Labor victory in Australian election to deliver a shock to fragile house prices

02. May 2019, 11:25 Uhr

It is a policy of old of Australia’s National Opposition: to reduce the tax deductions for real estate investors realising a negative yield on their debt-financed property, so-called negative gearing.

So far, both private home-owners and commercial property investors can deduct the full amount of their net rent losses from their tax bill, raising the attractiveness of real estate investment as well as speculation considerably.

Labor’s intention, now, is to abolish negative gearing for home-owners and investors as well as cutting the current capital gains tax discount on resold property from 50 to 25 per cent, applicable to all buyers of existent (by contrast to newly built) property after 1 January 2020 if the party wins the election in two weeks’ time.

Among others, the real estate analysis boutique SQM Research has warned that this as much as the policy’s rather fast and abrupt implementation from the start of next year already will heap pressure on already falling house prices – the Achilles heel of Australian consumers. SQM reckons such a move might shave off some 5 to 12 per cent from house prices nationally.

Labor, which is aiming to alleviate the burden for first-time buyers currently forced to put up as much as six times their annual income to buy a house, does not even argue the effect projected by SQM, though the party expects the effects to be considerably less pronounced.

Australia’s red-hot housing market artificially pumped up by Chinese retail investors is a long-time source of trouble for the economy Down Under, should house prices start to fall precipitously (see issue 06/17 of our monthly bulletin). As a matter of fact, prices have begun to drop already, and drastically so in Sydney and Melbourne. If Labor were to come to power and implement its plans unabridged, we anticipate a short-time crisis on the housing market almost certain to dent households’ and thus consumers’ spending much more severely, and at a weak point for the economy at that (see quarterly GDP growth in chart below). Only a Reserve Bank of Australia, already bent on potentially lowering rates should economic activity cool down further, might then come to the rescue.


[Picture by OpenClipart-Vectors, free use under Pixabay standard license]