors in those properties would face come resale time to those who won’t have the tax concession.”

According to Christopher and SQM, off the plan developers would likely attach a price premium to new properties, which investors would not be able to recoup as future buyers would not be able to access the tax concessions.

While the report is relatively critical in tone of Labor’s plan, Christopher said the idea of reform to negative gearing is not one that should be completely ignored.

“While we take the view that negative gearing reform is a good thing, such reform should be done as part of a wider property tax reform that should include a broad based land tax and the elimination of stamp duties.

“Such reform should have a phase in period of up to three years. Doing so would reduce the risks of a significant downturn which would likely have wider ramifications on the economy.”

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