With the federal election to occur on the 18th of May 2019, property investors should consider the two major parties’ negative gearing policies before casting their vote.
Both political parties have outlined their stance on negative gearing in the recent 2019 Federal Budget and Budget Reply, with the Coalition confirming they won’t be making changes. However, The Australian Labor Party (Labor) will limit negative gearing to newly built housing from January 1, 2020 and halve the Capital Gains Tax Discount (CGT) for assets held longer than twelve months from 50 per cent to 25 per cent from the same date.
Labor argues current negative gearing policy favours high-income earners and investors over aspiring home buyers. Labor has also quoted recent Australian Bureau of Statistics (ABS) data, stating 93 per cent of new investment loans go to people purchasing existing housing stock, as a reason for limiting negative gearing only to newly built housing.
Despite Labor’s claims, there’s been substantial research from industry experts indicating the data behind their decision to change negative gearing is critically flawed. To help inform investors, we’ve looked at some key research to consider.
How many properties are negatively geared?
According to the latest ATO taxation statistics data, the proportion of Australia’s 2.2 million landlords who are negatively geared fell to 60.3 per cent in 2016/2017, the lowest level since 2003.
The ATO data shows these 1.3 million landlords made rental losses, while 855,975 (39.7 per cent) were in a neutral position or made a gain.
Who is the average property investor according to the data?
So, is Labor right in thinking those who invest in property are wealthy and own several properties? Data from the Australian Taxation Office (ATO) and BMT Tax Depreciation doesn’t support this.
The ATO data for the 2016/2017 income year shows that 71 per cent of landlords had just one rental property.
In a recent study of BMT Tax Depreciation data for the 2017/2018 financial year, the number of investors who requested a depreciation schedule for just one property was even higher, at 93 per cent. This was up from 84 per cent in 2015/2016. In fact, BMT data showed just 6 per cent of enquirers owned two properties and 1 per cent owned three properties during 2017/2018.
From the 2016/2017 ATO data, 64.1 per cent of property investors had a taxable income of less than $80,000 and they accounted for 60.5 per cent of negatively geared properties. Just 7.3 per cent of negatively geared properties are for investors earning more than $180,000.
This data indicates most investors who negatively gear aren’t those on high incomes, but everyday Mum and Dad investors or professionals like Teachers, Nurses and Midwives or Police Officers. These are the people most likely to be adversely affected by Labor’s proposed negative gearing policy change.
What do industry experts say about new investment loans data?
In a recent article in The Australian Financial Review (AFR), Housing Industry Association (HIA) Chief Economist Tim Reardon said the figures quoted by Shadow Treasurer Chris Bowen are “substantially incorrect”.
“The ABS simply do not collect the data necessary to make a conclusion that 93 per cent of investors loans go to people purchasing existing housing stock,”
“We know from other sources the magnitude of investor activity in the new housing market is significantly higher than 7 per cent and perhaps, approaching 50 per cent on occasion,” Reardon said.
The figures imply Labor’s estimation that more than 90 per cent of new investment loans are to people purchasing existing stock are impossible.
From BMT Tax Depreciation’s own figures for the 2017/2018 financial year, 30.9 per cent of enquirers who requested a depreciation schedule did so for brand-new properties. This was an increase of 4.5 per cent when compared to the 26.4 per cent of investors who requested schedules for brand-new properties in 2015/2016.
How would Labor’s negative gearing policy changes impact the property market?
Industry experts, including our very own Chief Executive Officer Bradley Beer, are warning Labor’s negative gearing policy changes could be catastrophic for investors, developers and those in the real estate industry.
One consequence of Labor’s policy could be a reduction in the supply of new homes. In a property market already under pressure, the changes are also expected to accelerate a decline in house prices. Another factor to consider is a decrease in available rental stock for tenants as investors withdraw from the market.
Ultimately, the changes could impact on household confidence. The latest ANZ-Roy Morgan Australian Consumer Confidence index slid by 1.3 per cent following the 2019 Budget when compared with the previous week (where confidence rose 2.6 per cent – the biggest increase in more than seven months).
According to Martin North, Principal of Digital Finance Analytics, their latest analysis shows households have fears about job security, the cost of living and their financial capacity to cope.
This was reflected in comments in the AFR from HIA Economist Tim Reardon, who said “you do not free up a market by increasing taxes and restrictions.”
To read an article which explains negative gearing versus positive gearing, click here.
To read the article from the AFR, click here*.
*Please note this article is subscription content