Labor’s negative gearing plan to drive home prices down – Mango Money

Labor’s negative gearing plan to drive home prices down


First of all, what is negative gearing

Negative gearing is the ability for property investors to use the losses associated with managing an investment property to be offset against their taxable income.

For example, a property investor has purchased an investment property and after taking away all expenses associated with the property from the rental income, the investor has made an annual loss of $10,000.

If the investor was earning a taxable income of $100,000 per year but had an investment property running at a loss of $10,000 per year then the investor would be taxed on $90,000 per year.

Based on 2014-15 income year (I used the ATO simple tax calculator)

With a taxable income of $100,000, the tax would be $24,947

Whereas a taxable income of $90,000, the tax would be $21,247

The investor would pay $3,700 less tax to reflect their lower income.

Labor's plan as I know it

Labor have stated their plan is to promote growth and create a fairer tax system.

There are two parts to Labor's plan

  1. Labor will limit negative gearing to new housing from 1 July 2017
  2. Labor will halve the capital gains discount for all assets purchased after 1 July 2017.

(All investments made before this date will not be affected by this change and will be fully grandfathered. This means if you already have a negative geared property you will continue to receive the same tax benefits.) Click here to read Labor's announcement on negative gearing.

The impact on property prices and rents!

Labor's plan is primary designed to promote growth as investors will only receive negative gearing benefits if they invest in new properties. This is probably a great tax deal for the Government as they will receive GST on the new build, plus growth in the economy should result in higher wages (therefore more income tax) as demand for tradesman improves.

​An increase to housing stock

falling house prices

By directing the benefits to new properties only, we should see a significant boost in housing construction, thereby increasing the supply of housing stock. Simple supply and demand dictates that an increase in supply will put downward pressure on prices. Property investors and home owners will likely see the value of their property fall.

Impact on rents​ 

An increase to the supply of housing stock will likely result in more properties available for rent (as investors direct their money to new properties). With An increase in available properties so we are likely to see rents fall. This however is not likely to be across the board. Some locations may see rents rise as owner occupiers move in and less properties are available to rent in those areas.

The Winners

First Home Buyers

First home buyers will be the biggest winners out of this reform. An increase in housing stock alone should put downward pressure on prices. We should also expect that first home buyers will no longer be competing against investors for existing stock making it easier to enter the market.

Tradesman in the construction industry will also be big winners. It could be similar to the mining boom phase 2 as the construction industry receives a massive boost.

The Losers

Property investors

Existing property owners will be the biggest losers out of this. An increase in housing stock is likely to put downward pressure on property prices. And the double whammy will be the likely exit of investors competing in the established market. Investors could also find themselves struggling as rents fall, although I think this will really depend on the availability of new stock for renters. We could see rents in some very established areas increase due to the lack of rental properties available as investors leave those markets overtime.

The Mixed Bag

Renters are likely to see a mixed bag. Overall we should see rents fall as more housing stock becomes available for rent. But we could very well see rents rise in established locations as investors eventually leave the market due to natural attrition.

Looking forward

Younger generation benefit negative gearing

This is probably great news for my kids, as we should see lower continued downward pressure on property prices over time as more housing stock becomes available. But for existing property owners you are likely to find the reforms painful with downward pressure on prices and rents.

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