If Labor’s negative gearing policy is legislated in its current form, expect a rise in rental yields which will occur through a combination of falling house values and, eventually, a rise in rents.
That’s the headline from an update to an SQM Research (SQM) research paper released in November 2018, modelling the proposed Labor Party changes to negative gearing that may come into play on 1 July 2020.
SQM have modelled three different scenarios for rental returns and property values against their original forecast published in November 2018.
- Scenario 1 includes a .5 per cent cash rate cut, removing negative gearing from existing dwellings and halving of current capital gains tax (CGT)
- Scenario 2 is a more extreme variation of scenario 1 taking away the cash rate change
- Scenario 3 shows what might happen with a a .5 per cent rate cut but no changes to negative gearing or CGT
Gross rental yields to rise
Rental yield on a property shows how much cash the investment is generating as a percentage of that assets value.
SQM say that international comparisons, historical precedents and the effective grossed up yield benefit all indicate that acquisition rental yields are likely to rise between 0.85% and 1.2% over a two to three year period post the implementation of the new tax policy.
If interest rates are cut the rise in yields would be smaller.
Rents to remain stable then increase
While the across Australia weighted average says that rents will remain stable, SQM say the current slump in building approvals will be aggravated by the loss of negative gearing. The crystal ball also says that market rents could accelerate between seven and 12 per cent over the period 2022, assuming there is an interest rate cut with Brisbane and Perth likely to record the largest rises in rents.
Values will fall
Given the forecast of small rental growth and a rise in gross rental yields, SQM forecasts further price falls in the housing market over the period 2020 to 2022. They say there may be a small rally in the lead up to the proposed changes of negative gearing, especially if there is an interest rate cut prior to legislation passing but after that house prices would again fall due to a ‘rapid decline in investor demand’.
Sales turnover and stamp duty revenue will fall
SQM predict sales turnover will to fall somewhere between eight and 15 per cent from 2019 levels – with most of the declines in sales to occur in calendar 2020.
Build to rent schemes will increase
With the housing market potentially trading at a higher gross rental yield, SQM anticipates an increase in interest by financial institutions, particularly super funds investing in build-to-rent schemes which could be useful for long term affordability.
Off-the-plan investors beware
If values fall, investors seeking to benefit from negative gearing remaining on new properties/off-the-plan developments could be exposed to a risk of their property being valued below purchase price, especially if the investor is seeking to sell their investment within the first three years.
Managing Director Louis Cristopher commented, “Our analysis suggests the market impact would last by around three years. There is, right now increased consensus that the RBA may have to cut rates this year. If we were to see a cut of say 50 basis points, this would provide some cushion to the effects of negative gearing changes.
“Even so, the market would still record dwelling price falls. Housing construction; already in a slump, would likely fall further due to the lack of investor demand.
“This would set up a shortage of housing come later 2020, based on current strong population growth rates.
Cristopher went on to say that such a tax change during a housing downturn is a ‘risky move’ for the economy, encouraging discussion of a phase in period and only executed as part of a wider property tax reform.
“Once again, 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.
REIQ CEO Antonia Mercorella agrees with the research, stating Labor’s policy, in its current form, would see investors flee the real estate market in droves.
“The median rent for a three-bedroom house in Brisbane, according to the latest REIQ QMM report, is $435 a week. If SQM’s modelling is accurate this means renters will have to find at least another $95 a week.
“That’s a couple of tanks of fuel, that’s half the average weekly grocery bill for a young family. That’s not easy to suddenly have to find an additional $95 a week,” Ms Mercorella said.
Ms Mercorella also described Labor’s negative gearing policy as reckless and outdated.
“It was announced at a time when Sydney and Melbourne house prices were rising rapidly and the market needed to cool.
“That is no longer the situation.”
According to Scenario 3 – an alternative scenario with no changes to CGT or negative gearing but including a cash rate cut they predict property prices would rise between 8 per cent and 14 per cent over the same period.
While PM Scott Morrison and Deputy Leader Josh Frydenberg have also endorsed the analysis shadow treasurer Chris Bowen has rejected the research.
Now is the worst time for Labor’s new housing taxes @SQMResearch finds rents will increase by as much as 22% & house values will decrease by as much as 16% under Labor. As Wayne Swan said it would be “economically disastrous to do anything on negative gearing”. pic.twitter.com/NgngWJIfSw
— Josh Frydenberg (@JoshFrydenberg) March 21, 2019
But both @ScottMorrisonMP & @JoshFrydenberg have ensdorsed the analysis. They don’t like what the Treasury has told them so they go with the dodgy analysis with silly assumptions instead, because that supports their ridiculous scare campaign. https://t.co/j6FDvIC0Hj
— Chris Bowen (@Bowenchris) March 21, 2019
To obtain a copy of the full report click here.