The debate over negative gearing has included the fallacy that under Labor’s proposal, the interests of existing property investors will be protected. The reason given is that Labor’s proposal includes a “grandfathering” arrangement – meaning any investors who own properties that are negatively geared before the change date of July 1 next year will be eligible to continue claiming ongoing losses against wage or salary income going forward.
But in reality, existing property investors are the people who will suffer the most under this proposed policy. And not just those who use negative gearing – every single Australian who has any stake in property.
Owing to the fact that after July 1 2017 negative gearing would be available only for investments in newly built residential stock only, there will be fewer buyers for existing properties. It’s important also to note that even a brand new property becomes second hand as soon as it’s been purchased the first time. On top of that, Labor’s proposal includes a provision that CGT discounts will be halved, meaning higher taxes on profits when properties are sold.
Currently, around 30% of all property sales are to investors. There’s no telling what that number will become, but there’s no doubt it will fall dramatically as investors either can’t afford to sustain the losses they would previously have been able to negative gear, or divert their attention to other potentially more lucrative investments such as shares.
This lessening in demand for property overall means that all property values will fall – of course, by varying degrees in different areas and prices segments according to the individual balance between supply and demand and attainable yields.
Ultimately, any investor who is negative gearing a property investment today is only losing money on a cash flow basis under the premise that there will be longer term capital growth – that the value of the property will rise. If the expected capital growth does not materialise, or is in fact is replaced by a capital loss, how can anyone say that the interests of that investor possibly be protected?
The simple answer is, they’re not.
Let’s not forget that the majority of people who use negative gearing today (three-quarters) have a taxable income of less than $80K a year – they’re not people who can afford to take a hit on what is probably their most valuable investment.
Yet if Labor wins on 2 July, and if its policy on negative gearing is implemented as it stands, it is these mum-and-dad investors who stand to be the most adversely affected.
More broadly, this proposal affects many more Australians than those who are currently negative gearing. It would negatively impact everyone who owns a property, including the 67% of Australians who live in that property, plus the 18 million people who have a stake in property through their super funds – every single one of these people is an existing investor whose interests seem to be of no concern to those who support this risky proposal.