As far as investors are concerned, the key issue for the May 18 election is property.
Yes, franked dividends are high on the agenda. For sure, issues such as personal tax or energy — not to mention electric cars — are there, too. But when you go to the polls in the middle of one of the worst house price downturns in living memory, property is the hot-button subject.
The election announcement arrived in the same week we found out we are now in the middle of the worst housing downturn since World War II — or, to be sensible about it, the fourth-worst housing downturn since 1945 if you adjust for inflation.
This is — as the International Monetary Fund put it — a “delicate time” for investors who have watched as capital city house prices have fallen 8.8 per cent over the past year. The price falls are worst in Perth, Sydney and Melbourne. Categorically, they are worst of all in off-the-plan apartment developments where horror stories are emerging daily.
At first glance the two parties offer a stark contrast in property policies. You might blithely say the Coalition leaves things as they are for property investors and the ALP virtually attacks property investors with a plan from January 1 next year to eliminate negative gearing for new houses and a reduction in the capital gains discount.
There is a significant backlash building against these ALP policies, as a range of professional organisations worry they will accelerate house prices falls — and they will.
Even if we assume something of an investor rush to beat that January 1 deadline if the ALP wins, it is entirely deductive that once that deadline passes the slump we are enduring now will extend — possibly with a vengeance.
For most property investors, the only silver lining in an ALP win might be the roundabout consolation that perhaps new homes will be more affordable for their kids. There is, after all, an irony that investors stretch themselves to buy investment property to make some money so that some day they can help their kids get a home deposit.
First-home buyers may also benefit with the ALP’s improved tax breaks in the build-to-rent sector, which may be useful to some tenants and larger superannuation funds. There is also the potential return of federal-level first-homebuyer grants (the Rudd government gave us the federal-based first-homebuyers boost in 2007).
But there are bizarre anomalies in the ALP policies that directly hit middle-income investors but miss the seriously wealthy.
If you are negative gearing a property portfolio under an ALP regime, you may still be allowed to use those costs against other non-salary income. Of course, very few people will have non-salary income that is large enough to be able to write off investment property costs against it. The office of Labor treasury spokesman Chris Bowen has still to clarify the situation here.
The “very rich escape route” has a real similarity with the ALP’s franking credit plan, where very wealthy retired SMSF members with taxable income on funds beyond the cap of $1.6 million can still use franking credits, while most retirees cannot. Whether these loopholes were intentional, forgetful or just plain stupid, we will probably never know.
There is also a chance that rental yields may rise under a combination of falling property prices and a less attractive tax regime under the ALP: if developers build less property so that the existing stock effectively shrinks, then rental yields could go up.
Earlier this week there was a sliver of evidence that this might be happening already, when rental yields in the December quarter compared to the December quarter last year rose by 1 per cent. Most economists were puzzled by that movement, though hardly willing to call it a trend.
In the meantime there really is no contest — negative gearing we now know from the Parliamentary Budget Office is used for new housing by at least 22 per cent of investors (Bowen has been saying 7 per cent for years — a figure that allowed him to overestimate the revenue the negative gearing changes might collect). In any event, taking that PMO figure to be the authentic figure, it implies that about 78 per cent of investors (focused on existing property) who negatively gear today will be gone in a few years.
Moreover, even if you do manage to make money from negatively gearing a property in a market in which prices are falling when you go to sell, the ALP plans to hit you with a higher capital gains tax.
Here’s how it works: if you hold an asset such as a property for more than a year, your CGT under current rules is discounted by half. The ALP will reduce that discount to 25 per cent — mathematically that turns out to be a 12 per cent lift in the ultimate CGT you will pay. Putting it all together, for the Coalition, property investors will not be hard to win over.
By James Kirby - James Kirby, The Australian's Wealth Editor, is one of Australia's most experienced financial journalists. He is a former managing editor and co-founder of Business Spectator and Eureka Report and has previously worked at the Australian Financial Review and the South China Morning Post. He is a regular commentator on radio and television, he is the author of several business biographies and has served on the Walkley Awards Advisory Board.
13 April 2019