Ray White managing director Dan White.
Private retail investors who provide the bulk of rental housing across Australia are in the firing line following the biggest housing tax reversal in a generation.
The 2.2 million home investors have been slugged by the scrapping of negative gearing and the winding back of the capital gains tax discount, with the impact to flow through to tenants and potentially hit future housing supply.
Ray White Group said the Albanese government’s move to restrict negative gearing to new residential builds and reset the capital gains tax discount would directly affect the 2.9 million renting households.
“This was the most significant shift in property tax policy in 27 years, and it was announced without going to the polls,” Ray White managing director Dan White said. “Last night we were told of a fundamentally different landscape.”
Mr White said he expected the changes to rock the market, with the implications to be felt via a short-term hit to confidence and longer-term reassessment of residential property assets.
He said the implications were widespread as about 45 per cent of all landlords were negatively geared, according to ATO data. “When you understand those numbers, you understand the stakes,” Mr White said. “This is not a niche tax change affecting a small group of investors. It reaches directly into the housing security of nearly a third of Australian households.”
Mr White identified a myriad of problems with the new schemes, which were partly founded on the notion that 75,000 owner-occupiers would replace investors in residential property over the next decade. Investors are to be directed into new stock, but Mr White said this “just doesn’t stack up”.
LJ Hooker Group head of research Mathew Tiller.
“Most investors can’t afford new stock and they can’t just switch from existing homes to new homes. The switch into new stock is not going to happen,” he said, adding that buyers would be reluctant as onselling would also become tougher.
“Why would you buy if there is no investors to sell to? It’s going to be a much shallower pool.”
He said the notion that home supply would hold up – the government has forecast a small dip from the new measure – was another risk. He questioned whether many renters would be able to buy given affordability issues, high rates and rising costs.
“Moving renters into new stock is an equation that doesn’t work,” Mr White said. “It’s just a budget that’s seen to be doing something for first-home buyers. But in doing so they are putting renters and new supply at risk.”
The agency backed the grandfathering of existing investments as a “necessary” safeguard, adding that without this the switch could have had severe consequences.
Mr White referred to 1985, when the Hawke government scrapped negative gearing with no grandfathering and rents in Sydney jumped 50-60 per cent almost overnight. “They had to reverse the decision within two years,” Mr White said. “The government has learned that lesson. But the question now is what happens next.”
Implementing sweeping tax reforms also risks reducing investor interest before enough housing is delivered, according to LJ Hooker. The agency’s head of research, Mathew Tiller, warned about making major changes to negative gearing and capital gains tax when the market was fragile.
“The budget lands at a time when listings are rising, buyers are becoming more selective and price growth is moderating,” Mr Tiller said. “It marks the biggest change to property-related tax policy in a generation. It also matters because the market is already being pulled in two different directions, with softer conditions than a year ago and reduced borrowing due to higher interest rates.”
Property Investment Professionals of Australia chair Cate Bakos.
Mr Tiller said the tax reforms were unlikely to deliver a significant reduction in house prices – the bigger impact was likely to be on investor confidence and future investor activity. “We are not saying housing tax settings should never change, but timing matters given Australia remains under-supplied, and vacancy rates are already tight,” he said.
Small investors may push their capital into other asset classes if residential property was less attractive. Mr Tiller said this meant governments and institutional providers would need to step up to provide rental housing.
Investors fears the tax reversal will “decimate” future rental supply and push rents even higher.
Property Investment Professionals of Australia chair Cate Bakos said the switch would torpedo future investor activity at the very moment Australia needed more rental housing, not less.
“These changes are being dropped into a system that already can’t deliver homes at the speed or scale that Australia needs,” Ms Bakos said. She cited poor productivity, labour constraints and slow and costly approvals.
“When you add these CGT and negative-gearing changes on top, you don’t just slow investment, you tighten an already constrained supply pipeline to breaking point, which is the opposite of what the housing market needed right now.”