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Is Negative Gearing and Concessional Capital Gains Tax driving up Property Prices

There are plenty of buzzwords that get thrown around in the property industry, and two of the big ones are negative gearing and concessional capital gains tax. Some are claiming that both are the case of booming property prices in Melbourne and Sydney. Federal Treasurer Scott Morrison recently said “Negative gearing has been around for a century. It’s an established structural component of Australia’s housing market. If they are going to pull the rug out, who is going to put a roof over people’s head?” he said. My sentiments exactly.

In establishing the answer to this question, we should first ask ourselves, have property prices risen any differently today than they have over the last decade. According to Corelogic, between 2000 and 2007 city dwelling prices increased by 98.2% compared to 44.9% over the period from January 2010 to February 2017.

The table below shows city by city property growth differences between the two decades:

City

Property growth between January 2000 to February 2007

Property growth between January 2010 and February 2017

Sydney 78.3% 61.1%
Melbourne 95.6% 55.1%
Brisbane 147.2% 6.6%
Adelaide 124.4% 11%
Perth 199.4% -3.3%
Hobart 198.0% 3.4%
Darwin 97.3% -5.0%
Canberra 133.4% 23.8%

It can be seen from the above that Melbourne and Sydney are the only cities to record decent capital growth rates in the 2010 to 2017 decade as well as the 2000 to 2007 decade, all other cities have recorded significantly lower capital growth over the 2010 to 2017 periods.

So, you might ask yourself, if negative gearing and concessional capital gains tax applies right across Australia and is supposedly responsible for booming property prices then why is it that Sydney and Melbourne are the only two cities experiencing booming property prices.

If this were the case then all cities should have been experiencing high growth as well but clearly they are not, so it stands to reason that negative gearing and concessional capital gains tax are not the real reason for booming property prices in Melbourne and Sydney.

So why do politicians like Bill Shorten say that it is?

I believe that he knows that it won’t do anything to reduce property prices… he is just using a populist slogan to justify the unpalatable additional tax that the government would get from reducing negative gearing and reducing concessional capital gains tax.

If it’s not negative gearing and concessional capital gains tax that are driving up property prices in Melbourne and Sydney, then what is?

I believe that there are two primary factors that are driving up property prices in Melbourne and Sydney and not anywhere else in Australia and these are:

  1. It has been reported that around 25% of investment property buyers are Asians, primarily Chinese. The Chinese government has limited the number of houses that Chinese investors can purchase in China, so they are actively buying elsewhere.Australia is a favourite place for them to purchase and Melbourne and Sydney are their two most favoured cities in which to buy. They see prices of property in Australia are cheap compared to Chinese prices and are therefore willing to pay above market value for their property purchases.
  2. Melbourne and Sydney are both experiencing massive population growth. Each is growing at around 100,000 people per year, mostly cashed up migrants who bought their ticket into the country. They prefer to live in Melbourne and Sydney rather than any other capital city. These cashed up migrants are involved in bidding wars with the Chinese buyers and locals can’t compete.

So what will the impact be if negative gearing and concessional capital gains tax are reduced?

The impact will be instant and dramatic. Investors who rely on negative gearing will stop buying, builders will in turn reduce dwelling construction as demand dries up. These two things combined will result in a national rental housing shortage, that will in turn drive up property prices and increase rents as populations surge and rental property demand exceeds supply. There are already signs of rental shortages across Australia. SQM Research have reported that vacancy rates in March 2017 have tumbled right across Australia. This means that the number of available rental properties is drying up rapidly and construction of new rental stock is not meeting demand. The table below shows the reported vacancy rates in each city:

City Vacancy Rate – March 2017
Sydney 1.7%
Melbourne 1.5%
Brisbane 3.5%
Hobart 0.7%
Canberra 0.8%
Adelaide 1.8%
Darwin 3.5%
Perth 4.7%

What does all this mean for investors?

Booming property prices have created housing affordability issues in Melbourne and Sydney which means more people will have to rent in these two cities because they can’t afford to buy. This is bad news for home buyers but good news for investors. Why is it good news for investors? Low vacancy rates equate to increasing rental yields as renters compete for limited rental stock. It also means that tenant turn around at the end of a lease will reduce as vacancy rates reduce and renters scramble for available rental stock. Higher rental yields will act as an insurance against rising interest rates.

Interest rates are at historically low values, even with recent increases. 

Wrap up

I have been investing for more than 17 years and the property doomsayers have been talking down the market for most of that time, but you know what, it has never happened. Now is the time to invest. I believe that over the foreseeable future, interest rates will stay relatively constant because the economy is flat.

Demand for rental properties will increase with the massive immigration that is taking place and because of the affordability issues in Melbourne and Sydney.

Sydney price growth will start to plateau, Melbourne’s price growth will continue their upward trajectory, Perth and Darwin will continue going backwards while Brisbane, Adelaide and Canberra prices should continue with steady, not over the top, growth.

Until next time, happy investing.
Helen

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