NGs impact on prices and your exit strategy

Labour developed this policy before APRA and ASIC introduced regulatory changes. Before the Royal Commission. Its a policy that will require them to spend enormous political capital ... for little return. The regulatory changes have already made housing more affordable for FHB's by sidelining investors and reducing prices . So I think its worth considering that they may not pursue the policy if elected.

CGT concessions wound back from 50% to 25% = different story. I would imagine they will pursue that policy for sure.

 

halving CGT is more detrimental to many long term exit strategies of b&h investors then temporary cash-flow benefit of NG,
Will CGT changes be grandfathered?

if not grandfathered, this may result in many exits from long term holders sitting on large CGs, before its enforced, adding to the falling prices.

 

I dont know whether it is more detrimental.

The argument from the NO camp is that removing NG will reduce prices /make future resale values plummet because investors wont buy that stock , and that leaving the existing NG arrangements in place will not have that effect.

if thats a reasonable argument - I would suggest that 50% CGT concession on a property that delivers little or no profit ( because NG was removed) isnt a poorer outcome than 25% CGT concession on a property that has grown ( because NG was not removed)

Its that old saying - 100% of something is better than 100% of nothing. Or in this case, 25% of something is better than 50% of nothing , I guess

 

Politics these days is not about policy merits as such, its about populism,

So it depends on how its 'wrapped up and sold' to its votebank rather then its merit.

 

For me a couple of factors make this seem unlikely that there would be a further boost. One is affordability even with cheaper rates house prices are still way out of sync with income compared to the rest of the world and looking at the long run history. Additionally Australian prices are way over priced compared to the rest of the world. The more I read about how inflated our house prices have become and look at long term data the more confident I am there there's not going to be any increase in prices and most definitely either flattening or a drop regardless of what policies get put in place.

 

I think there will be a boost to sentiment and activity if not prices once it’s legislated and everyone has till the end of the financial year to enter into contracts.

Then everyone will be disappointed as price changes won’t be noticed.

 

Potentially yes - likely no as they have promised spending of all this additional ‘tax revenue’ they believe they will receive. If implemented likely to be reversed as previously (1980’s), when rentals rise and ‘rental crisis’ due to less investors in market to supply housing stock.
Unlike many other countries very limited public housing stock is provided by government in Australia.
Interesting times ahead!

 

Fake news unfortunately. Peddled by many pollies and swallowed whole by many punters. But simply not supported by the facts.

Fact check: Did abolishing negative gearing push up rents?

What it demonstrates is that rents didn't go up anywhere but Sydney and Perth between 1985 and 1987 - the period of abolition. Both cities had falling vacancy rates at the time NG was abolished, which was the real cause of their increased rents. The data tells us that the increases in both cities were related to their local economies, not the abolition of NG.

"Economist Saul Eslake, in a personal submission to a 2013 parliamentary inquiry, said that localised rent increases in Sydney and Perth did not support the argument that negative gearing was the cause. If the abolition of negative gearing had led to a "landlords' strike", "then rents should have risen everywhere (since negative gearing had been available everywhere)," Mr Eslake said"

You can see very clearly that vacancy rates in SYD and PER were the lowest of all cities when NG was abolished. ( the grey section on the graph below ) Melbourne was next, with a stable, unchanged vacancy rate - which is why rents there stayed stable/unchanged during the period of NG abolition. Other cities had increased vacancy rates, which is why rents actually fell during the period NG was abolished.

So it's unambiguously clear that NG abolition didnt drive rents up . Didnt happen anywhere but SYD and PER. It's also umambiguously clear that vacancy rates, not NG abolition, drove rents during that time...just as they did before hand, and just as they have done ever since





Further, when NG was reintroduced, rents didnt drop anywhere.....

So there's just no evidence whatsoever to support the theory that NG abolition did increase rents or will increase rents. It's just a complete urban myth I'm afraid. But it wont stop people who used to be anti NG becoming pro NG in the lead up to the election... as the "battle lines" are drawn for the heart and soul of voters all over the country. I give you Aussie John as just one example. Caught contradicting himself... he wont be the last. You'll see plenty of these debates in the next few months...

Last time we messed with housing

 

So many posts and so many arguments! All great stuff. I think anyone would be naive to think that with a tightening of credit and the abolition of NG across the board that prices wouldn't be further affected in Sydney and Melbourne particularly where the cost of holding is much higher than anywhere else based on the current yields

We also know that many people (incorrectly) purchase IPs to "reduce tax". Although this is ridiculous and completely misguided, it's still the misguided reality and will wipe out a decent chunk of potential purchasers in these markets. I will be very, very surprised if price falls aren't exacerbated in Sydney and Melbourne when Labor's NG policy is introduced if there has been no concurrent loosening of the credit supply by then. Unfortunately I don't think that is likely as the outcome of the RC will almost certainly be a shadow over credit supply for a while.

My 2 cents...

 

Grandfathered.

Here is Labor's policy in full for those who haven't read it yet.

Positive plan to help housing affordability

 

Just Imagine how far Sydney/Melbourne has to fall to make it attractive to yield seeking investors in absence of NG benefit and reduction in CGT discount.

