How would the local market react if negative gearing were no more?

Author: Pete Rose

Can you imagine how Australians would respond to the abolition of tax incentives for individuals who put their hard earned into rental property?

It’s just a few weeks since the New Zealand government took action to put a lid on property prices across the ditch. In March 2021, it began phasing out negative gearing provisions and toughened its capital gains tax regime, doubling the length of time for which investors must hold a house or unit before it becomes exempt, from five years to 10.

It’s radical stuff, which came in response to a 20 per cent increase in prices last year, and not everyone is happy. Those with skin in the game say changing the rules will cause significant hardship for highly geared investors. Would-be first home owners see it rather differently, of course. Amongst that cohort, the move has revived hopes that somehow, some way, someday they’ll be in the position to afford a place of their own (be it ever so humble).

Thus far, the measures are working as intended: prices have plateaued and auction clearance rates have fallen, from 79 per cent to 59 per cent.

Is the Australian government taking notes?

Undoubtedly. Our market has been booming apace with the Kiwis’ and housing affordability is a perennial concern, for the locked-out under-40s, and their parents who are having to contribute to deposits and guarantee mortgages, to help their offspring get under their own roof.

Last election saw Labor moot the prospect of winding back negative gearing and, if the idea looks politically palatable, it may well be mooted again.

How would local investors react, were the Kiwi experiment to be replicated on our side of the Tasman?

I think it’s likely a significant percentage would seek to shift their funds to more attractive investment vehicles, including trusts and syndicates that specialise in commercial property. It offers a better return – four to five per cent, versus the resi market’s paltry two to three – and greater certainty and liquidity.

Also likely is the emergence of digital platforms that make it cost effective to manage large pools of investors, thereby enabling mums and dads to start playing on what, historically, has been high net worth territory.

Think it could never happen, given negative gearing’s been a constant in Australia since the eighties? Times can change – and quickly, too – so I wouldn’t bet the house on it.