The impact on housing sentiment of proposed changes to negative gearing and capital gains tax are posing more of a risk to the nation’s apartment market than the changes themselves, according to an article published by Jones Lang LaSalle.

The Labor Party plans to limit negative gearing on newly built properties, which means that net losses, including interest cost, will be permitted to be offset against an investors’ total taxable income. At the same time, the tax will be payable on 75% rather than 50% of a property’s capital gain.

These proposals will add more uncertainty to the sector in the short term, said Leigh Warner, JLL’s head of residential research for Australia.

“Our greatest concern is not so much the potential policy changes themselves, but the impact on already weak sentiment in the two largest apartment markets of Sydney and Melbourne. It is likely to be a very negative election campaign in which these property taxation issues are front and centre, and there is a risk that this could further significantly damage confidence, regardless of whether the debate is based on fact or not,” said Warner.

Research revealed that apartment completions for 2019 are likely to decline to 16,000 from 23,200 in the previous year due to tightened mortgage lending, and this forecasted drop suggests that supply from the current construction boom has peaked.

The number of apartment completions may significantly slide over this year, but strong underlying demand growth will pave the way for a relatively fast reestablishment of the equilibrium, according to Warner. This will particularly occur as apartments remain more affordable than houses and the population continues to increase.

“There is even a risk that supply will fall too sharply for the country’s booming population growth and that in a few years’ time we will be talking about us not building enough again,” said Warner.

Data showed that there were 40,800 apartments under construction across the country’s five mainland capitals at the end of 2018—down from 44,300 in the third quarter of the year.

Sydney’s apartment market is yet to bottom out. Gross rental yields were kept stable at about 3.9%, but demand and prices are dropping.

Melbourne’s apartment market is headed for a downturn, but the city’s robust population growth and declining supply should ease the impact.

Brisbane’s construction levels, meanwhile, peaked early in 2016, and the market is on a downturn. Development conditions will continue to be restrained for the coming years although apartment rents and capital values are starting to stabilise.

The Perth market is around the bottom of the cycle and is anticipated to rise this year.  High levels of supply, though, could keep the market subdued.

Adelaide is anticipated to show signs of slowing, with supply increasing and demand weakening due to the end of the state government’s off-the-plan apartment concessions.