Negative gearing changes could "cause recession"

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If the Labor party gets into power and their proposed negative gearing changes are passed, the repercussions could “effect our economy to the point of recession”.

So says wHeregroup’s Todd Hunter, who believes altering negative gearing policies will not be beneficial to any sector of the market.

Labor’s policy, which aims to put an end to negative gearing on all property except new ones, will lead to further weakening of the market in his view.

“The changes to negative gearing proposal alone will cripple our property markets right across Australia. The proposal is to abolish negative gearing on all property, unless it is new. So, let’s sucker the investors into buying new stock to only screw them over when they want to sell,” he said.

“Why? Because that new property is no longer new, therefore limiting the buyers pool by one third (investors generally make up one-third of buyers) of the potential buyers who will be looking to buy your property. This is because tax breaks are only available on new property.”

Huntermade a strong case as to why non-investors like sellers, retirees, and renters are bound to bear the brunt of the plan’s consequences, as any homeowner who opts to sell their house will have lesser buyers, given that the property is second hand. Hunter explained that the lower number of buyers would mean less competition, which will result in lower growth.

In the same way, tenants will have to suffer higher rental prices, as less investors will push the number of investment properties lower. As such, there will be more competition for each property.

“The pools of properties coming onto the market will mainly only be new properties. Now in theory that sounds great, if there were investors around. Let’s presume there are – well, new properties are not everywhere, therefore limiting tenants where they can rent,” Hunter added.

This could create a situation where new land estates or high-rise apartment blocks are sold largely to investors seeking better tax treatment, making the entire area a 100% tenant zone.

From a tax perspective, Hunter also has this to say: “How can you not allow negative gearing from a property, but then also tax you on a positively geared property?”

Labor’s proposed changes also include a provision to reduce the Capital Gains Tax (CGT) discount from 50% to 25%, which is “by no way a small tax hike”, Hunter said.

“On a $200k profit on the sale of a property, the taxable amount increases by $50k.

So by the time we pay Stamp Duty and then CGT, the government are taking a massive percentage of any profit that a property may earn,” he said.

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Comments
  • Darren says on 21/11/2018 04:58:24 PM

    Getting rid of negative gearing will put alot of Mum and Dad investors out of the market, but that's not a bad thing.
    Having been there and done it, negative gearing an investment property is a poor long term strategy which most Mum and Dad investors rely on.
    Just because you get a tax break doesn't mean it's a good strategy, the money just goes to the bank instead of your pocket.
    If anything it might help hard working people trying to get ahead, avoid the trap it really is.
    From what I've now learned, I would never negative gear a property again, at least not for the long term.
    I doubt it will cause a recession, maybe slow the markets down a bit or maybe increase prices due to less buyers in the market.
    There are much better strategies than negative gearing that will make you money.

  • Bayls says on 21/11/2018 10:37:40 PM

    Darren, negative gearing is not an investment strategy, it’s a taxation method. A good or a bad investment can still benefit from the negative gearing method. Negative gearing & capital gains tax is not just for property, it can be applied to other investments or asset classes, like shares, businesses etc. so with Labour’s proposal it won’t just impact on the property market.

  • Ian Z says on 21/11/2018 10:58:27 PM

    Could Shorten or Bowen explain the taxation point that Hunter makes? How can they not allow claiming a loss on an investment property, and yet tax a gain? It doesn't make sense.

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