The reelection of the Coalition federal government will undoubtedly help the property market in Melbourne.
In this highly-charged political environment, that’s a bold statement that could get me into serious trouble with some, but the facts are simple: scrapping negative gearing for existing dwellings, and halving capital gains tax reductions across the board would have led to lower purchase demand from investors and developers over the medium-long term. Several serious analysts believe that Labor’s proposed policies had already bitten given the overwhelming assumption that they would be elected.
There are a lot of reasons why the residential real estate market is in the doldrums right now – intervention from government and government bodies over the last few years has to rank at the top.
At the federal level, we had the Australian Prudential Regulation Authority restrict annual growth in loans to property investors, and limit interest-only loans as a proportion of new lending. We had the Hayne Royal Commission which caused lenders to tighten borrowing capacities dramatically and become even more difficult to deal with and almost impossible to rely upon.
And, the Foreign Investment Review Board made real estate less attractive to foreign purchasers by reducing capital gains tax benefits, introducing annual charges for unoccupied or under-utilised properties, applying a 50% cap on foreign investment approvals for new developments, and significantly increasing applications fees.
At the Victorian State level, the government introduced a foreign purchase additional duty (FPAD), meaning that foreign buyers pay an extra 7% in stamp duty. It increased the annual absentee owner surcharge (or “ghost tax”). It made changes to off-the-plan stamp duty concessions so that they only apply to primary place of residence. And, it centralised land tax property valuations into the Valuer General (as opposed to local councils) which now conducts them every year instead of every second year.
Governments on both sides and at all levels have been tinkering with the residential real estate market constantly over recent years.
When the market was booming, you could forgive them for trying to put a lid on runaway prices – and even for trying to maximise tax incomes. But, now that the market is on its knees, it’s more important than ever to look critically at government initiatives.
Back to limiting negative gearing and axing capital gains tax breaks…
Sure, Labor’s proposed changes to negative gearing would not apply to properties already purchased. But, when owners of those established rental properties look to take them to the market, clearly fewer buyers would be interested in purchasing them, because newly built properties would provide significantly greater tax benefits.
Basic supply and demand tells us the simple truth – lower demand will lead to lower prices for these established dwellings.
Reducing capital gains tax breaks (or, put another way, doubling capital gains taxes) will similarly decrease demand from property investors. My family rented a house a few years back while we were building our ‘forever home’. I got to know the landlord pretty well, and we got talking about real estate one day. He told me that he actually sold the house we were renting from him a couple months before. But, when he notified his accountant, and came to understand the huge tax implications, he became so scared that he pled with the buyers to void the contract.
Many people think profits through property development are easy to attain – not so!
Costs have been rising dramatically over the last decade, in large part due to runaway Government bureaucracy. By the time you pay stamp duty, holding costs (how on earth does a simple planning permit take 12 months to attain!!?), Council Open Space Contributions, and GST on sales – profits are tight. A doubling of capital gains taxes has certainly been factored in by experienced developers, and we’ve seen demand for development sites plummet.
Capital gains tax curbs investment, and it’s investment that spurs asset appreciation.
One final point on why the reelection of the Coalition will help property prices. Within hours of the Coalition securing a majority government, investor confidence soared. Sectors that were bracing for challenging policy settings from Labor (banking, retail, and private health) made strong gains. Are property prices going to suddenly surge? No, of course not. But, the real estate market, perhaps more so than any other sector, feeds on confidence and sentiment – it’s fair to say that the prospect of higher taxes hurt both.
