19 Feb 2016

Bianca Hartge-Hazelman
Financy
18 February 2016
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Talk that the country’s most lucrative property tax break “could” be scaled back is likely to prompt one of three main reactions from investors; do I buy more property, hold fire or just give up?

It’s estimated that 1.2 million Australians have been beneficiaries of negative gearing, not just because of the nice tax deductions it allows but because it has helped property prices grow at five times the rate of wages.

But the unfortunate side-effect is that higher property prices have forced many people out of the market and into expensive rentals, plus it has virtually side-lined younger first home owners.

So will property prices sky rocket if reform is brought in or will they fall off a cliff?

If reform happened this year, that buyers have a limited window to take advantage of negative gearing which allows for property-related expenses, including mortgage repayments to be claimed as tax deductions against your taxable income.

At the moment you have a situation where the Labor party is pressuring the Turnbull government to reform negative gearing in the May Budget to effectively help first home buyers and boost construction activity.

This means that if reform happened this year, that buyers have a limited window to take advantage of negative gearing which allows for property-related expenses, including mortgage repayments to be claimed as tax deductions against your taxable income.

Urbis chief economist Nicki Hutley expects that the Turnbull government will hold fire on reforming negative gearing because they won’t want to be seen as “being pushed into reform” by Labor.

Labor wants to scrap negative gearing on existing homes, which accounted for 93 per cent of the $155 billion of property investment made last year, according to Bloomberg.

“I think it is a poor policy,” added Domain Group chief economist Dr Andrew Wilson. “This potentially could lead to an avalanche of property investors into the market and exacerbate property and rental prices.”

The Liberal Turnbull government is mulling over either ending negative gearing for certain new properties in 2017 or targeting high-end investors by either capping the number of properties that can be geared or limiting the size of the annual tax deduction that can be claimed, according to the Australian Financial Review.

But Dr Wilson believes that the government is more likely to “cap” the existing rules around what deductions can be made in negative gearing.

People are still buying irrespective of potential changes to negative gearing because prices are good, share markets have tanked and cash deposits are low. So getting in now even if the ALP policy is adopted, is going to be better.

“People are still buying irrespective of potential changes to negative gearing because prices are good, share markets have tanked and cash deposits are low,” says Dr Wilson, “So getting in now even if the ALP policy is adopted, is going to be better.

“There will be a flood of activity and the investor spruikers out there will start pushing strategies urging people to buy,” he says.

Regardless of how or if negative gearing is scaled back, if that happens, the decision to act is going to be complicated.

“While it may not be the best policy in its current format, it is one that is hard to remove in isolation without shocking the economy – not the best idea with growth less than trend at present,” says Hutley.

“Whatever gets done, it seems current investors will be protected by a grandfather clause – so I guess the moral is get in now! It will be interesting to see if the market is thinking the same way and whether this has a short term impact on property prices (i.e. raises them as more investors look to get set before any changes),” says Hutley.