Housing prices can be expected to continue to increase, though at a slower pace, under proposed changes to negative gearing and capital gains tax, according to modelling by UTS Business School researcher Dr Adrian Lee.
The analysis for The McKell Institute found that under proposed reforms the annual increase in housing prices across Australia’s eight capital cities would average 2.84 per cent over the next decade, versus 3.39 per cent under existing arrangements.
“Predicting house prices is always a hazardous exercise, but the modelling shows the proposed changes would not have the dramatic impact on prices that some people have suggested,” says Dr Lee, a researcher in the Finance Discipline Group at the Business School.
“The bottom line is that the proposed changes would not result in a statistically significant ‘shock’ to the housing market. House price growth could be expected to continue but at a slightly slower rate.”
That slower rate of growth would be good news for housing affordability, while ensuring current investors in the housing market still see a long-term increase in the value of their existing investments, he says.
'The proposed changes would not have
the dramatic impact on prices
that some people have suggested'
The research models the likely trajectory of house prices under the existing rules and under the proposed rules, using the same set of underlying assumptions about factors such as population and housing supply growth, to provide a comparison.
A McKell Institute report, Switching Gears, last year recommended limiting future negative gearing to new properties and the Federal Opposition has taken up this suggestion in its housing policy for the federal election. Labor also proposes to reduce the 50 per cent capital gains tax discount for assets held longer than 12 months to a rate of 25 per cent.
Opponents of the changes argue they would cause property prices to fall, decreasing the wealth of the 67 per cent of Australians who own property. The McKell Institute commissioned independent modelling in light of these concerns.
Abolishing negative gearing for existing homes, from 2017 onwards as proposed, would moderate demand for existing homes but lift demand for new homes, the analysis suggests. More young people would be able to invest in their first home, resulting in demand shifting from investors to owner-occupiers. Meanwhile, increased supply of new homes would ensure rents remained stable.
Other factors contributing to housing market growth are likely to include population growth, ageing Australians choosing to remain in their homes, income growth, foreign investment and the emergence of “peer to peer” lending as a source of affordable loans, it says.