No, the budget’s property tax changes have not spiked rents

I reported last week on claims by NAB’s head of Australian economics, Gareth Spence, and SQM Research managing director, Louis Christopher, that residential rents could soar by 15–30% over the next two years due to the federal budget’s changes to negative gearing and capital gains tax (CGT).

“In our view, the changes to the tax settings for investors in existing dwellings imply that gross rental yields will need to rise in order to compensate for the loss of tax benefits”, Spence said. “For investment properties in Sydney and Melbourne, a rise in the rental yield of 1 percentage point from about 3.5% to around 4.5% implies an increase in rents of 25% to 30%, assuming the current level of house prices is unchanged”.

“We estimate between a 1 to 1.5-percentage-point increase in the yield would be needed to compensate investors, and that equates to about 30% increase in rents”, Christopher said. “Even if the impact of the tax changes is shared between lower house prices and higher rents, that would mean about 15%. That’s going to be a significant input to inflation given rents are such a major component of the consumer price index”.