The success of every investment, whether property, shares or whatever, is based on what’s called the “yield.” It’s basically the future income of the investment, and is generally expressed annually as a percentage of the value of the asset. This is completely separate to the capital growth of an investment, or the profit that’s made when the investment is sold.
In Australia, property investors accept lower yields when they purchase property compared to in many other countries because if there’s a loss after rent and expenses have been calculated, it can be offset against other wage or salary income: that’s what negative gearing is.
If landlords lose the ability to write off losses on their investments, it’s inevitable that yields will have to increase to compensate.
This can happen in one of two ways — either by property prices falling, or by rents increasing. We believe the outcome will be a combination of both. Of course, some of the damage could be mitigated if the Reserve Bank lowers the cash rate further, but at a historical low of 1.75% already, there’s not a lot of room to move.
The other option is that fewer investors will enter the property market because of the disincentive to purchasing existing housing. This means fewer properties available for those who can’t afford to buy a home to rent.
And because of Labor’s plan to restrict negative gearing to newly built dwellings only, this also means that the supply of rental stock will be compromised even further, as residential construction varies from area to area and tends to be concentrated, creating localised housing shortages in some areas and placing even greater upward pressure on rents that are charged.
If Labor’s policy triggers an economic downturn or compounds the effect of any recession that comes, this means even more competition for the reduced number of rental dwellings that are available as people losing their jobs are forced to sell their homes. This will place even further upward pressure on rents.
With median rents already far higher in real terms than they were 30 years ago, BIS Shrapnel estimates that further steep rises now could push an estimated 70,000 households into rental accommodation stress — and many of those could well end up being pushed into either social housing or forced to live on the street.
Those able to afford to continue to rent their properties may find that the extra burden of increased rents might just put their dreams of home ownership out of reach for good, as their ability to save for a deposit and other upfront costs is made that much harder.
Think renters don’t need to worry about changes to negative gearing? Think again.