An updated modelling of the Labor government’s proposed changes to negative gearing has found that yields are likely to go up while prices are likely to decline, revealing estimations of the most affected capital cities.
Updated analysis from SQM Research has discovered that, under a potential Labor government, rents could rise anywhere between 7 per cent and 15 per cent on average, while dwelling prices could decline anywhere from 4 per cent to 12 per cent, according to SQM Research managing director Louis Christopher.
“In short, if Labor’s negative gearing policy is legislated in its current form, we expect a rise in rental yields which will occur through a combination of additional falling dwelling prices and, eventually, a rise in rents,” Mr Christopher said.
“Our analysis suggests the market impact would last by around three years. There is, right now, increased consensus that the RBA may have to cut rates this year. If we were to see a cut of, say, 50 basis points, this would provide some cushion to the effects of negative gearing repeal.
“Even so, the market would still record dwelling price falls. Housing construction, already in a slump, would likely fall further due to the lack of investor demand. This would set up a shortage of housing come later 2020, based on current strong population growth rates.”
Changing how tax works during the current market downturn, in Mr Christopher’s opinion, is a risky move.
“We encourage discussion of perhaps a phase-in period for such legislation that would reduce the economic shock that this tax change could create,” Mr Christopher said.
“Once again, [we] strongly encourage Labor to consider some of the investor issues, particularly surrounding the distortion their policy may create on pricing of off-the-plan developments and the likely losses investors in those properties would face come resale time to those who won’t have the tax concession.
“While we take the view that negative gearing reform is a good thing over the long term, such reform should be executed as part of a wider property tax reform that should be phased in over time.”
While rents are expected to go up and prices are expected to go down, the conditions in capital cities, however, are expected to vary, with some of the results from the modelling resulting in yields rising by as much as 20 per cent, and prices falling by as much as 16 per cent.
The modelling accounts for three scenarios from 2020 to 2022:
In the short term, rents are predicted to remain relatively stable, falling or rising by just 1 per cent, but 2021 on is expected to see some major changes, as the building supply pipeline is expected to be low during this time and would be exacerbated by a loss of negative gearing, according to SQM.
Under scenarios one and two with a loss of negative gearing, Brisbane rents are expected to be the strongest, rising between 12 per cent and 19 per cent in scenario one, and 13 and 22 per cent in scenario two.
is also expected to see positive results, with a scenario one result of 11 per cent to 17 per cent and a scenario two result of 12 per cent to 20 per cent.
All capital cities are expected to see growth under both scenarios, except for Darwin, with potential of a decline at a maximum of 7 per cent for scenario one and 1 per cent for scenario two, and Hobart which could remain stable and not see any movement under scenario two.
Under scenario three, however, both Perth and Brisbane are still on top, albeit more subdued with rises of 8 per cent to 12 per cent.
Declines are more prevalent here, with Darwin, Sydney, Hobart and Canberra all recording either declines or holding stable, at losses of 9 per cent, 2 per cent, 2 per cent and 0 per cent, respectively.
How this translates to yields is that scenario two could increase rental yields by 4 per cent to 5.2 per cent, with scenario one to record smaller yields.
Under either scenario one or two, property prices are expected to mostly decline between 2020 and 2022 due to a “rapid decline in investor demand”, with Melbourne being the worst off, declining by an expected 13 per cent to 8 per cent under scenario one and 16 per cent to 8 per cent under scenario two.
Sydney would not be far behind, declining by an expected 12 per cent to 7 per cent under scenario one and 14 per cent to 9 per cent under scenario two.
Even with the changes, however, there is still some room for growth, with five capital cities potentially seeing growth in scenario one and three in scenario two.
Perth is expected to hold on the strongest, rising by 3 per cent to 10 per cent under scenario one and declining by 4 per cent to rising by 2 per cent under scenario two.
Adelaide is expected to see the same conditions no matter the negative gearing scenario, as prices have been predicted to fall by 2 per cent to rising by 2 per cent in both scenarios one and two.
A scenario three outlook, however, means strong price growth by 2022, with the majority of capital cities expected to see price growth.
If negative gearing is left as is, Hobart is predicted to reap the rewards with growth between 11 per cent and 19 per cent, followed then by Perth with 9 per cent and 17 per cent, and then Adelaide with 9 per cent and 16 per cent.
The only capital city with the potential not to see growth is Darwin, which has a growth range of holding steady at 0 per cent up to 9 per cent growth.