 

Cool post @euro73 - thanks for sharing.

This line doesn't make sense to me:
This is inconsistent with arguments that negative gearing was a significant factor, with negative gearing likely to have a uniform impact on rents in all capital cities.

Negative gearing policy changes, while uniform in design, will have different impacts city to city, largely tied to the yield profile of that city. The 'hit' is relatively localised to certain cities, despite uniform policy. The % of investors negatively geared on Adelaide/Tas properties will be far lower than Sydney.

Essentially investors in Sydney and Melbourne will be hit the hardest associated with the negative gearing element of the change. Going further, investment funds should re-route to other cities where rental yields should fall (so more investment into Adelaide/Brissy/Regions/etc).

It was far before my time, so I don't actually have any experience on it - maybe there were different settings at the time.

But from an analytical point of view, if the same dynamics were true back then, looking at state by state rent differentials to claim it had no effect doesn't make sense. Looking at state by state differentials is a great way to examine some impacts though. If Sydney & Perth investment properties where the hardest hit from negative gearing changes and rents skyrocketed, that would be a better linkage.

 

Haha I assume this election will be far more negative than the last one (which seemed unusually 'policy debate' heavy). Fear campaigns about negative gearing/CGT will certainly get louder and louder.

I imagine it may be more effective too come Q1 2019. I assume when prices have fallen 10-15% in major capitals, people become more fearful and are more prone to fear campaigns.

 

It won't change my exit strategy, which is to hold. Apart from that I will just monitor the market, be flexible and adapt to what happens. Without knowing how the policy will be implemented, if at all, it is impossible to predict. At this stage I am keeping my options open

 

Fear mongering with saviour coolaid is a time tested political tool right from Roman times.

 

The yield profile across our cities doesnt vary much.... or at least, it didnt vary much before the big booms in MEL and SYD drove those cities yields down from 2014 onwards . So I dont know that there's a case to be made that the variations in rental yield between Adelaide, Hobart, Melbourne and Sydney for example, is pronounced.

While SQM doesnt provide data back to 1985, it does provide data from 2009...and here are the comparisons .

Here's the national data for the last 9 years



Here's Adelaide. Houses have basically treaded water at the high 4% range - 5% range in the period 2009-today. Apartments have improved their yields from mid 4 to low 5% range in the period 2009-today




Here's Hobart. Houses have basically treaded water at the low 4% range - mid4% range in the period 2009-today, but with quite some volatility along the way. up. down. up. down. up down. Apartments have improved their yields from @5% to @6% range in the period 2009-today - but with even more severe peaks and troughs along the way



Here is the SYD and MEL data... its clear that yields started dipping only after the big price acceleration started in late 13 into 14 for SYD, and 2015 onwards for MEL




Whichever data we use to look at the question of NG impact, none of it supports the argument that NG abolition equates to a guaranteed/automatic increase in rents. Sure, it might the next time around... but it didnt the first time around.

Long way to go before the election....

 

I think things are too different now from the 1980's to predict with any certainty what impact removal of NG will have... In 1986, the rental percentage was 26.2%.. In 2016 it was 30.9%. By now it's probably even a bit higher..

Home ownership in Australia data and trends – Parliament of Australia

Census reveals continued home ownership plunge

In future, if prices fall enough, and rents start rising, yield won't be a great measuring stick anyway.

 

NG and CGT changes will only impact rents quite indirectly, in as much as it reduces investor activity with a flow on to reduced vacancy rates. Not likely to be anything dramatic.

As others have said, I think the big impact will be property market confidence - it will supercharge the current bearish attitude toward Australian property, and investors will turn away big time in the short term, leading to much more than the 2% declines that Grattan Institute etc modelling predicts. These models assume Australian house buyers are 'homo economicus', which history shows and we all know they are of course not.

 

@euro73 - you may be right about the 88 changes, not really sure what happened there.

All those charts show is an underlying position at the moment. Adelaide and TAS yield more than Sydney & Melbourne.

Our cities do currently vary in rental yields. Current yields is what matters as this drives investment decisions.

That should theoretically mean that negative gearing changes will impact these cities differently.

Essentially if houses/units are yielding ~5-6% and rates are 4%, there's less stock that will be available to negatively gear.

Hence i don't believe the comment on ABC Fact Check - that negative gearing should have a uniform impact across cities. This IMO isn't true, as negative gearing potential is a function of yield/rates.

I tend to agree with @Rex & @euro73 on rental impacts of negative gearing though - it would have some impact, but its indirect and shouldn't lead to a significant price spike in rents. In fact, the design itself promotes new housing investment to a degree by shifting incentives. That promotes supply, which puts downward pressure on rents too.

 

@Redom , @euro73

Do you think CGT increase can lead to a rush amongst those sitting on huge CGs and closer to retirement, before it becomes a law?

Do you think removal of NG, increase in CGT and restrictive credit growth will make IPs more of a yield play then CG play, if so how do you think this impact the prices of existing dwellings especially in Syd/melb where current yields are too low? Both short term and long term.