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With the Federal Election to be held in May, property investors have to start thinking about the possible change in negative gearing policy and what future dynamics may play out if the Labour party get into power as expected.

If, as expected, negative gearing will only be allowed on “new” properties:

  • Developers will price new properties higher than established properties because of associated tax benefits
  • Banks will ask for 30-40% deposit on new properties, because if they get caught “holding the baby” they will have to sell this property to the lower priced established market
  • Rational investors are unlikely to actually purchase new properties (Why would an investor buy something that is going to be worth less as soon as you purchase?)
  • With less new stock coming to market and population growth continuing at its rapid pace, there will not be enough properties being built to house a growing population
  • Rents will rise significantly, which will in turn underpin prices (due to stronger rental yield).

The main reason for originally introducing negative gearing was that it was much cheaper for the private sector to supply housing than the Government! With the tax benefit removed, the taxpayer is likely going to have to shoulder that burden, as renters look to the Government to provide additional housing.