SQM Research released its weekly newsletter last night, which provided more tentative confirmation that the Government is considering reforming Australia’s negative gearing rules:
There was an SBS report in recent days suggested the Federal government is “looking at” this tax benefit. Macrobusiness were the first to republish it, and now so am I.
According to the story “Government sources say one of the changes being considered by Treasury is the grandfathering of arrangements for existing investors, but limiting future access to negative gearing so only new properties will be eligible.”
I can confirm from a recent event I attended that this is a possibility indeed.
Of course, while “looking at” negative gearing is one thing, making real change is another. Making such change takes character and strong support from the cabinet.
Now I am rather surprised the media has not picked up on this news story as it would be a serious game changer for the property market and all those who participate in it, presuming the details of the SBS scoop are correct.
In terms of timing, it would almost be perfect. In my opinion, if you were to time such a repeal, you would do it while the market was in recovery and not while it was having a downturn. Implementing such a change may also hold off interest rate rises. But in all this, I am also aware that they don’t want to kill the goose that lays the golden egg in terms of a construction recovery. Off memory it was also mentioned at this event, that the government didn’t want to kill the economy in attempting to put the budget back into the black.
For a period of time, I think it could be safely said that if negative gearing was repealed or altered, investors would back off buying into the housing market, which is what those who are demanding lower dwelling prices want to see. But if the story above is correct i.e. keeping negative gearing on new dwellings, then we may well keep the dwelling construction side of the economy going.
If there was some type of grandfathering provision, then, I would expect a massive rush of investors jumping in before the date, then afterwards – a slump. Possibly similar to the intro than wind back of the First Home Buyer boost of 2009-2010.
Obviously the devil will be in the detail, which presumably will come out closer to or at the budget in May.
Interesting days.
I agree with Louis that now is as good a time as any to reform negative gearing, particularly if there are grandfathering arrangements for existing investors and negative gearing is restricted to newly constructed dwellings only.
Changes of this nature should prevent backlash from pre-existing investors, who get to keep their lurks, while at the same time removing speculative demand from the housing market which, as we all know, is running near record levels, according to recent ABS housing finance data.
Meanwhile, by redirecting negative gearing to newly constructed homes, the negative impact on construction from lower overall housing demand (and prices) would at least be muted; or perhaps construction might even boosted by the change, as the shift of first home buyers grants to new builds appears to have done.
As well, this change is likely to assist in lowering the dollar and improving competitiveness as it pulls capital out of unproductive and inflationist housing speculation.
Either way, the original policy intent of boosting supply and improving rental availability would be met by changing negative gearing in this way, which would be a win for the Budget, the housing market, and broader economy.
